RECOGNIZING

FRANCHISING

OPPORTUNITIES

Chapter 2

Paulink C. Barba

BSBA – Marketing Management

KEY POINTS:

I. The advantages of franchising for both franchisor and franchisee

II. The potential disadvantages

of franchising to the franchisor

and the franchisee

III. The seven steps for franchise protection

before investing in a franchise

IV. The typical elements

included in a franchising agreement

A. THE ADVANTAGES OF FRANCHISING FOR

FRANCHISEE

1. ESTABLISHED PRICE PRODUCT OR SERVICE

This advantage is where the consumers are already

AWARE of the name and reputation of the product

or service the franchise system offers. Such

franchisors generally spend a large portion of

advertising budget on national campaigns or

television and radio, magazines and newspapers to

keep their public awareness.

2. TECHNICAL AND MANAGERIAL ASSISTANCE

This type of advantage is

provided by the franchisor.

The new franchisee will

receive technical assistance

which often includes location

and site selection, store

layout and design, store

remodelling (if the franchisee

is converting an existing

site), inventory purchase and

control methods, equipment

and fixture purchasing or

leasing and assistance with

the grand opening of the new

franchise business.

3. QUALITY CONTROL STANDARDS

This third type of advantage is again provided by

the franchisor. By setting and maintaining high

standards, a franchisor does the franchisee a

genuine service. Properly administered and

controlled, such standards help the franchise to

achieve positive results by ensuring product service

uniformity throughout the franchise system.

4. LESS OPERATING CAPITAL

Franchising offers its prospects with less

cash than if he or she were to open a

business independently.

This is because

1. The business may not require as much inventory as a comparable nonfranchised business

2. Knowledge and experience is always provided by the franchisor concerning how much stock is needed and when to reorder.

This can dramatically reduce the potential aging

of stock, waste, spoilage and unprofitable

storage of low item demands 3. A new franchisee

may be able to receive some financial assistance

in the form of credit, as cash or inventory from

the franchisor’s resources.

5. OPPORTUNITY FOR GROWTH

This fifth potential advantage

concerns growth opportunities for

operating a territorial franchise. A

territorial franchise guaranties no

competition from the same franchisor

within a specified geographic boundary. It

may later be in a position to sub franchise

or license other persons to operate stores

belonging to the territorial franchisee. If a

new franchised company is enjoying

successful growth, its franchisees could

have more opportunity for financial gain

as territorial franchisees.

B. THE POTENTIAL DISADVANTAGES OF

FRANCHISING TO THE FRANCHISEE

1. FAILED EXPECTATIONS

These are the expectations of the franchisee to the

franchisor’s business expertise, experience, selling

methods, trademark and advertising. Because of

the following elements the franchisor had, the

franchisee sees the value of franchisor-franchisee

relationship. Without such assistance, there would

be little reason for a prospective business owner to

enter a franchising agreement.

2. SERVICE COSTS

These services are expense items to the franchisee

which are provided by the franchisor. In some

instances, they may be of dubious value. These

include franchise fees and royalties which the

franchisee might find “excessive” especially after

being in business for several months and realizing

the effect that the royalties and fees are having on

the franchisee’s anticipated return on investment.

3. OVERDEPENDENCE

This type of disadvantage again points to the

franchisor-franchisee relationship. A franchisee can

become too dependent on the advice of the

franchisor to address operations, crises, changing

market conditions, pricing strategy or promotions

and so may fail to apply commonsense and

knowledge of local customers and market

conditions.

4. RESTRICTIONS OF FREEDOM OWNERSHIP

The franchising contract may

contain restrictions or

requirements that an

independent business person

would not have to satisfy. For

example, territorial

restrictions imposed by the

franchisor may limit the potential

customer contacts a franchisee

might see or territories may

overlap or be inequitably

determined by a franchisor.

5. TERMINATION OF AGREEMENT

This concerns the franchisee’s decision to terminate

the franchising relationship as a result of perceived

or real differences with the franchisor. Lack of

cooperation from the franchisor can make it

difficult to sell the business to a prospective buyer

or to simply dissolve the business entirely.

