WEEK-7-11_CM_MDL_SEM1_ELT1-Franchising.pdf
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Sep 01, 2025
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About This Presentation
Franchising Module
Slide Content
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 1
ELT 1 (Franchising)
Module/1
st
Semester/Midterm/Week 7-11
LESSON II: Developing and Evaluating franchise System
Learning Objectives:
At the end of the lesson you must be able to:
1. To discuss the importance of evaluating a franchise system.
2. To know the required information of franchising.
3. To know if the Intellectual property is well protected.
4. To enumerate the advantages and disadvantages of operating a franchise
5. Identify the sources of information for scanning the franchise opportunities.
Definition of Terms
1. Franchise-
special privilege to do certain things that is conferred by government on an individual o
r a corporation and which does not belong to citizens generally of common right, e.g., a
right granted to offer Cable Television service.
2. The franchisor-is the business that grants licenses to various franchisees,
3. Franchise contracts-are complex, and the costs and responsibilities to potential
franchisees will vary from offer to offer.
4. Intellectual property is a set of intangibles owned and legally protected by a company
from outside use or implementation without consent.
5. A licensing fee is an amount of money paid to an entity for the right to engage in a
certain line of business or to use a copyrighted item.
Introduction
Considerations for Developing a Franchise System
By many accounts, the franchise “industry” is one of the privileged few that is poised to react
favorably to the down economy. Coupled with the recent boom in the popularity and
understanding of the franchise model, this is perhaps one of many reasons that more and more
businesses, across a wide array of industries, are developing franchise opportunities to meet
their growth objectives.
FRANCHISING 1
ELT 1 (Franchising)
Module/1
st
Semester/Midterm/Week 7-11
LESSON II: Developing and Evaluating franchise System
Learning Objectives:
At the end of the lesson you must be able to:
1. To discuss the importance of evaluating a franchise system.
2. To know the required information of franchising.
3. To know if the Intellectual property is well protected.
4. To enumerate the advantages and disadvantages of operating a franchise
5. Identify the sources of information for scanning the franchise opportunities.
Definition of Terms
1. Franchise-
special privilege to do certain things that is conferred by government on an individual o
r a corporation and which does not belong to citizens generally of common right, e.g., a
right granted to offer Cable Television service.
2. The franchisor-is the business that grants licenses to various franchisees,
3. Franchise contracts-are complex, and the costs and responsibilities to potential
franchisees will vary from offer to offer.
4. Intellectual property is a set of intangibles owned and legally protected by a company
from outside use or implementation without consent.
5. A licensing fee is an amount of money paid to an entity for the right to engage in a
certain line of business or to use a copyrighted item.
Introduction
Considerations for Developing a Franchise System
By many accounts, the franchise “industry” is one of the privileged few that is poised to react
favorably to the down economy. Coupled with the recent boom in the popularity and
understanding of the franchise model, this is perhaps one of many reasons that more and more
businesses, across a wide array of industries, are developing franchise opportunities to meet
their growth objectives.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 2
This article briefly outlines some of the key factors -- brand identity, policies & procedures,
expansion targets, and management systems -- that businesses need take into consideration
when evaluating whether their concept is ripe for franchising.
Strong Brand Identity
A strong brand identity is fundamental to any franchise system. If the franchisor’s brand name
and reputation alone cannot get customers through the front door, prospective franchisees may
question the value they would receive from investing in the particular franchise on offer.
Moreover, in competing for franchise sales, a less-than-memorable trademark alone may cause
prospects to cross your opportunity off the list. Finally, with a strong brand identity, franchisors
can more easily get on the radar of the highest-quality prospective franchisees: with thousands
of active franchise systems to consider (browse the FranchiseHelp.com franchise directory to see
for yourself), potential franchise buyers -- like it or not -- tend to use shortcuts to narrow their
franchise search. A recognizable brand or mark can be a key element to staying top of mind with
investors. Prospective franchisors should invest significant time and effort in developing and
protecting a strong brand identity.
Established Policies and Procedures
Also fundamental to building a successful franchise system is having clearly documented, well-
defined policies and procedures in place for developing and operating the business. Along with
name recognition, a tested and executable business model represents the primary value in
purchasing a franchise as opposed to starting a new business from scratch. Franchisors need to
have materials for training and assisting franchisees in the pre-opening phase of their business,
and need to have comprehensive operational documents to guide franchisees throughout the
term of the franchise agreement. In addition to providing value to franchisees, when properly
written, these documents also serve to help protect the franchisor from unnecessary exposure
to potential liability.
Defined Expansion Targets
Once the business decides on franchising as a means of expansion, it needs to decide exactly
where it will be expanding to. Several states (including California, Maryland, New York and
Virginia) have annual franchise registration requirements that entail relatively modest filing and
legal fees. Perhaps the product offering is not necessarily palatable or otherwise suited to a
particular region, or perhaps the market in certain regions is already over-saturated with
competing offerings. Perhaps your goal is to take the entire nation by storm. These are all factors
that should be considered when planning to roll out a new franchise system.
Capacity to Manage and Support a Network of Franchisees
It is also important to consider the impact that franchising will have on your existing business
structure. Many small business owners have successfully transitioned into managing franchise
systems on their own, but if you plan to pursue rapid growth it may be necessary to bring on
franchise-specific personnel to manage and administer the system. Issues will inevitably arise,
and it is important to be able to provide timely and meaningful responses to your franchisees.
