franchising and the entrepreneur chapter 06

business education

1. Copyright 2008 Prentice Hall Publishing 1Chapter 6: Franchising
Franchising and
the Entrepreneur

2. Copyright 2008 Prentice Hall Publishing 2Chapter 6: Franchising
The Franchising Boom !!!The Franchising Boom !!!

Annual sales of more than $1 Annual sales of more than $1
trillion of almost every product or trillion of almost every product or
service imaginable.service imaginable.

Franchise sales account for 44 Franchise sales account for 44
percent of total retail sales.percent of total retail sales.

More than 3,000 franchisers More than 3,000 franchisers
operating some 350,000 outlets in operating some 350,000 outlets in
the United States.the United States.
Boom!

3. Copyright 2008 Prentice Hall Publishing 3Chapter 6: Franchising
100
150
200
250
300
350
400
19801983198819931998200020012002200320042005
Year
Franchising Growth
Number of Units (in Thousands)

4. Copyright 2008 Prentice Hall Publishing 4Chapter 6: Franchising
The Franchising Boom !!!The Franchising Boom !!!

Franchises employ one in every 16 Franchises employ one in every 16
workers in the U.S. in more than workers in the U.S. in more than
100 major industries. 100 major industries.

Economic impact of franchising Economic impact of franchising
on the U.S. economy: $1.5 trillion.on the U.S. economy: $1.5 trillion.

A new franchise opens somewhere A new franchise opens somewhere
in the world every six-and-a-half in the world every six-and-a-half
minutes.minutes.
Boom!

5. Copyright 2008 Prentice Hall Publishing 5Chapter 6: Franchising
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 business services, and often to use its business
format and system. format and system.

6. The Franchising RelationshipThe Franchising Relationship
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 require
franchisees to purchase from the franchisor
Develops and coordinates national ad
campaign; may require minimum level of
spending on local advertising
Sets quality standards and enforces them
with inspections; trains franchisees
Provides support through an established
business 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 purchase
only from approved suppliers; must purchase
from supplier if required.
Pays for national ad campaign; complies with
local advertising requirements; gets franchisor
approval on local ads
Maintains quality standards; trains employees
to implement quality systems
Operates business on a day-to-day basis with
franchiser’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 of
PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.

7. Copyright 2008 Prentice Hall Publishing 7Chapter 6: Franchising
Types of FranchisingTypes of Franchising

TradenameTradename

Product distributionProduct distribution

Pure (Business format)Pure (Business format)

8. Copyright 2008 Prentice Hall Publishing 8Chapter 6: Franchising
Franchising BasicsFranchising Basics

Franchisee gets the right to use all of the elements of a fully Franchisee gets the right to use all of the elements of a fully
integrated business operation.integrated business operation.

Essence of what franchisees purchase from the franchisers: Essence of what franchisees purchase from the franchisers:
Experience.Experience.

Key Question: What can a franchise do for me that I cannot do Key Question: What can a franchise do for me that I cannot do
for myself? for myself?

9. Copyright 2008 Prentice Hall Publishing 9Chapter 6: Franchising
Benefits of FranchisingBenefits of Franchising

Management training and supportManagement training and support

Start-upStart-up

OngoingOngoing

Brand name appealBrand name appeal

Standardized quality of goods and Standardized quality of goods and
servicesservices

10. Copyright 2008 Prentice Hall Publishing 10Chapter 6: Franchising
Benefits of FranchisingBenefits of Franchising

National advertising programNational advertising program

Franchisees contribute 1 percent to 5 Franchisees contribute 1 percent to 5
percent of salespercent of sales

Financial assistanceFinancial assistance

Only one-third of franchisers offer Only one-third of franchisers offer
financial assistance to franchisees. financial assistance to franchisees.