6. PERFORMANCE OF OTHER FRANCHISEES

This is the least-considered potential disadvantage to the franchisee. If the franchisor becomes lax in managing the franchise system or does not enforce the quality standards imposed throughout the network, poor performance by some in the franchise network can affect the sales of others. Usually, a customer of a multiunit franchised company will tend to blame the entire franchise and nit the single operating unit for poor service or low quality.

C. ADVANTAGES TO THE FRANCHISOR

1. EXPANSION

Most businesses grow through

expansion of their distribution

system. Yet the average business

owner wishing to broaden

distribution of a product or service

may not have the same options to

consider as Sloan. In fact,

franchising may be the only viable

option for growth, unless that owner

would choose to become part of a

larger existing company as a captive

producer or a franchisee, or choose to

expand at a slow pace by saving

profits earned from the principal

business.

2. MOTIVATION

Another advantage to the franchisor is that the

franchisee is usually more motivated that the

company-employed manager, When a franchised

unit is operated by an owner as opposed to a

company-employed manager, that unit will usually

benefit from the owner’s motivation, self-direction

and personal interest in the success of the

Operation.

3. OPERATION OF NON-UNION BUSINESS

In the decision whether to

franchise, a business owner should

also give consideration to the area

of employee and labor relations.

There is greater likelihood that

company-owned units would be more

attractive to union organizers than

franchised units, largely because a

single franchised operating unit is less

likely to be unionized and to develop

labor relations appropriate to the local

supply-and-demand conditions of the

labor pool.

4. BULK PRICING

An advantage exists for franchisors in business

that require inventory of parts, completed units for

sale and supplies or packaging associated with the

production or sale of the product, Economy of scale

in purchasing can be achieved more rapidly by a

company choosing franchising compared with a

company that expands through company-owned

units.

D. DISADVANTAGES TO THE FRANCHISOR

POTENTIAL PROBLEMS

A. RECRUITMENT

The recruitment problem concerns the difficulty of

finding promising franchisees. Although many seek

franchising as a means to enter business, most

prospective franchisee candidates lack the

experience, motivation, or the proper capital

backing needed to become successful franchises.

B. COMMUNICATION

As in any business relationships, communication

problems can arise. In franchising, a franchisee

may develop a sense of independence and no longer

feel a need to rely on the franchisor for the

successful operation of the business; he or she may

conclude that the business would run just as

smoothly without the franchisor’s advice and seek

to discontinue the relationship.

C. LOSS OF FREEDOM

Independent business persons can easily

make decisions and change policies within

their organizations; but once a franchise

system is developed, the franchisor or

parent company must get permission from

franchisees to introduce new products, to

add or eliminate services, or to change

operating policies. Thus the franchisor

stands to lose a substantial amount of

control as a franchises system increases its

size. It can become difficult for the

franchisor to modify product or process in

order to meet the ever-changing needs of

customers, particularly if the franchise

system increases its size.

E. 7 STEPS FOR FRANCHISE PROTECTION

BEFORE INVESTING IN A FRANCHISE

1. Protect yourself by self-evaluation

2. Protect yourself by investing the

franchise

3. Protect yourself by studying the

disclosure document.

4. Protect yourself by checking out the

disclosures

5. Protect yourself by questioning

earnings claims

6. Protect yourself by obtaining

professional advice

7. Protect yourself by knowing your legal

rights

F. THE TYPICAL ELEMENTS INCLUDED IN A

FRANCHISING AGREEMENT

1. Franchising

2. Fee

3. Signs

4. Quality Control

5. Business Hours

6. Advertising

7. Decor

8. Products and services

available

9. Reporting

10. Royalties

11. Bookkeeping

12. Equipment

13. Supplies

14. Location requirements

15. Personnel (appearance

and training)

16. Facilities

17. Franchisor-Franchisee

Relationships

18. Maintenance

THANK YOU