Franchising

Definition: “Franchising is an arrangement

whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive right of local distributor to independent retailer in return for Royalties and conformation to standardized operating procedures”.

Types of Franchising

1. Trade Name Franchising: A system of franchising in which a

franchisee purchases the right to use the franchisor’s trade name without distributing particular product under the franchisor’s name.

2. Product Distribution Franchising: A system of franchising in which a

franchiser licenses a franchisee to sell its products under the franchiser’s brand name and trademark through a selective, limited distribution network.

Automobile

3. Pure Franchising: A system of franchising in which a

franchisee sells a franchisee a complete business format and system.

Advantages of Franchising

Management Training and Support Brand Name appeal Capital Requirement Standard Quality of Goods and Services Knowledge of the market Operating and Structural Control Centralized Buying Power Greater Chance for Success

Advantages to Franchiser

Expansion Risk Cost Advantages Profitability Location advantage Name recognition product success

Drawbacks of Buying a Franchisee Franchise fees and Profit Sharing Strict Adherence to Standardized

Operations Restrictions on Purchasing Limited Product Line Unsatisfactory Training Programs Market Saturation Lees Freedom

10 myths of franchising

Myth 1:-Franchising is the safest way to go into business because franchises never fails.

• The failure rate is lower than the independent busi.

• No guarantee of success• Potential franchises take same degree of

caution in judging the risk as they would any other business.

Myth 2:-I'll be able to open my franchise for less money than the franchiser estimates

• Wants to establish a new busi, normally it takes more money & more time than the estimation

• One retail company advices, “ if a franchiser tells u that u need $100000to get started busi than better u have $150000.”

Myth 3:-The bigger the franchise organization, the more successful I’ll be• Bigger is not always better• largest franchise has to struggle for

maintaining their growth because the best location is already taken.

• Market saturation is big problem for large franchises.

• While smaller franchises are accounting for much of the growth in the industry.

Myth 4:-I'll use 80% of the franchiser’s busi system, but I’ll improve on it by substituting my experience and know-how. • When franchisees buy a franchise they are

buying the franchiser’s experience and know-how.

• If the franchisee isn’t willing to use franchiser’s system then why to pay all money to him?

Myth 5:-All franchises are same.

• Each franchise has its own unique requirement , procedures, and culture.

• Some will suit on u than others• Avoid to select the franchise which offers

lowest cost.• Always see that whether u will be

comfortable with system or not

Myth 6:-I don’t have to be “hands-on manager”. I can be an absentee owner and still be very successful

• Hands-on manager means the manager who solves the problems as it comes

• They don’t believe in formulation of any kind of strategy.

• So the franchise success requires the attention of hands on managers

Myth 7:-Anyone can be a satisfied, successful franchise owner.• Free spirit person means the person like

hands-on managers are not always success and satisfied owner.

Myth 8:-Franchising is the cheapest way to get into busi for yourself.

• Sometimes the price tag of buying into some system is running into several hundreds of thousands of dollars.

• Actually franchiser look for candidates who are on solid financial footing.

Myth 9:-The franchiser will solve my business problems for me, after all, that’s why I pay ongoing royalty • The franchiser offers franchisees start-up and

ongoing training programs • Franchisers will not run their franchisees’

busi for them• The franchisees’ job is only to take the

formula that he franchiser has developed & make it work on his location.

Myth 10:-Once I open my franchises ,I’ll be able to run things the way I want to• Franchisees are not free to run the busi any

way.• Every franchisee signs a contract that

requires to run the busi according to the franchiser’s requirement.

• If the franchisees violates the terms of an agreement then the relationship of them are cancelled.

The right way to buy a franchise

Before buying a franchise clues which gets suspicious of an entrepreneur to invest in a franchise.• Claims that the franchise contract is a

standard one that you don’t need to read it.

• Fails to give you a copy of the required disclosure document at your first face to face meeting.

• A marginally prototype store or no prototype at all.

• A poorly prepared operations of the franchise system & it has only manual outlining or it has no system at all.

• When the franchiser makes oral promises without any written documentation.

• If the franchisee turnover rate is high or high termination rate.

• An unusual amount of litigation brought against the franchiser.

• Attempts to discourage you from allowing lawyer to evaluate the franchise contract before you sign it.

• If there is no written documentation to support claims & promise.

• Claiming to the exampt from federal laws requiring complete disclosure of franchise details.

• A high pressure sale sign the contract now & lose the opportunity.

• “Get-rich-quick schemes” promises of huge profits with min efforts.

• Unwilling to provide a list of present franchisees for you to interview.

• Evasive, vague to your questions about the franchise & its operations.

Steps which will help you to make u right choice1) Evaluate yourself:-• Entrepreneurs should study their own traits,

goals, experience, likes, dislikes, risk orientation, income requirements, time & family commitments, & other characteristics.

• Will u be Comfortable working in a structured environment?

• What kinds of Franchises fit your desire lifestyle?• In what Religion do you want to work or live ?• What is your detailed Job description? • Goal is right or not

2) Research your market• Before buying franchise, research the market in

the area you plan to serve.• How fast the overall market growing?• In which area the growth is fast?• Potential customers & their characteristics?• Education & income?• Products & service s do they buy?• Gaps exit in the market?• These gaps represent potential franchise

opportunity for you.

3) Consider your franchise option:• The international association publishes the

franchise opportunity guide, which lists its members & some basic info about them.

• Many cities host franchise trade shows throughout the year, where hundreds of franchisers gather to sell their franchises.