11. Copyright 2008 Prentice Hall Publishing 11Chapter 6: Franchising
Benefits of FranchisingBenefits of Franchising

Proven products and business formatsProven products and business formats

Site selection and territorial protectionSite selection and territorial protection

Important issue: Territorial encroachmentImportant issue: Territorial encroachment

Greater chance for successGreater chance for success

12. Copyright 2008 Prentice Hall Publishing 12Chapter 6: Franchising
Drawbacks of FranchisingDrawbacks of Franchising

Franchise fees and ongoing royaltiesFranchise fees and ongoing royalties

Strict adherence to standardized Strict adherence to standardized
operationsoperations

Restrictions on purchasingRestrictions on purchasing

Approved suppliers onlyApproved suppliers only

13. Copyright 2008 Prentice Hall Publishing 13Chapter 6: Franchising
Drawbacks of FranchisingDrawbacks of Franchising

Limited product lineLimited product line

Less freedomLess freedom

““Happy prisoners”Happy prisoners”

14. Copyright 2008 Prentice Hall Publishing 14Chapter 6: Franchising
Ten Myths of FranchisingTen Myths of Franchising
1. Franchising is the safest way to go into business 1. Franchising is the safest way to go into business
because franchises never fail.because franchises never fail.
2. I’ll be able to open my franchise for less money 2. I’ll be able to open my franchise for less money
than the franchiser estimates. than the franchiser estimates.
3. The bigger the franchise organization, the more 3. The bigger the franchise organization, the more
successful I’ll be. successful I’ll be.
4. I’ll use 80 percent of the franchiser’s business 4. I’ll use 80 percent of the franchiser’s business
system, but I’ll improve upon it by substituting system, but I’ll improve upon it by substituting
my experience and know-how. my experience and know-how.

15. Copyright 2008 Prentice Hall Publishing 15Chapter 6: Franchising
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 manager. I can be an 6. I don’t have to be a hands-on manager. I can be an
absentee owner and still be very successful. absentee owner and still be very successful.
7. Anyone can be a satisfied, successful franchise 7. Anyone can be a satisfied, successful franchise
owner. owner.
(Continued)(Continued)

16. Copyright 2008 Prentice Hall Publishing 16Chapter 6: Franchising
Ten Myths of FranchisingTen Myths of Franchising
8. Franchising is the cheapest way to get into 8. Franchising is the cheapest way to get into
business for yourself. business for yourself.
9. The franchiser will solve my business problems for 9. The franchiser will solve my business problems for
me; after all, that’s why I pay an ongoing royalty me; after all, that’s why I pay an ongoing royalty
fee. fee.
10. Once I open my franchise, I’ll be able to run 10. Once I open my franchise, I’ll be able to run
things the way things the way II want to. want to.
(Continued)(Continued)

17. Copyright 2008 Prentice Hall Publishing 17Chapter 6: Franchising
Detecting Dishonest FranchisersDetecting 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 disclosure Failure to provide a copy of the required disclosure
documents.documents.

Poorly prepared operations manual.Poorly prepared operations manual.

Promises of future earnings with no documentation.Promises of future earnings with no 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.

18. Copyright 2008 Prentice Hall Publishing 18Chapter 6: Franchising
Detecting Dishonest FranchisersDetecting Dishonest Franchisers

Attempts to discourage your attorney from evaluating the Attempts to discourage your attorney from evaluating the
contract before signing it.contract before signing it.

No written documentation.No written documentation.

A high pressure sale. A high pressure sale.

““Get rich quick” schemes, promising huge profits with Get rich quick” schemes, promising huge profits with
minimal effort.minimal effort.

Reluctance to provide a list of existing franchisees.Reluctance to provide a list of existing franchisees.

Evasive, vague answers to your questions.Evasive, vague answers to your questions.
(Continued)(Continued)

19. Copyright 2008 Prentice Hall Publishing 19Chapter 6: Franchising
The The RightRight Way to Buy a Way to Buy a
FranchiseFranchise

Evaluate yourself - What do you like and dislike?Evaluate yourself - What do you like and dislike?

Research your market.Research your market.

Consider your franchise options.Consider your franchise options.

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.

20. Copyright 2008 Prentice Hall Publishing 20Chapter 6: Franchising
Factors That Make a Franchise Factors That Make a Franchise
AppealingAppealing

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