FRANCHISING 2
This article briefly outlines some of the key factors -- brand identity, policies & procedures,
expansion targets, and management systems -- that businesses need take into consideration
when evaluating whether their concept is ripe for franchising.
Strong Brand Identity
A strong brand identity is fundamental to any franchise system. If the franchisor’s brand name
and reputation alone cannot get customers through the front door, prospective franchisees may
question the value they would receive from investing in the particular franchise on offer.
Moreover, in competing for franchise sales, a less-than-memorable trademark alone may cause
prospects to cross your opportunity off the list. Finally, with a strong brand identity, franchisors
can more easily get on the radar of the highest-quality prospective franchisees: with thousands
of active franchise systems to consider (browse the FranchiseHelp.com franchise directory to see
for yourself), potential franchise buyers -- like it or not -- tend to use shortcuts to narrow their
franchise search. A recognizable brand or mark can be a key element to staying top of mind with
investors. Prospective franchisors should invest significant time and effort in developing and
protecting a strong brand identity.
Established Policies and Procedures
Also fundamental to building a successful franchise system is having clearly documented, well-
defined policies and procedures in place for developing and operating the business. Along with
name recognition, a tested and executable business model represents the primary value in
purchasing a franchise as opposed to starting a new business from scratch. Franchisors need to
have materials for training and assisting franchisees in the pre-opening phase of their business,
and need to have comprehensive operational documents to guide franchisees throughout the
term of the franchise agreement. In addition to providing value to franchisees, when properly
written, these documents also serve to help protect the franchisor from unnecessary exposure
to potential liability.
Defined Expansion Targets
Once the business decides on franchising as a means of expansion, it needs to decide exactly
where it will be expanding to. Several states (including California, Maryland, New York and
Virginia) have annual franchise registration requirements that entail relatively modest filing and
legal fees. Perhaps the product offering is not necessarily palatable or otherwise suited to a
particular region, or perhaps the market in certain regions is already over-saturated with
competing offerings. Perhaps your goal is to take the entire nation by storm. These are all factors
that should be considered when planning to roll out a new franchise system.
Capacity to Manage and Support a Network of Franchisees
It is also important to consider the impact that franchising will have on your existing business
structure. Many small business owners have successfully transitioned into managing franchise
systems on their own, but if you plan to pursue rapid growth it may be necessary to bring on
franchise-specific personnel to manage and administer the system. Issues will inevitably arise,
and it is important to be able to provide timely and meaningful responses to your franchisees.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 3
Failure to do so may lead to unhappy franchisees and degradation of the system and the brand,
which can have significant impacts on the success of a franchise system
Evaluate Franchise Opportunity In 10 Simple Steps:
A good deal of information has been written and published about how to evaluate a franchise
opportunity. Whether one is an individual or represents a private equity firm, it’s important to be able
to evaluate and vet a franchise before conducting a full-scale analysis. The following is a way to do an
initial franchise review, before investing a lot of time and money.
To perform this 10- step review, you’ll need a copy of the Franchise Disclosure Document for
each franchise you’re evaluating. An FDD can be obtained from the franchisor and they are
available from certain Franchise Registration States or can be purchased from franchise vendor
sites. If the decision is to pursue a specific franchise opportunity, a complete and detailed
evaluation should follow this 10-step preliminary review, which should include utilizing legal
and financial professionals with franchising experience.
Following are 10 preliminary steps for evaluating a franchise opportunity:
1. Franchisor Management-review the management background and experience of
key franchisor executives and support staff. It’s important that they have
experience in the business sector and franchise industry. Franchisor leadership
should have a cross section of business skills and experience.
2. Franchisee Territory-The territory should be defined in a consistent manner and
allow for franchisee growth. Verify if the franchisee territory is Exclusive,
Protected or Open. Franchisors that grant small open territories can result in
conflicts among neighboring franchisees as some franchisees will be more
aggressive than others. There is also the potential for a dispute with the
franchisor over the territory.
3. Franchisee Fees-identify if the franchisor charges other fees for services above
and beyond any royalty and ad fund fees. Additional continuing fees for software
usage and licensing fees, when added to royalty and ad fees will increase
FRANCHISING 3
Failure to do so may lead to unhappy franchisees and degradation of the system and the brand,
which can have significant impacts on the success of a franchise system
Evaluate Franchise Opportunity In 10 Simple Steps:
A good deal of information has been written and published about how to evaluate a franchise
opportunity. Whether one is an individual or represents a private equity firm, it’s important to be able
to evaluate and vet a franchise before conducting a full-scale analysis. The following is a way to do an
initial franchise review, before investing a lot of time and money.
To perform this 10- step review, you’ll need a copy of the Franchise Disclosure Document for
each franchise you’re evaluating. An FDD can be obtained from the franchisor and they are
available from certain Franchise Registration States or can be purchased from franchise vendor
sites. If the decision is to pursue a specific franchise opportunity, a complete and detailed
evaluation should follow this 10-step preliminary review, which should include utilizing legal
and financial professionals with franchising experience.
