Page 52 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 1 Understanding business activity

ACTIVITY 4.2

Chata and Juma – their story continues!
After considering the advantages and disadvantages of entering into partnership with Juma, Chata decided it was the only

way he was going to be able to expand his bakery business. Juma not only brought much needed capital to the partnership,
but also brought many ideas too. The business, which they now call Chaju Bakery and Confectionery Products (CBCP), has
been very successful, so successful that the partners are considering further expansion. They plan to open their own retail
outlets for the products they currently produce and new ones which they hope to manufacture when they move to larger
premises.
Chata and Juma realise that they need to raise additional finance for the expansion. Chata’s father and Juma’s sister are
both keen to invest in CBCP. However, the two potential investors are worried about the unlimited liability they will have if
CBCP remains a partnership. Chata and Juma do not want to risk losing the capital their family members are prepared to
invest in the business, so are considering becoming a private limited company.

1 Identify and explain the main advantage to Chata’s father and Juma’s sister of CBCP becoming a private limited
company.
2 Identify and explain three possible advantages and three possible disadvantages to Chata and Juma of CBCP becoming
a private limited company

Franchises

KEY TERM A franchise is a form of business organisation in which a firm which already
has a successful product or service – called the franchisor – agrees to allow
Franchise: a business system
another business – called the franchisee – to use the franchisor’s trade name,
50 where entrepreneurs buy the logo and products in exchange for a fee. This is a popular way for multinational

right to use the name, logo and
product of an existing business. businesses to expand across many countries. For example, there are very
few countries in the world that do not have a McDonald’s! Most of these are

franchised outlets. The franchisee makes the decision about whether to operate as
a sole trader, partnership or incorporated business organisation.
Business entrepreneurs may decide to enter into a franchise agreement

rather than setting up their own business because of the benefits of this type of

organisation. Th ese benefits include the following:
■ There is less chance of business failure because the product and brand are already
well established, for example Chicken Licken, The Natural Source and Hilton Hotel
franchises.
■ The franchisor often provides advice and training to the franchisee as part of the

franchise agreement.
■ The franchisor will finance the promotion of the brand through national
advertising.
■ The franchisor will already have checked the quality of suppliers, so the franchisee
is guaranteed quality supplies.

However, there are some limitations of franchising. Th ese include:

■ The initial cost of buying into a franchise can be very expensive.
■ The franchisor will take a percentage of the revenue or profits made by the
franchisee each year.
■ There are very strict controls over what the franchisee is allowed to do with
A franchise the product, pricing and store layout. For example, if you go to diff erent