• Convenient & efficient way• Magazines – entrepreneur, FSB• Help u to find best franchise within you price

range

4) Get a copy of the franchisers’ UFOC:• UFOC means Uniform Franchising Offering Circular.• The law requires franchisers to register a UFOC &

deliver a copy to franchisees before any offer or sale of a franchise.

• Once you narrow down your choices, you should contact each franchise & get a copy of UFOC. Read it.

• This document is an important tool in your search for the right franchise.

• You should make which is the most.• When evaluating a franchise opportunity ,what

should a potential franchisee looking for?• Actually there is no guarantee of success ,there are

some characteristics which are:

Characteristics:• A unique concept & marketing approach • Profitability• A registered trademark• A busi system that works• A solid training program• Affordability• A positive relation with franchisees

I) A unique concept or marketing approach:Ex:- “me-too” franchises are no more

successful than “me-too” independent businesses.

Ex:- pizza franchiser like PAPA JOHNS is known for its quality of its ingredients

while DOMINO’S is known for its fast delivery

ii) Profitability:A franchiser should have a track record of profitability.Franchisees who follows the business format should expect to earn a reasonable rate of return.

iii) A registered trademark: Name recognition is difficult to achieve without a well known & protected trademark.

iv) A business system that works:A franchiser should have a system i.e efficient & is well documented in its manner.

v) A solid training program:The most valuable components of a franchise system is the training which offers to franchisee.The system should be relatively easy to teach.

vi) Affordability:A franchisee should not have to take on excessive amount of debt to purchase a franchise.Being forced to borrow too much money to open a franchise outlet can ruin a business from the outset.

vii) A positive relationship with franchiser:The most successful franchises are those that see their franchisees as partners & treat them accordingly.

5) Talk with existing franchisees:• Interview some franchise owner who is in the

busi at least 1 year about positive & negative features of the agreement

• Did the franchise estimate the Start-up cost accurately?

• Do they get support from the franchiser which has promised?

• Has the franchise met their expectations concerning profitability & return on investment?

• Would they buy franchise again?

6) Ask the franchiser some tough questions:

• Que about the company & relationship with its franchisee

• What is the company culture?• What is the philosophy concerning the relationship?• How much input do franchisees have into the system?• What are the franchisers’ future expansion plans?• What kind of Profit can you expect?• Does the franchiser have well formulated strategic

plan?• What happens if you want to sell your franchise in

future?• In what circumstances either party terminate the

franchise agreement?

7) Make your choice

• After completing research, make the informed choice about the franchise is right or not.

• It is time to put a solid busi plan will serve u on the path of success.

Trends shaping in franchise

Three major growth waves since its beginning• First wave – early 1970 when a fast food

restaurants used the concept to grow rapidly.

• Second wave – mid 1980s as our economy shifted heavily towards service sector.

• Third wave – early 1990s & even continuing today which is characterized by new & low cost franchises that focuses on specific market niches.

Significant trends affect the franchise:

1) Changing face of franchises:• Educated, more sophisticated, more busi

acumen, & more financially secure than those of 20 years ago.

• Franchising is attracting skilled, experienced businesspeople whose goal is multiple outlet & want to cover entire states or region .

2) International opportunity

• One of major trends in franchising is internationalization of American franchises system

• Franchising is becoming major export for US• Growing no of US franchises are moving into international

markets to boost the sales & profit.• According to the report by Arthur, 44% of US franchisers

have international locations which up from 34% in 1989.• International expansion is a relatively new phenomena in

franchising & appro. 75% of franchisers established their first foreign outlet within past 10 years.

• As they venture into foreign market, franchisers have learned the adaptation which is the key of success

• Busi format may not change, some of the details of operating of its local outlets must be I there.

3) Smaller, non traditional location• Actually, the cost of building in full scale

locations is very high so the franchisers are searching out non traditional location

• In non traditional location, they want to build smaller & less expensive outlets

• They want to use intercept marketing- it is the principal of putting a franchises’ products or services directly in the path of potential customers

4) Conversion franchises

• Means the owner of independent busi become franchisees to gain the adv of name recognition

• The franchiser gets immediate entry into new market & experienced operators

• The visibility of franchisee gets increased & a big sales boost

5) Multiple unit franchising• Means a franchisee opens more than one unit in

a broad territory within a specific time period.• Multiple ownership of franchise unit has

expanded in recent years.• Now it is common to own 60, 70, or even 200

units.• The popularity of multiple unit franchising has

paralleled the trend towards increasingly experienced & sophisticated franchisees.

• They set very high performance goals which can not be achieved by a single outlet.

6) Master franchising:• Means a method of franchising that gives the right to

create a semi independent organization in a particular territory to recruit, sell & support other franchises.

• The master franchisee buys the right to develop sub franchises within broad geographic area or sometimes in entire country.

• Many franchisers use it to open outlets in international market more quickly & efficiently because it understand local laws

• Ex:- a YOGURT franchise has a master franchise with TCBY international and opened 21 stores in China & Hong Kong.

• Based on his success, the company has sold him the master franchise in India.

7) piggybacking:• Piggybacking means combination franchising.• There are two or more distinct franchise under

one roof• It is called a “Buddy System”• This buddy system approach works when the

two franchise ideas are well suited & appeal to a similar customers.

• Some franchisers are discovering new ways to reach customers by teaming up with the other franchisers which selling complementary products or services.

Ex:- The franchisee who combinedShell oil (gas station),Charley’s Steakery (sandwich shop)TCBY (frozen yogurt)

Franchises under one roof in Columbus, &Ohio.• Their sales are running 10% higher than the

three outlets would generate in separate location.

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