Following are 10 preliminary steps for evaluating a franchise opportunity:
1. Franchisor Management-review the management background and experience of
key franchisor executives and support staff. It’s important that they have
experience in the business sector and franchise industry. Franchisor leadership
should have a cross section of business skills and experience.
2. Franchisee Territory-The territory should be defined in a consistent manner and
allow for franchisee growth. Verify if the franchisee territory is Exclusive,
Protected or Open. Franchisors that grant small open territories can result in
conflicts among neighboring franchisees as some franchisees will be more
aggressive than others. There is also the potential for a dispute with the
franchisor over the territory.
3. Franchisee Fees-identify if the franchisor charges other fees for services above
and beyond any royalty and ad fund fees. Additional continuing fees for software
usage and licensing fees, when added to royalty and ad fees will increase
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 4
expenses. Be sure that the initial franchise fee and the continuing fees are
comparable to similar franchises.
4. Item 20- review the growth of new franchisees and compare to franchisee
terminations. This number will reveal net franchisee growth and prevent one
from seeing misleading data. Also, the number of Franchises Sold but, not
Opened can indicate if the franchisor is devoted more resources to selling
franchise versus the growth and development of existing franchises. The tables
in Item 20 contains information which can indicate positive or negative
performance results.
5. Financial Statements- Unless the franchisor is a start-up there should be three
(3) years of audited financials available. Look for a continuing and growing
stream of revenues from franchisee royalties. Initial franchise fees should not
represent the preponderance of revenues unless it’s a start-up.
6. Required Suppliers and Rebates- Does the franchisor requires purchases from
specific vendors? Compare that information to the data in Item 8, which shows
the percent of purchases from the franchisor and other vendors and suppliers. In
addition, does the franchisor receive rebates from vendors and suppliers and if
yes, how much? Many rebates from required franchisee vendors could
compromise the trust between a franchisor and its franchisees.
7. Intellectual Property-Does the franchisor have any confidential, proprietary
information or trade secrets that distinguishes the franchise from the
competitors? Check Items 13-14 of the FDD to determine how unique the system
is, and whether the franchisor has a comparative advantage over its
competition. Also, does the franchisor have the marks trademarked? Make sure
that the franchisor properly and legally controls the brand name, and there is no
potential dispute over ownership of the marks.
8. Item 19-it’s important that the franchisor makes a Financial Performance
Representation under Item 19. Any established franchisor should make an Item
FRANCHISING 4
expenses. Be sure that the initial franchise fee and the continuing fees are
comparable to similar franchises.
4. Item 20- review the growth of new franchisees and compare to franchisee
terminations. This number will reveal net franchisee growth and prevent one
from seeing misleading data. Also, the number of Franchises Sold but, not
Opened can indicate if the franchisor is devoted more resources to selling
franchise versus the growth and development of existing franchises. The tables
in Item 20 contains information which can indicate positive or negative
performance results.
5. Financial Statements- Unless the franchisor is a start-up there should be three
(3) years of audited financials available. Look for a continuing and growing
stream of revenues from franchisee royalties. Initial franchise fees should not
represent the preponderance of revenues unless it’s a start-up.
6. Required Suppliers and Rebates- Does the franchisor requires purchases from
specific vendors? Compare that information to the data in Item 8, which shows
the percent of purchases from the franchisor and other vendors and suppliers. In
addition, does the franchisor receive rebates from vendors and suppliers and if
yes, how much? Many rebates from required franchisee vendors could
compromise the trust between a franchisor and its franchisees.
7. Intellectual Property-Does the franchisor have any confidential, proprietary
information or trade secrets that distinguishes the franchise from the
competitors? Check Items 13-14 of the FDD to determine how unique the system
is, and whether the franchisor has a comparative advantage over its
competition. Also, does the franchisor have the marks trademarked? Make sure
that the franchisor properly and legally controls the brand name, and there is no
potential dispute over ownership of the marks.
8. Item 19-it’s important that the franchisor makes a Financial Performance
Representation under Item 19. Any established franchisor should make an Item
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 5
19 disclosure. The more detailed the financial information the easier to evaluate
franchisee performance and make financial projections. If the franchise is a
startup there should be financial data for company locations.
9. Franchisor Litigation- franchisor-franchisee litigation is a barometer of the state
of franchisee- franchisor relations, is it positive or negative? Has the franchisor
acted to protect its system and brand or is it a case of franchisees having
disputes with the franchisor, because they are not receiving support or meeting
their financial expectations? Some medium to large franchisors report no
litigation while some smaller franchisors may have had many legal disputes. The
amount and source of litigation is an area that should be reviewed since it be can
be a red flag.
10. Franchisor Training Programs- Franchisee training should be comprehensive and
presented by more than one person. Training that includes a portion of onsite
training for new franchisees provides real world franchise experience that the
classroom can’t duplicate.
Whether you’re a multi-unit franchisee, an individual franchise candidate or a representative of
a private equity group these 10 steps will allow you to perform a preliminary franchise review.
Although a first step in the franchise evaluation process, it can provide an overview of a
franchise investment opportunity at minimal cost and expense. If you decide to proceed with a
specific franchise opportunity, be sure to utilize an accountant and franchise attorney to guide
you along the way.
