The Franchise Business: Checkpoint 1

Quick checkpoint - five questions on franchises, unit economics, why brands franchise, incentives and McDonald's.

Quick checkpoint - five questions on franchises, unit economics, why brands franchise, incentives and McDonald’s.

Question 1 of 5 What does a franchisee get?

A brand name, business system and support Ownership of the whole brand Free money Nothing

The franchisee runs the outlet using the brand's system.

Question 2 of 5 Why are franchise profits sensitive to sales?

Many costs like rent and staff are fixed Costs are all variable Royalties are zero Prices never change

Lower sales hit profits hard.

Question 3 of 5 Why might a brand franchise distant outlets?

Monitoring salaried managers far away is hard Distant outlets are always profitable Laws require it To lose control

Owners have stronger incentives.

Question 4 of 5 What is the free-rider problem in franchising?

A franchisee cuts quality, harming the whole brand Customers don't pay Brands give free products No royalties are charged

Standards and inspections address it.

Question 5 of 5 How does McDonald's earn much of its franchise income?

Rent on properties it controls Selling toys Government grants Only burger sales

It's often called a real estate company.

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