Franchising and the Entrepreneur
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
The Franchising Boom !!!
Annual sales of more than $1 trillion of almost every product or service imaginable. Franchise sales account for 44 percent of total retail sales. More than 3,000 franchisers operating some 350,000 outlets in the United States.
Boom!
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
The Franchising Boom !!!
Franchises employ one in every 16 workers in the U.S. in more than 100 major industries. Economic impact of franchising on the U.S. economy: $1.5 trillion. A new franchise opens somewhere in the world every six-and-a-half minutes.
Boom!
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
Franchising
A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
The Franchising Relationship Element The Franchiser
The Franchisee
Site selection Design Employees
Oversees and approves; may choose site Provides prototype design Makes general recommendations and training suggestions Determines product or service line
Chooses site with franchisers approval Pays for and implements design Hires, manages, and fires employees Modifies only with franchisers approval
Products and services Prices Purchasing
Can only recommend prices
Establishes quality standards; provides list of approved suppliers; may require franchisees to purchase from the franchisor Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Sets quality standards and enforces them with inspections; trains franchisees Provides support through an established business system
Sets final prices
Must meet quality standards; must purchase only from approved suppliers; must purchase from supplier if required. Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads Maintains quality standards; trains employees to implement quality systems Operates business on a day-to-day basis with franchisers support
Advertising
Quality control
Support
Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association , National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.
Types of Franchising
Tradename Product distribution Pure (Business format)
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
Franchising Basics
Franchisee gets the right to use all of the elements of a fully integrated business operation.
Essence of what franchisees purchase from the franchisers: Experience.
Key Question: What can a franchise do for me that I cannot do for myself?
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Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
Benefits of Franchising
Management training and support
Start-up Ongoing
Brand name appeal
Cloning
Standardized quality of goods and services
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
Benefits of Franchising
National advertising program
Franchisees contribute 1 percent to 5 percent of sales
Financial assistance
Only one-third of franchisers offer financial assistance to franchisees. SBA Franchise Registry
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Benefits of Franchising
Proven products and business formats Centralized buying power Site selection and territorial protection
Important issue: Territorial encroachment
Greater chance for success
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Drawbacks of Franchising
Franchise fees and ongoing royalties
Average initial franchise investment (excluding real estate) = $318,975 Royalties range from 1 percent to 11 percent of franchisees sales
Strict adherence to standardized operations Restrictions on purchasing
Approved suppliers only
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Drawbacks of Franchising
Limited product line Contract terms and renewal
Average term = 10.3 years
Unsatisfactory training programs Market saturation Less freedom
Happy prisoners
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Ten Myths of Franchising
1. Franchising is the safest way to go into business because franchises never fail. 2. Ill be able to open my franchise for less money than the franchiser estimates. 3. The bigger the franchise organization, the more successful Ill be. 4. Ill use 80 percent of the franchisers business system, but Ill improve upon it by substituting my experience and know-how.
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Ten Myths of Franchising
(Continued)
5. All franchises are the same. 6. I dont have to be a hands-on manager. I can be an absentee owner and still be very successful. 7. Anyone can be a satisfied, successful franchise owner.
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Ten Myths of Franchising
(Continued)
8. Franchising is the cheapest way to get into business for yourself. 9. The franchiser will solve my business problems for me; after all, thats why I pay an ongoing royalty fee. 10. Once I open my franchise, Ill be able to run things the way I want to.
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Franchising and the Law
Uniform Franchise Offering Circular (UFOC)
Requires franchisers to disclose to potential franchisees information on 23 important topics Idea is to give franchisees the information they need to protect themselves from dishonest franchisers and to make good investment decisions
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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Detecting Dishonest Franchisers
Claims that the contract is standard; no need to read it. Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Poorly prepared operations manual. Promises of future earnings with no documentation. High franchisee turnover or termination rate. Unusual amount of litigation by franchisees.
Chapter 6: Franchising
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Detecting Dishonest Franchisers
(Continued)
Attempts to discourage your attorney from evaluating the contract before signing it. No written documentation. A high pressure sale. Claims to be exempt from federal disclosure laws. Get rich quick schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions.
Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
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The Right Way to Buy a Franchise
Evaluate yourself - What do you like and dislike? Research your market. Consider your franchise options. Get a copy of the franchisers Uniform Franchise Offering Circular (UFOC) and read it. Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice.
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Chapter 6: Franchising
Copyright 2008 Prentice Hall Publishing
Factors That Make a Franchise Appealing
Unique concept or marketing approach Profitability Registered trademark Business system that works Solid training program Affordability Positive relationship with franchisees
Copyright 2008 Prentice Hall Publishing 22
Chapter 6: Franchising
Trends Shaping Franchising
Changing face of franchisees
Better educated with more business acumen
11 percent of franchisees operate multiple outlets (and growing) More than 500 U.S. franchisers now have international locations Intercept marketing
Copyright 2008 Prentice Hall Publishing 23
Multiple-unit franchising
International opportunities
Smaller, nontraditional locations
Chapter 6: Franchising
Trends Shaping Franchising
Conversion franchising
72 percent of North American franchisers use as a growth strategy
Master franchising Piggybacking (or combination or multibranded franchising) Serving dual-career couples and baby boomers
Copyright 2008 Prentice Hall Publishing 24
Chapter 6: Franchising
