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1Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Franchising and the
Entrepreneur
Franchising and the
Entrepreneur
2Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
The Franchising The Franchising Boom !!!Boom !!!
Annual sales of more than $1 Annual sales of more than $1 trillion of almost every trillion of almost every product or service product or service imaginable.imaginable.
Franchise sales account for Franchise sales account for 44 percent of total retail 44 percent of total retail sales.sales.
More than 3,000 franchisers More than 3,000 franchisers operating some 350,000 operating some 350,000 outlets in the United States.outlets in the United States.
Boom!
3Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
100
150
200
250
300
350
400
1980 1983 1988 1993 1998 2000 2001 2002 2003 2004 2005
Year
Franchising GrowthNumber of Units (in Thousands)
4Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
The Franchising The Franchising Boom !!!Boom !!!
Franchises employ one in Franchises employ one in every 16 workers in the U.S. every 16 workers in the U.S. in more than 100 major in more than 100 major industries. industries.
Economic impact of Economic impact of franchising on the U.S. franchising on the U.S. economy: $1.5 trillion.economy: $1.5 trillion.
A new franchise opens A new franchise opens somewhere in the world somewhere in the world every six-and-a-half minutes.every six-and-a-half minutes.
Boom!
5Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
FranchisingFranchising
A system in which semi-A system in which semi-independent business owners independent business owners (franchisees) pay fees and (franchisees) pay fees and royalties to a parent company royalties to a parent company (franchiser) in return for the (franchiser) in return for the right to become identified right to become identified with its trademark, to sell its with its trademark, to sell its products or services, and products or services, and often to use its business often to use its business format and system. format and system.
The Franchising The Franchising RelationshipRelationship
The Franchiser The Franchisee
Oversees and approves; may choose site
Provides prototype design
Makes general recommendations and training suggestions
Determines product or service line
Can only recommend prices
Establishes quality standards; provides list of approved suppliers; may requirefranchisees to purchase from the franchisor
Develops and coordinates national adcampaign; may require minimum level ofspending on local advertising
Sets quality standards and enforces themwith inspections; trains franchisees
Provides support through an establishedbusiness system
Chooses site with franchiser’s approval
Pays for and implements design
Hires, manages, and fires employees
Modifies only with franchiser’s approval
Sets final prices
Must meet quality standards; must purchaseonly from approved suppliers; must purchasefrom supplier if required.
Pays for national ad campaign; complies withlocal advertising requirements; gets franchisorapproval on local ads
Maintains quality standards; trains employeesto implement quality systems
Operates business on a day-to-day basis withfranchiser’s support
Site selection
Design
Employees
Products and services
Prices
Purchasing
Advertising
Quality control
Support
Element
Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice ofPriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.
7Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Types of Types of FranchisingFranchising
TradenameTradename Product distributionProduct distribution Pure (Business format)Pure (Business format)
8Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Franchising Franchising BasicsBasics
Franchisee gets the right to use all of the Franchisee gets the right to use all of the elements of a fully integrated business operation.elements of a fully integrated business operation.
Essence of what franchisees purchase from the Essence of what franchisees purchase from the franchisers: Experience.franchisers: Experience.
Key Question: What can a franchise do for me Key Question: What can a franchise do for me that I cannot do for myself? that I cannot do for myself?
9Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Benefits of Benefits of FranchisingFranchising
Management training and Management training and supportsupport Start-upStart-up OngoingOngoing
Brand name appealBrand name appeal ““Cloning”Cloning”
Standardized quality of Standardized quality of goods and servicesgoods and services
10Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Benefits of Benefits of FranchisingFranchising
National advertising programNational advertising program Franchisees contribute 1 Franchisees contribute 1
percent to 5 percent of salespercent to 5 percent of sales Financial assistanceFinancial assistance
Only one-third of franchisers Only one-third of franchisers offer financial assistance to offer financial assistance to franchisees. franchisees.
SBA – Franchise RegistrySBA – Franchise Registry
11Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Benefits of Benefits of FranchisingFranchising
Proven products and Proven products and business formatsbusiness formats
Centralized buying powerCentralized buying power Site selection and territorial Site selection and territorial
protectionprotection Important issue: Territorial Important issue: Territorial
encroachmentencroachment Greater chance for successGreater chance for success
12Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
New 1 2 3 4 5 6 7 8 9 10
Years in Business
Success Rate Comparison
% Franchises Surviving
% Independent Businesses Surviving
13Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Drawbacks of Drawbacks of FranchisingFranchising
Franchise fees and ongoing Franchise fees and ongoing royaltiesroyalties Average initial franchise Average initial franchise
investment (excluding real estate) investment (excluding real estate) = $318,975= $318,975
Royalties range from 1 percent to Royalties range from 1 percent to 11 percent of franchisees’ sales11 percent of franchisees’ sales
Strict adherence to standardized Strict adherence to standardized operationsoperations
Restrictions on purchasingRestrictions on purchasing Approved suppliers onlyApproved suppliers only
14Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Drawbacks of Drawbacks of FranchisingFranchising
Limited product lineLimited product line Contract terms and renewalContract terms and renewal
Average term = 10.3 yearsAverage term = 10.3 years Unsatisfactory training Unsatisfactory training
programsprograms Market saturationMarket saturation Less freedomLess freedom
““Happy prisoners”Happy prisoners”
15Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Ten Myths of FranchisingTen Myths of Franchising
1. Franchising is the safest way to go into 1. Franchising is the safest way to go into business because franchises never fail.business because franchises never fail.