FRANCHISE DEVELOPMENT – DOING IT RIGHT
LEGAL DOCUMENTS ALONE DO NOT A FRANCHISE SYSTEM MAKE
For those of us experienced in franchising, we are often amazed when companies considering
the establishment of a new franchise system (even large, well-established international
companies) begin the process at the end – the development of the legal agreements. Presented
with a lengthy questionnaire by their legal counsel, they are asked to provide information
necessary to prepare franchise agreements and disclosure documents. The problem, though, is
FRANCHISING 5
19 disclosure. The more detailed the financial information the easier to evaluate
franchisee performance and make financial projections. If the franchise is a
startup there should be financial data for company locations.
9. Franchisor Litigation- franchisor-franchisee litigation is a barometer of the state
of franchisee- franchisor relations, is it positive or negative? Has the franchisor
acted to protect its system and brand or is it a case of franchisees having
disputes with the franchisor, because they are not receiving support or meeting
their financial expectations? Some medium to large franchisors report no
litigation while some smaller franchisors may have had many legal disputes. The
amount and source of litigation is an area that should be reviewed since it be can
be a red flag.
10. Franchisor Training Programs- Franchisee training should be comprehensive and
presented by more than one person. Training that includes a portion of onsite
training for new franchisees provides real world franchise experience that the
classroom can’t duplicate.
Whether you’re a multi-unit franchisee, an individual franchise candidate or a representative of
a private equity group these 10 steps will allow you to perform a preliminary franchise review.
Although a first step in the franchise evaluation process, it can provide an overview of a
franchise investment opportunity at minimal cost and expense. If you decide to proceed with a
specific franchise opportunity, be sure to utilize an accountant and franchise attorney to guide
you along the way.
FRANCHISE DEVELOPMENT – DOING IT RIGHT
LEGAL DOCUMENTS ALONE DO NOT A FRANCHISE SYSTEM MAKE
For those of us experienced in franchising, we are often amazed when companies considering
the establishment of a new franchise system (even large, well-established international
companies) begin the process at the end – the development of the legal agreements. Presented
with a lengthy questionnaire by their legal counsel, they are asked to provide information
necessary to prepare franchise agreements and disclosure documents. The problem, though, is
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 6
that the questions are often their main guide to how their franchise system should be
structured.
As a potential franchisor you may not fully understand all of the questions or have an
independent frame of reference to know what all your available options truly are. The
attorneys, knowledgeable in the law and prior agreements, often will provide you with advice
and direction. However, without the benefit of being able to evaluate business alternatives,
conduct research, and fully explore the strategic considerations that most of these decisions
require, the franchise system will often end up operating as a legal vehicle for expansion rather
than what it truly should be, a business structure for expansion.
Since the franchising process began with the development of legal documents, new franchisors
may view their franchise system as a legal device governed primarily by the rule of law.
Experienced franchisors understand that while the law is an element of franchising, it truly is a
minor portion of the way franchisors manage their business, make decisions on its direction, or
how they interact with their franchisees.
If you think about legal agreements taking the lead in the franchise development process, it
would be similar to an attorney asking you questions necessary to draft leases on a residential
building before the market studies are conducted, the location is selected, the engineers have
completed their site review, the building is designed, the financing is in place, the permits are
obtained, the builder has been selected, or even the costs for construction and management
are known… Except that in franchising, especially if it is your first time developing a system, the
issues are more complex and the risks extend not only to your company and its stakeholders,
but to your future franchisees.
Keep in mind: while you may have an operating business with a long history and experienced
management, you are developing a new business – a franchise system. It should be the
structure of that business that you focus on first, not the structure of the legal agreements.
Therefore, before you begin to develop your legal agreements, before you invest in the creation
of a franchise system, before you print brochures, hire your franchise staff, and start selecting
franchisees, the first thing you need to do is understand that franchising is a business. All the
legal documents should do is describe the business and the terms you are offering to your
franchisees.
The process of basing your business strategy on legal questionnaires is simply insufficient for
the design, development, long-term growth, management, and financial well being of your
franchise system.
IN THE BEGINNING …
So, where should you begin?
The first issue is to determine if your business is ready to expand, and whether franchising is an
appropriate strategy for your company. Before a single franchisee exists, there has to be a
franchisor. And before a company begins what can be a costly process of developing a franchise
program, it’s prudent to have a franchise feasibility examination conducted.
FRANCHISING 6
that the questions are often their main guide to how their franchise system should be
structured.
As a potential franchisor you may not fully understand all of the questions or have an
independent frame of reference to know what all your available options truly are. The
attorneys, knowledgeable in the law and prior agreements, often will provide you with advice
and direction. However, without the benefit of being able to evaluate business alternatives,
conduct research, and fully explore the strategic considerations that most of these decisions
require, the franchise system will often end up operating as a legal vehicle for expansion rather
than what it truly should be, a business structure for expansion.
Since the franchising process began with the development of legal documents, new franchisors
may view their franchise system as a legal device governed primarily by the rule of law.
Experienced franchisors understand that while the law is an element of franchising, it truly is a
minor portion of the way franchisors manage their business, make decisions on its direction, or
how they interact with their franchisees.
If you think about legal agreements taking the lead in the franchise development process, it
would be similar to an attorney asking you questions necessary to draft leases on a residential
building before the market studies are conducted, the location is selected, the engineers have
completed their site review, the building is designed, the financing is in place, the permits are
obtained, the builder has been selected, or even the costs for construction and management
are known… Except that in franchising, especially if it is your first time developing a system, the
issues are more complex and the risks extend not only to your company and its stakeholders,
but to your future franchisees.
