7 - 1 Copyright © 2016 Pearson Education, Inc. Franchising and the Entrepreneur 7 Section 2: The Entrepreneurial Journey Begins

7 - 1Copyright © 2016 Pearson Education, Inc.

Franchising and the Entrepreneur

77

Section 2: The Entrepreneurial Journey Begins

About 3,000 franchisors operate more than 770,000 outlets in the United States.

Franchises generate more than $800 billion in annual sales and account for 4.1% of the U.S. GDP.

Franchises employ 8.1 million workers in the United States in more than 300 major industries.




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.


Franchisee gets the right to use all of the elements of a fully integrated business operation.

Essence of what franchisees purchase from the franchisors: Experience.

Key Question: “What can a franchise do for me that I cannot do for myself?”



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Trade-name

Product distribution

Pure (Business format)

A business systemManagement training and support

Start-upOngoing

Brand name appeal“Cloning”

Standardized quality of goods and services


National advertising programsFranchisees contribute 1% to 5% of sales.

Financial assistanceAbout 20% of franchisors offer direct financial assistance to franchisees.

SBA – Franchise Registry


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Proven products and business formats

Centralized buying power

Site selection and territorial protection

Important issue: Territorial encroachment

Greater chance for success


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Franchise fees and ongoing royaltiesAverage upfront franchise fee =

$25,147Royalties range from 1% to 11% of

franchisees’ salesAverage royalty = 6.7% of sales



Strict adherence to standardized operations

Restrictions on purchasingApproved suppliers only

Limited product lineContract terms and renewal

Average term = 10.3 years



Unsatisfactory training programsMarket saturationLess freedom

“No independence”“Happy prisoners”


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1. Franchising is the safest way to go into business because franchises never fail.

2. I ’ll be able to open my franchise for less money than the franchiser estimates.

3. The bigger the franchise organization, the more successful I’ll be.

4. I ’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how.

5. All franchises are the same.7 - 17Copyright © 2016 Pearson Education, Inc.

6. I don’t 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.

8. Franchising is the cheapest way to get into business for yourself.

9. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee.

10.Once I open my franchise, I’ll be able to run things the way I want to.


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Franchise Disclosure Document (FDD)Established in 2008 to replace the Uniform

Franchise Offering Circular (UFOC)Requires franchisors to disclose to potential

franchisees information on 23 important topics

Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions.


Evaluate yourself: What do you like and dislike?

Research your market.Consider your franchise options.Get a copy of the Franchisor’s FDD –

and read it!



Number of Franchisees from which Prospective Franchisees Solicit Information Before Selecting a Franchise

Unique concept or marketing approach

Profitability

Registered trademark

Business system that works

Solid training program

Affordability

Positive relationship with franchisees


Evaluate yourself: What do you like and dislike?

Research your market. Consider your franchise options. Get a copy of the Franchisor’s FDD – and

read it! Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice.



International opportunitiesMany franchises are focusing on

international markets as a source of growth.Yum! earns 75% of its revenues from

international franchises.McDonald’s earns 70% of its sales

internationally.


Smaller, nontraditional locationsIntercept marketing: putting a franchise’s

products or services directly in the paths of potential consumers, wherever they may be.

Conversion franchising

Owners of independent businesses become franchisees to gain the advantage of name recognition.

72% of North American franchisors use it as a growth strategy.


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RefranchisingFranchisors sell their company-owned

outlets to franchisees.

Multi-unit franchising

IFA: 20% of franchise owners are multiple-unit owners.

Typical multiple-unit franchises own five outlets.


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Area development and master franchising

Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time.

Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.


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Co-brandingAka piggyback or combination

franchising:

Two or more franchises team up to sell complementary products or services under one roof.


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Franchising: Is a key part of the small

business sectorIncreases the chance of

business success for the entrepreneur

Growth continues


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7 - 1 Copyright © 2016 Pearson Education, Inc. Franchising and the Entrepreneur 7 Section 2: The Entrepreneurial Journey Begins