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ACCA Strategic Professional · Advanced Financial Management · Acquisitions and mergers versus other growth strategies

A restaurant chain owner is considering expanding via franchising rather than opening company-owned outlets. Which of the following is an advantage to the franchisor of franchising compared with owning the outlets?

The key advantage is rapid expansion with limited capital, since franchisees fund and run the outlets. The franchisor gives up some control and outlet profits in exchange for fees, and still bears brand reputation risk from poorly run franchises.

  1. ARapid expansion with less capital because franchisees fund the outletsCorrect
  2. BComplete control over day-to-day operations in every outlet
  3. CRetention of all outlet profits after franchisee costs
  4. DElimination of brand reputation risk from poor outlets

Explanation

Franchisees provide the capital and management effort, so the franchisor grows faster with less investment. Control is weaker since outlets are independently owned, franchisees keep the outlet profit and pay only fees or royalties, and brand risk remains because poor franchisee quality damages the brand.

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