Keep in mind: while you may have an operating business with a long history and experienced
management, you are developing a new business – a franchise system. It should be the
structure of that business that you focus on first, not the structure of the legal agreements.
Therefore, before you begin to develop your legal agreements, before you invest in the creation
of a franchise system, before you print brochures, hire your franchise staff, and start selecting
franchisees, the first thing you need to do is understand that franchising is a business. All the
legal documents should do is describe the business and the terms you are offering to your
franchisees.
The process of basing your business strategy on legal questionnaires is simply insufficient for
the design, development, long-term growth, management, and financial well being of your
franchise system.
IN THE BEGINNING …
So, where should you begin?
The first issue is to determine if your business is ready to expand, and whether franchising is an
appropriate strategy for your company. Before a single franchisee exists, there has to be a
franchisor. And before a company begins what can be a costly process of developing a franchise
program, it’s prudent to have a franchise feasibility examination conducted.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 7
Only after the feasibility examination is conducted should you begin the work of developing the
franchising strategy. The development of the legal agreements is one of the last elements of
that process.
A franchise feasibility examination measures a company against recognized benchmarks
typically used in franchising. It is designed to assist a company’s management in making a
determination whether they are ready to expand, and whether franchising is the correct
growth strategy. It also explores other methods of expansion that may be available and better
suited for the company.
But, even before conducting a feasibility examination, there is a simple test used to determine
if a business is not able to franchise, or ready for expansion. If the existing business:
• Is only a concept and has not commenced operations;
• Has only a limited operating history;
• Is not profitable at the unit level; and
• Does not currently achieve a reasonable return on investment at the unit level
…It’s not able franchise – at least not yet.
To be able franchise, the business has to be a business, and that business must at least be
profitable and achieving a reasonable return on investment.
Think of the elements in a franchise system that you should be offering to future franchisees.
One of the principal elements is your experience in operating the business to be franchised. If
that experience doesn’t exist, or is so minimal as to be negligible, all that you are really offering
potential franchisees is the opportunity of being a guinea pig. While legal counsel could develop
franchise documents sufficient to offer franchises for a business that never existed, and you
might even find individuals willing to buy your franchise, the risk of failure for both the
franchisor and franchisee will be high. Unfortunately, with the abundance of franchise
packaging firms (both consultants and attorneys) existing in franchising today, those
“opportunities” exist.
When conducting a feasibility examination, we review business and financial benchmarks. The
benchmarks used depend on the industry segment, the company, and other determinants but
broadly fall into a few interrelated and interdependent buckets, including the underlying
business; its products and services; how well the business can be systematized for new and
existing franchisees; the skills required by franchisees to operate the business; the organization
and support required to manage and grow the system; the potential for expansion; and, the
underlying business economics.
It’s not possible to discuss in depth here all of the elements that require review in a feasibility
examination. Even in Franchising for Dummies, we touched on the issues of feasibility only in
one chapter. But, let’s examine some of the highlights.
FRANCHISING 7
Only after the feasibility examination is conducted should you begin the work of developing the
franchising strategy. The development of the legal agreements is one of the last elements of
that process.
A franchise feasibility examination measures a company against recognized benchmarks
typically used in franchising. It is designed to assist a company’s management in making a
determination whether they are ready to expand, and whether franchising is the correct
growth strategy. It also explores other methods of expansion that may be available and better
suited for the company.
But, even before conducting a feasibility examination, there is a simple test used to determine
if a business is not able to franchise, or ready for expansion. If the existing business:
• Is only a concept and has not commenced operations;
• Has only a limited operating history;
• Is not profitable at the unit level; and
• Does not currently achieve a reasonable return on investment at the unit level
…It’s not able franchise – at least not yet.
To be able franchise, the business has to be a business, and that business must at least be
profitable and achieving a reasonable return on investment.
Think of the elements in a franchise system that you should be offering to future franchisees.
One of the principal elements is your experience in operating the business to be franchised. If
that experience doesn’t exist, or is so minimal as to be negligible, all that you are really offering
potential franchisees is the opportunity of being a guinea pig. While legal counsel could develop
franchise documents sufficient to offer franchises for a business that never existed, and you
might even find individuals willing to buy your franchise, the risk of failure for both the
franchisor and franchisee will be high. Unfortunately, with the abundance of franchise
packaging firms (both consultants and attorneys) existing in franchising today, those
“opportunities” exist.
When conducting a feasibility examination, we review business and financial benchmarks. The
benchmarks used depend on the industry segment, the company, and other determinants but
broadly fall into a few interrelated and interdependent buckets, including the underlying
business; its products and services; how well the business can be systematized for new and
existing franchisees; the skills required by franchisees to operate the business; the organization
and support required to manage and grow the system; the potential for expansion; and, the
underlying business economics.
It’s not possible to discuss in depth here all of the elements that require review in a feasibility
examination. Even in Franchising for Dummies, we touched on the issues of feasibility only in
one chapter. But, let’s examine some of the highlights.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 8
THE UNDERLYING BUSINESS
As we said before, you need an operating business before you begin to franchise. But, is it really
enough to have only one location before you begin to expand? In a practical sense, two would
be better, but probably more are required.
