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1. Is this franchisee business attractive?

Can I create upsides to this


business model? What flexibility should I factor while getting into this
business?

Failure rate of the franchisee model is less. Hence the risk of


capital investment is less.
The franchisee can leverage the brand image of the company.
Due to this the time and resources required to build the clientele
will be low.
The burden of taking so many legal, financial, marketing and
operational decisions wont be there as the franchisor will be
advising on all aspects of business operation.
The hassle of training the work force will was be not there.
The expenditure on promotion will be comparatively less because
the brand advertising will be done by the franchisor and only the
local promotion has to be taken care off by the franchisee.
Definitely, an upside can be created to this business model. As it
is seen from the exhibit that the capacity utilization is increasing
year on year from 35% to 45%.
Moreover, the revenues are expected to increase by 28.57%.
The return on investment has also increase from 38% to 57%.

2. Is the Salon business better than a distribution business? What are the
parameters for comparing the 2 business models and how do they
compare on each parameter?
The various different parameters we have considered to compare the 2
businesses are listed below:
i. Working capital required during initial investment
ii.
Cost incurred at initial investment
iii.
Margin and revenue
iv.
Intensity of competition
v. And, Flexibility in business
Working capital required during initial investment: Working
capital required for salon franchise is only Rs.5 lakhs, whereas for the
distribution business, it is a huge sum amount of Rs. 35 lakhs.
Conclusion: The Salon business is better

Cost incurred at initial investment: The cost which will be incurred


while going for either of the options must be factored, and it will be
huge for the franchise business as it will have so many variables such
as one-time sign-up fee, premium cost etc. whereas, for the
distribution alternative, only the infrastructure cost is needed.
Conclusion: The Distribution business is better
Margin and revenue: The gross margin of salon is 29.3% compared
to 12% of distribution business. Whereas, revenue from distribution is
higher than that from salon
Conclusion: The distribution business is better
Initial investment
Working capital req
Revenue per
annum
Gross margin

Salon franchise
4,100,000
500,000
7,898,640
29.30%

DISTRIBUTION BUSINESS
Turnover per month
Turnover per annum
Gross margin @12%
Operational expense per month
operational expense per annum
Infrastructure expense
Working capital per month

Distribution business
1,000,000
3,500,000
60,000,000
12%

5,000,000
60,000,000
7,200,000
150,000
1,800,000
1,000,000
3,500,000 or 42, 000,
000annually

Based on the above parameters, the distribution business


excels in few factors and lacks in the other. However, if we see
on a long term and profitability basis, the distribution business
looks much more exciting than franchise business.
3. I would buy the existing store rather than going for a new franchisee
store in a sub urban location. There are multiple reasons for the above
decision. Some of the reasons are stated as under:

Capacity Utilization: The capacity utilization is pretty low in case


of the new franchisee store. The initial ROI is also not very high. It

will take time to set the client base in the new location and it always
has a risk.
Revenue from services: The revenue generated from the services
is very high in case of existing store as compared to the new store.
Expenses: The expenses for a new franchisee store are high (Both
Fixed and Variable). Variable expenses are going to be more in this
case because we need to pay the royalty to the franchisor other
than the sone time signup fee and store launch expense.
Location: The already existing store is placed in densely populated
high end residential area with a monthly turnover of Rs.15 Lacs. The
location advantage would help in getting the sales and the risk of
denial from the customer also goes down
ROI on EBITDA: The ROI for the existing store is already at 45%
and sustainable whereas the value projected in the profit and loss
account may vary as per the business in future years.
Staff training and Asset costs: In case of the existing store
trained staff can be acquired which would save the cost of training
the staff and also the assets can be acquired at a depreciated value.
Due to both of these factors a lot of costs can be saved and would
ultimately increase the ROI.
Forecasting of consumable costs: The requirement for various
consumables and admin costs can be predicted in a well-established
network. The forecasting would help in better planning and
management of store which would help in overall sustenance of the
store in the future.
Feasibility: It would be comparatively easy to operate an already
existing store rather than a new one. The well-developed network
and connections with the distributors would help in further
expansion and operation.