Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 1 Franchising and the Entrepreneur

Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 11Chapter 4 FranchisingChapter 4 Franchising

Franchising and the Entrepreneur


The Franchising The Franchising Boom!!!Boom!!! Sales exceeding $1 trillion from virtually Sales exceeding $1 trillion from virtually

every product or service imaginable.every product or service imaginable. One out of 12 retail businesses in the One out of 12 retail businesses in the

U.S. is a franchised operation. U.S. is a franchised operation. Franchise sales account for 40% of total Franchise sales account for 40% of total

retail sales.retail sales. A new franchise opens somewhere in the A new franchise opens somewhere in the

world every six-and-a-half minutes and world every six-and-a-half minutes and in the United States every eight minutes.in the United States every eight minutes.


274,265290,605

310,044

341,579 337,693351,459

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100,000

150,000

200,000

250,000

300,000

350,000

400,000

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2000 2001 2002 2003 2004 2005

Year

Franchising GrowthNumber of Units (in Thousands)


FranchisingFranchising Franchising – semi-independent business Franchising – semi-independent business

owners pay fees and royalties to a parent owners pay fees and royalties to a parent company in exchange for the right to sell company in exchange for the right to sell its products and services under the its products and services under the franchiser’s trade name and often to use franchiser’s trade name and often to use its business format and system. its business format and system.


Types of Types of FranchisingFranchising

TradenameTradename Product distributionProduct distribution Pure (Business format)Pure (Business format)


Why Buy a Franchise?Why Buy a Franchise?

Franchisees benefit from the franchiser’s Franchisees benefit from the franchiser’s experience.experience.

Franchisees get a proven business system Franchisees get a proven business system and avoid having to learn by trial-and-and avoid having to learn by trial-and-error.error.

Franchisees earn a great deal of Franchisees earn a great deal of satisfaction from their work.satisfaction from their work.

Before buying, ask: “What can a franchise Before buying, ask: “What can a franchise do for me that I cannot do for myself?” do for me that I cannot do for myself?”


Benefits of Benefits of FranchisingFranchising

Business systemBusiness system Management training and Management training and

supportsupport Brand name appealBrand name appeal Standardized quality of goods Standardized quality of goods

and servicesand services National advertising programNational advertising program


Benefits of Benefits of FranchisingFranchising

Financial assistanceFinancial assistance Proven products and business Proven products and business

formatsformats Centralized buying powerCentralized buying power Site selection and territorial Site selection and territorial

protectionprotection Greater chance for successGreater chance for success


Drawbacks of Drawbacks of FranchisingFranchising

Franchise fees and profit sharingFranchise fees and profit sharing Strict adherence to standardized Strict adherence to standardized

operationsoperations Restrictions on purchasingRestrictions on purchasing Limited product lineLimited product line Unsatisfactory training programsUnsatisfactory training programs Market saturationMarket saturation Less freedomLess freedom


Ten Myths of Ten Myths of FranchisingFranchising

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

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

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


Ten Myths of Ten Myths of FranchisingFranchising

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

5.5. All franchises are the same.All franchises are the same.6.6. I don’t have to be a “hands-on” I don’t have to be a “hands-on”

manager. I can be an absentee manager. I can be an absentee owner and be very successful. owner and be very successful.


Ten Myths of Ten Myths of FranchisingFranchising7.7. Anyone can be a satisfied, Anyone can be a satisfied,

successful franchise owner.successful franchise owner.8.8. Franchising is the cheapest way to Franchising is the cheapest way to

get into business for yourself.get into business for yourself.9.9. The franchiser will solve my The franchiser will solve my

business problems for me; after all, business problems for me; after all, that’s why I pay an on-going royalty.that’s why I pay an on-going royalty.

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

What Do Franchisers What Do Franchisers Look for in a Look for in a Franchisee?Franchisee?

Experienced?Experienced? Hard Working?Hard Working? Team Player?Team Player? Leadership & Management Skills?Leadership & Management Skills? Risk Averse?Risk Averse? Educated?Educated? Financially Stable?Financially Stable? A Desire to Succeed?A Desire to Succeed?

Yes NoMaybe


Yes NoMaybe



Yes NoMaybe



Yes NoMaybe



Yes NoMaybe



Yes NoMaybe



Yes NoMaybe



Yes NoMaybe



Yes NoMaybe



Franchising and the Franchising and the LawLaw Key protection is the Uniform Key protection is the Uniform

Franchise Offering Circular (UFOC).Franchise Offering Circular (UFOC). Franchisers Franchisers mustmust deliver a copy of deliver a copy of

UFOC before any offer or sale of a UFOC before any offer or sale of a franchise.franchise.