Several locations in different neighborhoods or areas will give you an indication of whether
your business is a single-unit local market phenomenon or something that has wider consumer
appeal. Possibly more important, though, is how long you have operated the business.
Understanding how it operates in different seasons, whether it can be successful against the
competition, who its customers are, and what they really think of the concept may be more
important than the number of locations you presently operate. Keep in mind that others are
going to have to follow in your footsteps – will they be able to base upon your experience and
knowledge of your industry?
What you are trying to develop is a chain of businesses using the same name, usually the same
look, and almost certainly the same methods of operation. To secure and maintain a “brand
personality” that consumers recognize and can rely upon every time they hear your brand
mentioned requires consistency. Having a business that you can model for successful
duplication is essential in determining franchisability.
Let’s not forget about the product or services your franchisees will be offering to the public. Are
they any good? Are sales based upon a well-established consumer demand, or only a passing
fad? How are your products and services different – and hopefully better – than those offered
by the competition?
Understanding who your competition is and what actions they are likely to take in the
marketplace not only allows you to make a determination of whether your offering is
sufficiently competitive, it enables you to begin to be proactive in responding to the expected
market changes. You will also need, in examining your options for expansion, to determine
whether consumers will want or need your product or services tomorrow. Understanding their
buying patterns and changes in the marketplace is essential in understanding the long-term
popularity of your product or services.
Do you understand the competitive landscape? Is it likely that other companies will be able to
absorb your product and services into their consumer offering? If you don’t think it is possible,
look what happened to the frozen yogurt market when every ice cream stand and green grocer
added frozen yogurt machines. Notice the impact on the bagel franchises when Dunkin Donuts
added bagels? Do you wonder about the future strength of the smoothie market as other
chains add it to their menus? They will likely have to change from a single-product offering
simply to survive, but will that cause them to lose their competitive distinction.
What will changes and improvements in technology do to your consumer offering? Will it make
your product or service unnecessary or necessary less often? Remember when cars needed a
tune-up every 15,000 miles? Well today, it’s closer to 100,000 miles and requires equipment
and expertise not thought of 15 years ago. Notice the reduction of specialized tune-up shops.
Remember when the automotive dealers did a poor job, had miserable service, and charged
more for an oil change than you paid for the car? More customers today are going back to their
FRANCHISING 8
THE UNDERLYING BUSINESS
As we said before, you need an operating business before you begin to franchise. But, is it really
enough to have only one location before you begin to expand? In a practical sense, two would
be better, but probably more are required.
Several locations in different neighborhoods or areas will give you an indication of whether
your business is a single-unit local market phenomenon or something that has wider consumer
appeal. Possibly more important, though, is how long you have operated the business.
Understanding how it operates in different seasons, whether it can be successful against the
competition, who its customers are, and what they really think of the concept may be more
important than the number of locations you presently operate. Keep in mind that others are
going to have to follow in your footsteps – will they be able to base upon your experience and
knowledge of your industry?
What you are trying to develop is a chain of businesses using the same name, usually the same
look, and almost certainly the same methods of operation. To secure and maintain a “brand
personality” that consumers recognize and can rely upon every time they hear your brand
mentioned requires consistency. Having a business that you can model for successful
duplication is essential in determining franchisability.
Let’s not forget about the product or services your franchisees will be offering to the public. Are
they any good? Are sales based upon a well-established consumer demand, or only a passing
fad? How are your products and services different – and hopefully better – than those offered
by the competition?
Understanding who your competition is and what actions they are likely to take in the
marketplace not only allows you to make a determination of whether your offering is
sufficiently competitive, it enables you to begin to be proactive in responding to the expected
market changes. You will also need, in examining your options for expansion, to determine
whether consumers will want or need your product or services tomorrow. Understanding their
buying patterns and changes in the marketplace is essential in understanding the long-term
popularity of your product or services.
Do you understand the competitive landscape? Is it likely that other companies will be able to
absorb your product and services into their consumer offering? If you don’t think it is possible,
look what happened to the frozen yogurt market when every ice cream stand and green grocer
added frozen yogurt machines. Notice the impact on the bagel franchises when Dunkin Donuts
added bagels? Do you wonder about the future strength of the smoothie market as other
chains add it to their menus? They will likely have to change from a single-product offering
simply to survive, but will that cause them to lose their competitive distinction.
What will changes and improvements in technology do to your consumer offering? Will it make
your product or service unnecessary or necessary less often? Remember when cars needed a
tune-up every 15,000 miles? Well today, it’s closer to 100,000 miles and requires equipment
and expertise not thought of 15 years ago. Notice the reduction of specialized tune-up shops.
Remember when the automotive dealers did a poor job, had miserable service, and charged
more for an oil change than you paid for the car? More customers today are going back to their
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 9
dealer for routine maintenance. Improved technology and changes in customer service
certainly had an impact on the franchised automotive aftermarket, and many franchise systems
had to evolve from their original concepts.
Understanding your true competitive position, not only against other franchise systems but also
against everyone who offers your product or service, is critical. Understanding how market
conditions will affect your offering is essential in looking at the feasibility of expansion and
franchising.