2. I’ll be able to open my franchise for 2. I’ll be able to open my franchise for less money than the franchiser less money than the franchiser estimates. estimates.
3. The bigger the franchise organization, 3. The bigger the franchise organization, the more successful I’ll be. the more successful I’ll be.
4. I’ll use 80 percent of the franchiser’s 4. I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon business system, but I’ll improve upon it by substituting my experience and it by substituting my experience and know-how. know-how.
16Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Ten Myths of FranchisingTen Myths of Franchising
5. All franchises are the same.5. All franchises are the same.
6. I don’t have to be a hands-on 6. I don’t have to be a hands-on manager. I can be an absentee manager. I can be an absentee owner and still be very successful. owner and still be very successful.
7. Anyone can be a satisfied, successful 7. Anyone can be a satisfied, successful franchise owner. franchise owner.
(Continued)(Continued)
17Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Ten Myths of FranchisingTen Myths of Franchising
8. Franchising is the cheapest way to 8. Franchising is the cheapest way to get into business for yourself. get into business for yourself.
9. The franchiser will solve my business 9. The franchiser will solve my business problems for me; after all, that’s why problems for me; after all, that’s why I pay an ongoing royalty fee. I pay an ongoing royalty fee.
10. Once I open my franchise, I’ll be 10. Once I open my franchise, I’ll be able to run things the way able to run things the way II want to. want to.
(Continued)(Continued)
18Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Franchising and the Franchising and the LawLaw
Uniform Franchise Offering Uniform Franchise Offering Circular (UFOC)Circular (UFOC) Requires franchisers to disclose to Requires franchisers to disclose to
potential franchisees information potential franchisees information on 23 important topicson 23 important topics
Idea is to give franchisees the Idea is to give franchisees the information they need to protect information they need to protect themselves from dishonest themselves from dishonest franchisers and to make good franchisers and to make good investment decisionsinvestment decisions
19Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Detecting Dishonest Detecting Dishonest FranchisersFranchisers
Claims that the contract is “standard; no Claims that the contract is “standard; no need to read it.”need to read it.”
Failure to provide a copy of the required Failure to provide a copy of the required disclosure documents.disclosure documents.
Marginally successful prototype or no Marginally successful prototype or no prototype.prototype.
Poorly prepared operations manual.Poorly prepared operations manual. Promises of future earnings with no Promises of future earnings with no
documentation.documentation. High franchisee turnover or termination High franchisee turnover or termination
rate.rate. Unusual amount of litigation by Unusual amount of litigation by
franchisees.franchisees.
20Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Detecting Dishonest Detecting Dishonest FranchisersFranchisers
Attempts to discourage your attorney from Attempts to discourage your attorney from evaluating the contract before signing it.evaluating the contract before signing it.
No written documentation.No written documentation. A high pressure sale. A high pressure sale. Claims to be exempt from federal disclosure Claims to be exempt from federal disclosure
laws.laws. ““Get rich quick” schemes, promising huge Get rich quick” schemes, promising huge
profits with minimal effort.profits with minimal effort. Reluctance to provide a list of existing Reluctance to provide a list of existing
franchisees.franchisees. Evasive, vague answers to your questions.Evasive, vague answers to your questions.
(Continued)(Continued)
21Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
The The RightRight Way to Buy a Way to Buy a FranchiseFranchise
Evaluate yourself - What do you like and Evaluate yourself - What do you like and dislike?dislike?
Research your market.Research your 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 read it.read it.
Talk to existing franchisees.Talk to existing franchisees. Ask the franchiser some tough questions.Ask the franchiser some tough questions. Make your choice.Make your choice.
22Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Factors That Make a Factors That Make a Franchise AppealingFranchise Appealing
Unique concept or marketing Unique concept or marketing approachapproach
ProfitabilityProfitability Registered trademarkRegistered trademark Business system that worksBusiness system that works Solid training programSolid training program AffordabilityAffordability Positive relationship with franchiseesPositive relationship with franchisees
23Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Trends Shaping Trends Shaping FranchisingFranchising
Changing face of franchiseesChanging face of franchisees Better educated with more business Better educated with more business
acumenacumen Multiple-unit franchisingMultiple-unit franchising
11 percent of franchisees operate 11 percent of franchisees operate multiple outlets (and growing)multiple outlets (and growing)
International opportunitiesInternational opportunities More than 500 U.S. franchisers now More than 500 U.S. franchisers now
have international locationshave international locations Smaller, nontraditional locationsSmaller, nontraditional locations
Intercept marketingIntercept marketing
24Chapter 6: Franchising Copyright 2008 Prentice Hall Publishing
Trends Shaping Trends Shaping FranchisingFranchising
Conversion franchisingConversion franchising 72 percent of North American 72 percent of North American
franchisers use as a growth franchisers use as a growth strategystrategy
Master franchisingMaster franchising Piggybacking (or combination or Piggybacking (or combination or
multi-branded franchising)multi-branded franchising) Serving dual-career couples and Serving dual-career couples and
baby boomersbaby boomers