Franchising and the Franchising and the LawLaw The UFOC contains information on The UFOC contains information on

23 topics, including:23 topics, including: Franchiser’s business experienceFranchiser’s business experience Franchise fees and costsFranchise fees and costs Lawsuits involving the franchiserLawsuits involving the franchiser Financial assistance availableFinancial assistance available Territorial protection grantedTerritorial protection granted Restrictions on purchasingRestrictions on purchasing


Detecting Dishonest Detecting Dishonest FranchisersFranchisers Claims that the contract is Claims that the contract is

“standard; no need to read it.”“standard; no need to read it.” Failure to provide a copy of the Failure to provide a copy of the

required disclosure documents.required disclosure documents. Marginally successful prototype or Marginally successful prototype or

no prototype.no prototype. Poorly prepared operations manual.Poorly prepared operations manual. Unsolicited testimonial from “a Unsolicited testimonial from “a

highly successful franchisee.” highly successful franchisee.”


Unusual amount of litigation by Unusual amount of litigation by franchisees.franchisees.

Promises of future earnings with no Promises of future earnings with no documentation.documentation.

High franchisee turnover or High franchisee turnover or termination rate.termination rate.

Attempts to discourage your Attempts to discourage your attorney attorney from evaluating the contract before from evaluating the contract before signing it.signing it.

(Continued)(Continued)

Detecting Dishonest Detecting Dishonest FranchisersFranchisers


No written documentation.No written documentation. High pressure sale.High pressure sale. Claims to be exempt from federal Claims to be exempt from federal

disclosure laws.disclosure laws. "Get rich quick" schemes, "Get rich quick" schemes,

promising promising huge profits with minimal effort.huge profits with minimal effort.

Reluctance to provide a list of Reluctance to provide a list of existing franchisees.existing franchisees.

Evasive, vague answers to your Evasive, vague answers to your questions.questions.

Detecting Dishonest Detecting Dishonest FranchisersFranchisers (Continued)(Continued)


How to Buy a How to Buy a FranchiseFranchise

Preparation, common sense, and Preparation, common sense, and patience are vital ingredients in patience are vital ingredients in choosing the right franchise.choosing the right franchise.

Evaluate yourself - What do you like Evaluate yourself - What do you like and dislike?and dislike?

Research the market.Research the market. Consider your franchise options.Consider your franchise options. Get a copy of the franchiser’s Uniform Get a copy of the franchiser’s Uniform

Franchise Offering Circular (UFOC) and Franchise Offering Circular (UFOC) and study it.study it.


What Should You Look What Should You Look For?For? A unique concept or marketing A unique concept or marketing

approachapproach ProfitabilityProfitability A registered trademarkA registered trademark


What Should You Look What Should You Look For?For? A business system A business system

that worksthat works A solid training A solid training

programprogram AffordabilityAffordability A positive relationship A positive relationship

with franchiseeswith franchisees



How to Buy a How to Buy a FranchiseFranchise Talk to existing franchisees.Talk to existing franchisees. Ask the franchiser some tough Ask the franchiser some tough

questions.questions. Make your choice.Make your choice.


Table 4.4 Advantages and Disadvantages of Buying a New vs. an Established Franchise

Pros Cons

New Franchise

Can be new and excitingBusiness concept can be fresh and different in the marketPossibility of getting lower fees as a “pioneer” of the conceptPotential for a high return on investment

Business is not tested or established in the marketUnknown brand and trademarkPossibility that the concept is a fad with no staying powerFranchiser may lack the experience to deliver valuable services to franchisees

Established Franchise

Business concept likely is well-known to consumers and market for the products or services is already established.Franchiser has experience in delivering services to franchiseesFranchiser has had time to work the “bugs” out of the business system

High franchise fees and costs that often are non-negotiableConcept may be on the wane in the marketFranchiser’s brand and trademark may remind customers of an outdated conceptFranchiser’s “trade dress” may be in need of updating and redesigning

Source: Based on Andrew A. Caffey, “Age Issues,” Entrepreneur, January 2002. p. 118.


Franchise Franchise ContractsContracts

Note clauses covering:Note clauses covering: TerminationTermination RenewalRenewal Transfers and BuybacksTransfers and Buybacks

40% of New Franchisees Sign 40% of New Franchisees Sign Contracts Without Reading Contracts Without Reading

Them !!!Them !!!

Contract


Trends Shaping Trends Shaping FranchisingFranchising

International opportunitiesInternational opportunities Smaller, nontraditional locationsSmaller, nontraditional locations Conversion franchisingConversion franchising Multiple-unit franchisingMultiple-unit franchising Master franchisingMaster franchising Piggybacking (Combination Piggybacking (Combination

franchising)franchising) Serving aging baby boomersServing aging baby boomers


Franchising Web SitesFranchising Web Sites

Entrepreneur’sEntrepreneur’s Franchise Zone Franchise Zone http://www.entrepreneur.com/Frahttp://www.entrepreneur.com/Franchise_Zone/FZ_FrontDoor/0,4670nchise_Zone/FZ_FrontDoor/0,4670,,00.html,,00.html

Subway Sandwiches and SaladsSubway Sandwiches and Saladshttp://www.subway.com/http://www.subway.com/

Auntie Anne’s PretzelsAuntie Anne’s Pretzelshttp://www.auntieannes.com/http://www.auntieannes.com/

Documents

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 1 Franchising and the Entrepreneur