THE SYSTEMATIZATION OF THE BUSINESS
When consumers walk into any branded location, they have expectations of what their
experience will be like. The interesting thing about branded locations is that before consumers
ever walk through the door, based upon their experience at other locations or based upon
recommendations of others who have shopped at other locations, they have expectations
about how you operate. Making their expectations into a shopping reality requires that the
business operate consistently from location to location.
During the feasibility examination, ensuring that consistency is possible requires a few
assessments to be made, including:
• Whether the business, at the unit level, can be defined and broken down into clearly
defined steps that can be included in operating procedures and manuals; and
• Whether franchisees and their staff can be taught, within a reasonable period of time
and at a reasonable cost, to execute those steps.
These determinations also necessitate an analysis of whether the prospective franchisee or
their future staff requires any specialized skills or licenses before they become franchisees.
AVAILABLE FRANCHISEES
The skills or licenses your franchisees or staff requires may reduce the pool of available
candidates and have an impact on the ability of the franchisor to find people able to meet their
expansion goals.
Earlier we stated, “Before there is a single franchisee, there has to be a franchisor.” Well, before
there is a franchise system, there has to be someone willing and able to become a franchisee.
Are they out there?
It’s not sufficient to guess whether a pool of potential franchisees exists. Simply knowing who
your potential franchisee might be is not enough. You also need to know whether the pool of
candidates available to purchase your franchise will be sufficient to meet your expansion goals.
Even if you determine that the pool of potential franchisees is adequate, are you certain that
they would be interested in your franchise. If they are, will they be able and willing to make the
FRANCHISING 9
dealer for routine maintenance. Improved technology and changes in customer service
certainly had an impact on the franchised automotive aftermarket, and many franchise systems
had to evolve from their original concepts.
Understanding your true competitive position, not only against other franchise systems but also
against everyone who offers your product or service, is critical. Understanding how market
conditions will affect your offering is essential in looking at the feasibility of expansion and
franchising.
THE SYSTEMATIZATION OF THE BUSINESS
When consumers walk into any branded location, they have expectations of what their
experience will be like. The interesting thing about branded locations is that before consumers
ever walk through the door, based upon their experience at other locations or based upon
recommendations of others who have shopped at other locations, they have expectations
about how you operate. Making their expectations into a shopping reality requires that the
business operate consistently from location to location.
During the feasibility examination, ensuring that consistency is possible requires a few
assessments to be made, including:
• Whether the business, at the unit level, can be defined and broken down into clearly
defined steps that can be included in operating procedures and manuals; and
• Whether franchisees and their staff can be taught, within a reasonable period of time
and at a reasonable cost, to execute those steps.
These determinations also necessitate an analysis of whether the prospective franchisee or
their future staff requires any specialized skills or licenses before they become franchisees.
AVAILABLE FRANCHISEES
The skills or licenses your franchisees or staff requires may reduce the pool of available
candidates and have an impact on the ability of the franchisor to find people able to meet their
expansion goals.
Earlier we stated, “Before there is a single franchisee, there has to be a franchisor.” Well, before
there is a franchise system, there has to be someone willing and able to become a franchisee.
Are they out there?
It’s not sufficient to guess whether a pool of potential franchisees exists. Simply knowing who
your potential franchisee might be is not enough. You also need to know whether the pool of
candidates available to purchase your franchise will be sufficient to meet your expansion goals.
Even if you determine that the pool of potential franchisees is adequate, are you certain that
they would be interested in your franchise. If they are, will they be able and willing to make the
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 10
required investment? Answering questions about the marketability of your franchise offering
and the extent that it can be marketed is essential in determining whether your business is able
to franchise.
Determining whether there is likely to be a sufficient pool of franchisees to meet your
expansion requirements, at a very basic level, requires you to determine:
• What basic skills will your franchisees will need?
• Will they be able to hire employees with the needed skills if they may not have them?
• If they can’t hire skilled staff, will your training program give their staff the necessary
skills?
You can’t wait until you begin to offer franchises to have answers to questions about your
system’s marketability. You may find out that you have all of the documents required to invite
people to come to your party, but nobody shows up to help you blow out the candles. One of
the reasons so many new franchisors experience little if any growth in their systems is that the
pool of candidates was never adequate for their purpose, and a feasibility examination might
have determined that before they began the development of the system.
THE SUPPORT SYSTEM AND FEES
It’s simply not enough for you to sell franchises to call yourself a franchisor. Expansion of the
system is only one goal. The management of a growing and profitable system is your long-term
objective.
Good franchisors today provide support and other services to their franchisees sufficient to give
them a sustainable competitive advantage over the competition. Will you be able to provide
the necessary support? During the feasibility examination you will need to determine:
• The types of headquarters and field support services that will be required and how and
when you will provide those services, and
• The cost of developing and providing those services.
Establishing fees and other sources of revenue will be a significant focus when you begin to
design and develop your franchise system. But, during the feasibility examination, making
certain that sufficient income will be available is essential in determining whether your business
can expand through franchising.
It is important to remember that ultimately, the fees and other sources of revenue will need to
meet two tests:
• First, they will need to provide the franchisor with sufficient income to provide the
services required while providing for a reasonable return on their investment for
developing and operating the franchise system.
FRANCHISING 10
required investment? Answering questions about the marketability of your franchise offering
and the extent that it can be marketed is essential in determining whether your business is able
to franchise.
