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Chapter 3 3-1Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
PowerPoint Presentation by PowerPoint Presentation by
Thomas MThomas MccKaig, Ryerson UniversityKaig, Ryerson University
Franchising Franchising OpportunitiesOpportunities
33
Chapter 3 3-2Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Looking AheadLooking Ahead
After studying this chapter, you should be able to:
1. Describe the significance of franchising in Canada.
2. Identify the major advantages and limitations of franchising
3. Discuss the process for evaluating a franchise opportunity.
4. Evaluate franchising for the franchisor’s perspective.
5. Describe the franchisor/franchisee relationship.
Chapter 3 3-3Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Franchising TermsFranchising Terms
• FranchisingA marketing system revolving around a two-party legal
agreement, whereby the franchisee conducts business according to the terms specified by the franchisor
• Franchise contractThe legal agreement between franchisor and franchisee
• FranchiseThe privileges conveyed in the franchise contract
…continued
Chapter 3 3-4Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Franchising TermsFranchising Terms
• FranchiseeAn entrepreneur whose power is limited by a
contractual agreement with a franchisor
• FranchisorThe party in the franchise contract that specifies
the methods to be followed and the terms to be met by the other party
Chapter 3 3-5Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Types of FranchisesTypes of Franchises
• Product and Trade Name FranchiseGrants the right to use a widely recognized product or
name
• Business Format FranchiseProvides an entire marketing system and ongoing
guidance from the franchisor
• Piggyback FranchisingThe operation of a retail franchise within the physical
facilities of a host store…continued
Chapter 3 3-6Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Types of FranchisesTypes of Franchises
• Master LicenseeAn independent firm or individual acting as a sales agent
with the responsibility for finding new franchises within a specified territory
• Multiple-Unit OwnershipHolding by a single franchisee of more than one
franchise from the same company
• Area Developers Individuals or firms that obtain the legal right to open
several franchised outlets in a given area
Chapter 3 3-7Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Figure 3-2
Pluses Minuses
Formalized training
Financial assistance
Proven marketingmethods
Managerial assistance
Quicker startup time
Overall lower failurerates
Franchise fees
Royalties
Restrictions on growth
Less independence inoperations
Franchisor may be solesupplier of somesupplies
Termination/renewalclauses
The Pros and Cons of FranchisingThe Pros and Cons of Franchising
Chapter 3 3-8Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
The Advantages of FranchisingThe Advantages of Franchising
• Proven marketing concept and customer base• Training • Financial assistance• Operating assistance
Chapter 3 3-9Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Financial AssistanceFinancial Assistance
• Start-up business costs are normally high and thus by teaming up with a franchise organization, the individual can increase her/his chance of receiving financial help.
• The franchisor might chose to use liberal payment schemes to the franchisee in order to get over the initial financial hurdle.
Chapter 3 3-10Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Operating AssistanceOperating Assistance
• The franchisor provides a range of operating services including site selection, bulk purchasing of equipment, and inventory.
• Other areas of assistance include the use of an established, nation-wide brand
Chapter 3 3-11Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Pros and Cons of FranchingPros and Cons of Franching
• Advantages– Probability of success
• Proven line of business
• Pre-qualification of franchisee
– Training• Franchisor-provided
– Financial assistance• Franchisor assistance
– Operating benefits• Franchisor-aided
• Limitations–Franchise costs
• Initial franchise fee
• Investment costs
• Royalty payments
• Advertising costs
–Restrictions on Business Operations
–Loss of independence
Chapter 3 3-12Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Limitations of Franching: Restriction of Business Operations
Limitations of Franching: Restriction of Business Operations
• Restricting of sales territory• Requiring site approval and
imposing requirement on the outlet’s appearance
• Restricting the goods/services that can be sold
• Restricting the resale of the franchise without their permission
• Restricting advertising and hours of operation
Chapter 3 3-13Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Evaluating Franchise OpportunitiesEvaluating Franchise Opportunities
• Locating a Franchise Opportunity
• Investigating the Potential FranchiseInformation sources
• Independent, third-party sources
• Franchisors themselves
• Existing and previous franchisees
Chapter 3 3-14Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Explanation of CostsExplanation of Costs
• Franchise fee
• First and Last Month’s Rent
• Leasehold Improvements
• Equipment
• Furniture and Fixtures
• Signage
• Insurance, Licences and Permits
• Training
• Initial Inventory
• Working Capital
• Royalty
Chapter 3 3-15Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Global Franchising OpportunitiesGlobal Franchising Opportunities
• Historically, many Canadian franchisors have expanded into the United States.
• Canadian franchising enterprises are now expanding into countries beyond North America.
Chapter 3 3-16Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Investigating the Franchise CandidateInvestigating the Franchise Candidate
• Three sources of information:– independent third party sources– franchisors– existing and previous franchisees
Chapter 3 3-17Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Selling a FranchiseSelling a Franchise
• Why would a businessperson wish to become a franchisor? Three benefits can be identified:
1. Reduction of capital requirements
2. Increase in management motivation
3. Speed of expansion
…continued
Chapter 3 3-18Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Selling a FranchiseSelling a Franchise
• Drawbacks associated with franchising from the franchisor’s perspective.
1. Reduction in control
2. Sharing of profits
3. Increase in operating support
Chapter 3 3-19Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Franchising FraudsFranchising Frauds
• The Rented Rolls Royce Syndrome
• The Hustle
• The Cash-Only Transaction
• The Boast
• The Big-Money Claim
• The Couch Potato’s Dream
• Location, Location, Location
• The Disclosure Dance