Case Study - Franchising

Franchising refers to the purchasing of a licence which enables a business to use the name, logo, and trading method of an existing and generally successful business. The franchisee is required to pay an initial fee and an annual royalty based on the profits to the franchisor. Franchisees have to sign a contract outlining guidelines on operations set by the franchisor.

To what extent is a franchise opportunity a true reflection of what it is like to set up and run a business?

A franchise opportunity provides a business with the opportunity for growth through franchising. While setting up a business could be quite risky, franchising provides franchisees with a better chance to be successful as franchises or the original businesses are generally already successful. Also, there are lower start-up costs for franchisees who opt to franchise as opposed to starting a new business. Generally, entrepreneurs find it hard to get loans from banks for new businesses because new businesses are more at risk for failure, whereas franchising involves lower start-up costs and franchisees don't have to worry too much about the financing. Although it is expensive for the franchisee to buy a franchise, they are more likely to get loans due to the evident success of the business. However, setting up a business would offer more independence to the entrepreneur and they would be able to offer products and services as they choose, whereas with franchising, franchisees have to follow strict guidelines set by franchisors. Also, franchisees have to pay a percentage of their revenue to franchisors and also pay an annual royalty, which is a disadvantage as it decreases their profit, but they are still more likely to make a higher profit than if they were to start a business because that's riskier and have a smaller chance to be successful.

2. Use the Forbes site(http://www.forbes.com/business/2005/04/06/05mlbland.html) (select 'Skip this welcome screen' in the top right or wait a few seconds to see the story) and the Business of Baseball site(http://www.businessofbaseball.com/) to do some research on the financial position of the different baseball franchises in the United States and Canada. Using the data, suggest which teams are the most vulnerable to seeing their franchise sold to a rival bidder such as Portland Oregon (see the Oregon Stadium Campaign(http://www.oregonstadiumcampaign.com/)).

Baseball team values have risen 15% from 2004 to 2005. Baseball teams in the US and Canada are worth more than 176 million dollars. Many of these teams are in debt which makes them venerable to be sold to rival bidders. The most vulnerable teams to be sold to rival bidders include the Arizona Diamondbacks and the Los Angeles Dodgers.
(Note: All of the data is from 2005)

Arizona Diamondbacks -

1-Yr Value Chg.	3%
Ann. Value Chg.2	8%
Debt/Value3	103%
Revenue	$136 mil
Operating Income4	$-18.7 mil
Player Expenses5	$103 mil
Gate Receipts6	$45 mil

The team value is $286 million. The baseball team is owned by a partnership consisting of 4 members. The baseball team's debt is very high, although the team value is not as high as some of the other well-known teams like The Dodgers. To pay off the debt, the team would have to have a considerable increase in profit. The player expenses are also fairly high which is affecting the team's situation. The team's vulnerability of being sold off to a rival bidder lie in its debt and the fact that the team is struggling to pay this debt off.

Los Angeles Dodgers -

1-Yr Value Chg.	6%
Ann. Value Chg.2	NA
Debt/Value3	99%
Revenue	$166 mil
Operating Income4	$-7.4 mil
Player Expenses5	$110 mil
Gate Receipts6	$59 mil

Frank McCourt purchased the Los Angeles Dodgers for $421 million. The team is very successful and well-known which causes its significant difference in value to other teams like the Diamondbacks. Since the team's value is fairly high and it cost a considerable amount for the team, the debt is fairly high since a lot of money is necessary for the purchase of the team. Since the team is so far in debt and the team is favorable among bidders due to its success and popularity, it makes the team vulnerable of being sold off to a rival bidder.



3. Imagine a situation where the English soccer Premier League became the franchisor as is the case with MLB Inc.

• How might the Premier League seek to use this position to expand the growth of the 'brand'?
• What implications would this scenario have for clubs in the League and outside it (i.e. those in the Championship)?

If English soccer Premier League were to take over or franchise football teams like with Major League Baseball, it could cause a decrease in fan base and in turn cause a fall in success. The football teams would receive a higher revenue and there would be better financing. However, this could cause problems in the long run. The Premier League and football as a sport in general relies heavily on fan base. It is an internationally recognized sport, and although the Premier League is based in Britain, there are supporting fans all over the world. Since the business' success is dependent on the fans, it may not be wise for the Premier League to upset fans as this would take a toll on its success and profit. Fans would protest because franchising the brand would make the teams less city-based and affect the fans, similar to the case of the baseball team of the Montreal Expos which angered fans to the point where the team lost part of its fan base and became less successful.
Clubs in the Premier League might lose fans due to the change in location. In theory, the League would benefit from external economies of scale as franchising should enable growth. However, the direction of this growth may not be in the interest of fans, and the success of the League is dependent on the fan base which would make the League less successful in the long run. However, if the League could franchise while mainting fans' loyalty, it could cause a relative increase in success and profits. Outside clubs like the championships could also suffer from a loss in fan base and public interest.