Franchises, social enterprises, lifestyle and online businesses

Franchising

A franchisor sells the right to trade under its brand and business model to a franchisee, who pays an initial fee and usually a royalty (a percentage of sales).

• For the franchisee: a proven brand and system, training and national advertising, so lower risk and easier bank finance. But high fees, royalties taken even when profit is low, strict rules on suppliers and layout, and the brand's reputation can be damaged by others.
• For the franchisor: rapid growth using franchisees' capital, motivated owner-managers. But less control over quality and a share of the profit is given up.

Social enterprise

A business whose main aims are social or environmental, such as training disadvantaged people, recycling or community services. It trades to make a surplus, but reinvests most of it in its social purpose instead of paying it out to owners. It can take any legal form. It may attract grants and customer goodwill, but may find it harder to raise commercial finance and must balance mission with paying its way.

Lifestyle businesses

Set up mainly to give the owner an income and a way of life they enjoy, such as a surf school, craft studio or small cafe, not to grow fast. Owners value independence, flexible hours and doing something they love. Such businesses tend to stay small, may not attract investors seeking growth, and profit is not the only aim.

Online businesses

Businesses that trade mainly or only through the internet.

• Advantages: low start-up and overhead costs (no shop rent), access to national or global customers, open 24 hours, data on customers' behaviour.
• Disadvantages: intense price competition and easy comparison, delivery costs and returns, cyber security and payment fraud risks, and customers cannot see or try products.

Worked example

A franchisee pays an initial fee of $30,000 and a royalty of 6% of sales. In year 1 sales are $420,000. Find the total paid to the franchisor in year 1.

1. Royalty = 6% x 420,000 = $25,200
2. Total = 30,000 + 25,200 = $55,200

Answer: $55,200

Check yourself

1. A franchisee's annual sales are $250,000 and the royalty is 5% of sales. Calculate the royalty paid.
   Show answer

   $12500. 0.05 x 250,000 = $12,500.

2. A franchisee pays a royalty of 8% of sales and paid $36,000 in royalties last year. Calculate the franchisee's sales.
   Show answer

   $450000. 36,000 / 0.08 = $450,000.

3. Which is the main advantage to a franchisee of buying a franchise?
   • Freedom to choose any supplier
   • No ongoing payments to the franchisor
   • A proven brand and business model reduce the risk of failure
   • Complete control over the menu or product range
   Show answer

   A proven brand and business model reduce the risk of failure. Customers already know the brand and the system has been tested.

4. Why might a franchisor prefer franchising to opening its own outlets?
   • It keeps all the profit from every outlet
   • It can expand quickly using franchisees' capital
   • It gains full control of day-to-day management
   • It avoids having a brand
   Show answer

   It can expand quickly using franchisees' capital. Franchisees fund their own outlets, so growth needs less of the franchisor's capital.

5. What mainly distinguishes a social enterprise?
   • It never makes a profit
   • It is owned by the government
   • It cannot sell goods or services
   • It reinvests most of its surplus in a social or environmental purpose
   Show answer

   It reinvests most of its surplus in a social or environmental purpose. It trades like a business but its purpose is social.

6. A lifestyle business is most likely to
   • aim to float on a stock exchange
   • prioritise the owner's independence and quality of life over rapid growth
   • be run by a board of directors for shareholders
   • seek venture capital to expand
   Show answer

   prioritise the owner's independence and quality of life over rapid growth. Its aim is the owner's chosen way of life.

7. Explain one disadvantage of trading only online.
   Show answer

   Competition is intense because customers can compare prices instantly, which squeezes margins; there are also delivery costs, returns and cyber security risks.. Any developed drawback: price comparison, delivery and returns, security, no physical contact.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.