Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Franchising and the Entrepreneur CHAPTER 6

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Franchising and the Franchising and the EntrepreneurEntrepreneur

Franchising and the Franchising and the EntrepreneurEntrepreneur

CHAPTER CHAPTER 66

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 2Ch. 6: Franchising and the Entrepreneur

The Franchising BoomThe Franchising Boom More than 3,000 franchisors operate More than 3,000 franchisors operate

more than 909,000 outlets in the more than 909,000 outlets in the United States.United States.

Each year, franchises produce goods Each year, franchises produce goods and services that are worth $881 and services that are worth $881 billion, 4.4% of the U.S. GDP. billion, 4.4% of the U.S. GDP.

Franchises employ one in every 12 Franchises employ one in every 12 workers in the U.S. in more than 230 workers in the U.S. in more than 230 major industries. major industries.


The Franchising BoomThe Franchising Boom

Economic impact of franchising Economic impact of franchising on the U.S. economy: $2.3 trillion.on the U.S. economy: $2.3 trillion.

A new franchise opens A new franchise opens somewhere in the world somewhere in the world every 8 minutes.every 8 minutes.


FranchisingFranchising

A system in which semi-independent A system in which semi-independent business owners (franchisees) pay business owners (franchisees) pay fees and royalties to a parent fees and royalties to a parent company (franchiser) in return for company (franchiser) in return for the right to become identified with the right to become identified with its trademark, to sell its products or its trademark, to sell its products or services, and often to use its services, and often to use its business format and system. business format and system.


The Franchising RelationshipThe Franchising RelationshipThe 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 and suppliers

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 and purchaseonly from approved suppliers

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

FIGURE 6.1Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.


Types of FranchisingTypes of Franchising

TradenameTradename

Product distributionProduct distribution

Pure (Business format) Pure (Business format)


Franchising BasicsFranchising Basics

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

Essence of what franchisees purchase Essence of what franchisees purchase from the franchisors: from the franchisors: ExperienceExperience..

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



Benefits of FranchisingBenefits of Franchising

A business systemA business system Management training and supportManagement training and support

Start-upStart-up OngoingOngoing

Brand name appealBrand name appeal ““Cloning”Cloning”

Standardized quality of goods and Standardized quality of goods and servicesservices



National advertising programsNational advertising programs Franchisees contribute 1% to 5% of salesFranchisees contribute 1% to 5% of sales

Financial assistanceFinancial assistance Only 20% of franchisors offer direct Only 20% of franchisors offer direct

financial assistance to franchisees. financial assistance to franchisees. SBA – Franchise RegistrySBA – Franchise Registry

Proven products and Proven products and business formatsbusiness formats


FIGURE 6.3 Franchisor Financial AssistanceSource: The Profile of Franchising 2006, International Franchise Association

(Washington, DC: 2007), p. 70.



Centralized buying powerCentralized buying power Site selection and territorial protectionSite selection and territorial protection

Important issue: Important issue: Territorial encroachmentTerritorial encroachment

Greater chance for successGreater chance for success


Drawbacks of FranchisingDrawbacks of Franchising

Franchise fees and ongoing royaltiesFranchise fees and ongoing royalties Average upfront franchise fee = $25,147Average upfront franchise fee = $25,147 Royalties range from 1% to 11% of Royalties range from 1% to 11% of

franchisees’ salesfranchisees’ sales Average royalty = 6.7% of salesAverage royalty = 6.7% of sales

Strict adherence to standardized Strict adherence to standardized operationsoperations

Restrictions on purchasingRestrictions on purchasing Approved suppliers onlyApproved suppliers only


Drawbacks of FranchisingDrawbacks of Franchising

Limited product lineLimited product line Contract terms and renewalContract terms and renewal

Average term = 10.3 yearsAverage term = 10.3 years Unsatisfactory training programsUnsatisfactory training programs Market saturationMarket saturation Less freedom – Less freedom –

““No independence”No independence” ““Happy prisoners”Happy prisoners”

(continued)


Ten Myths of FranchisingTen Myths of Franchising

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

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

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

4.4. I’ll use 80 percent of the franchiser’s I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by business system, but I’ll improve upon by substituting my experience and know-how. substituting my experience and 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 manager. I don’t have to be a hands-on manager. I can be an absentee owner and still be very I can be an absentee owner and still be very successful. successful.

7.7. Anyone can be a satisfied, Anyone can be a satisfied, successful franchise owner. successful franchise owner.

(continued)(continued)



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

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

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



Franchising and the LawFranchising and the Law

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

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

potential franchisees information on 23 potential franchisees information on 23 important topicsimportant topics

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


Detecting Dishonest Franchisers Detecting Dishonest Franchisers

Claims that the contract is “standard; no need to Claims that the contract is “standard; no need to read it.”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 prototype.Marginally successful prototype or no 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 rate.High franchisee turnover or termination rate.

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

In addition to the text


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 laws.Claims to be exempt from federal disclosure laws. ““Get rich quick” schemes, promising huge profits Get rich quick” schemes, promising huge profits

with minimal effort.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.


Detecting Dishonest Franchisers Detecting Dishonest Franchisers In addition to the text


The The RightRight Way to Way to Buy a FranchiseBuy a Franchise

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 Franchisor’s FDD – Get a copy of the Franchisor’s FDD – and 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.


Factors That Make a Factors That Make a Franchise AppealingFranchise Appealing

Unique concept or marketing approachUnique concept or marketing approach ProfitabilityProfitability Registered trademarkRegistered trademark Business system that worksBusiness system that works Solid training programSolid training program AffordabilityAffordability Positive relationship with franchiseesPositive relationship with franchisees

In addition to the text


Trends Shaping FranchisingTrends Shaping Franchising

Changing face of franchiseesChanging face of franchisees Better educated with more business Better educated with more business

acumenacumen Multiple-unit franchisingMultiple-unit franchising

52% of franchisees operate multiple 52% of franchisees operate multiple outlets (and growing)outlets (and growing)

International opportunitiesInternational opportunities IFA Survey: 52% of U.S. franchisors have IFA Survey: 52% of U.S. franchisors have

an international presencean international presence Master franchisingMaster franchising


Trends Shaping FranchisingTrends Shaping Franchising

Smaller, nontraditional locationsSmaller, nontraditional locations Intercept marketingIntercept marketing

Conversion franchisingConversion franchising 72% of North American franchisors use 72% of North American franchisors use

as a growth strategyas a growth strategy

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


ConclusionConclusion

Franchising:Franchising: Is a key part of the small business Is a key part of the small business

sectorsector

Increases the chance of business Increases the chance of business success for the entrepreneursuccess for the entrepreneur

Growth continues Growth continues


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