General Accepted Accounting Principles

GAAP COURSE RBS 2016

Assignment nr.2 – Franchise.

1) A franchise is a corporation consisting of two parts; one “owner” and one “taker”.

The Franchise owner is the owner of the business model (brand and the company), and the Franchise taker is the person managing one store or department of the franchise using the business model from the Franchise owner. This means that the franchise taker is the boss of his/her own company, but with limitations and rules set by the franchise owner.

2) The franchise model is an interesting way of expanding and growing a business, as it already has some useful guidelines or information on how to succeed and have a sustainable business. However, expanding a business using the franchise model is not only glorious as there are there are many factors that has to be taken to account. For example, if “Mr. Puffs” expand to a country or area where there is larger competition, it not given that the new franchise will have success.

3) Mr. Puff might face large competition over time. There might also be some competing businesses that forces the prices to drop, and therefor makes the business less profitable for Mr. Puff. Also if the expected customers find substitutes to Mr. Puff`s, there might be a lower demand of Mr. Puff’s business. Another issue is that the franchise taker can sell low quality product under the name: “Mr. Puff” which can cause a damage to the brand.

4) For the firm it might seem more profitable to use the COCO as all the return and profit goes directly to the company. However, if the COFO model shows sustainability over longer period of time, it is a good model where the owner of the brand makes profit from the franchise taker and can supervise and develop the business to a large chain of franchise businesses.