Determining whether there is likely to be a sufficient pool of franchisees to meet your
expansion requirements, at a very basic level, requires you to determine:
• What basic skills will your franchisees will need?
• Will they be able to hire employees with the needed skills if they may not have them?
• If they can’t hire skilled staff, will your training program give their staff the necessary
skills?
You can’t wait until you begin to offer franchises to have answers to questions about your
system’s marketability. You may find out that you have all of the documents required to invite
people to come to your party, but nobody shows up to help you blow out the candles. One of
the reasons so many new franchisors experience little if any growth in their systems is that the
pool of candidates was never adequate for their purpose, and a feasibility examination might
have determined that before they began the development of the system.
THE SUPPORT SYSTEM AND FEES
It’s simply not enough for you to sell franchises to call yourself a franchisor. Expansion of the
system is only one goal. The management of a growing and profitable system is your long-term
objective.
Good franchisors today provide support and other services to their franchisees sufficient to give
them a sustainable competitive advantage over the competition. Will you be able to provide
the necessary support? During the feasibility examination you will need to determine:
• The types of headquarters and field support services that will be required and how and
when you will provide those services, and
• The cost of developing and providing those services.
Establishing fees and other sources of revenue will be a significant focus when you begin to
design and develop your franchise system. But, during the feasibility examination, making
certain that sufficient income will be available is essential in determining whether your business
can expand through franchising.
It is important to remember that ultimately, the fees and other sources of revenue will need to
meet two tests:
• First, they will need to provide the franchisor with sufficient income to provide the
services required while providing for a reasonable return on their investment for
developing and operating the franchise system.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 11
• Second, when paid or incurred by the franchisee, the franchisee will have sufficient
revenue to be profitable and there will be sufficient residual income to ensure a
reasonable return on their investment.
Setting appropriate fees is one of the most difficult decisions a franchisor will have to make. If
you set your fees too high, your franchise may not be marketable against the competition and
your franchisees may not be profitable. If you set them too low, your franchise may be
marketable but you may not have enough revenue to provide the services needed to your
franchisees. Neither alternative is satisfactory.
However, we often find in discussions with clients who are already operating a franchise system
that their franchise fees were set primarily by profiling those of their direct franchise
competitors. When you think about it, even if franchisees offer the identical product or services
as their competitors, their investment, sales, or cost of operation will not be identical to those
of their direct competitors. Even if the franchise system looks the same as others, the same cost
structure, growth strategy, exit strategy, and a host of other variables will not be the same.
Establishing fees based primarily on those of the competition is not only foolish, it’s potentially
dangerous since the fees need to be based upon the reality of the business being franchised.
Unfortunately, many new franchisors who do not strategically develop their franchise system
and who do not sufficiently understand the system’s economic realities simply review the
listings contained in publications like the Entrepreneur 500, determine what the competition is
charging their franchisees, and set their fees lower. If all you have to offer a franchisee is lower
fees, do you really have anything worthwhile to offer? If the fees you select are too low or too
high, the impact on the future franchise system can be dramatic.
As an inelastic method of distribution, that is, one governed by long-term contracts where
changes in the fee structure during the term will be difficult if not impossible, franchisors will
have to live with the fees they set initially, at least for those franchisees that enter under that
contract. In addition, setting ongoing fees simply as a percentage of gross sales may be routine
for most franchisors, but it may be the wrong structure for your system. Changing how you
charge royalty fees will be equally disruptive.
The feasibility examination should provide some assurances that once developed, the franchise
system will be able to meet the financial expectations of the franchisor and future franchisees.
During the strategic process, when all of the variables are examined in detail and the costs are
better known, the final rate and structure of the fees can then be determined.
YOUR ABILITY TO EXPAND
By definition, the reason companies enter into a franchised method of distribution is to expand.
What are your goals for expansion? Are they realistic and achievable?
Few franchisors come out of the box and successfully develop into a national chain overnight.
Many, because they do not have a market development strategy, allow the phone calls to
determine their expansion strategy and find themselves with one location here and the next
one a thousand miles away. Spending all of your royalty in travel to a distant franchisee or
FRANCHISING 11
• Second, when paid or incurred by the franchisee, the franchisee will have sufficient
revenue to be profitable and there will be sufficient residual income to ensure a
reasonable return on their investment.
Setting appropriate fees is one of the most difficult decisions a franchisor will have to make. If
you set your fees too high, your franchise may not be marketable against the competition and
your franchisees may not be profitable. If you set them too low, your franchise may be
marketable but you may not have enough revenue to provide the services needed to your
franchisees. Neither alternative is satisfactory.
However, we often find in discussions with clients who are already operating a franchise system
that their franchise fees were set primarily by profiling those of their direct franchise
competitors. When you think about it, even if franchisees offer the identical product or services
as their competitors, their investment, sales, or cost of operation will not be identical to those
of their direct competitors. Even if the franchise system looks the same as others, the same cost
structure, growth strategy, exit strategy, and a host of other variables will not be the same.
Establishing fees based primarily on those of the competition is not only foolish, it’s potentially
dangerous since the fees need to be based upon the reality of the business being franchised.
Unfortunately, many new franchisors who do not strategically develop their franchise system
and who do not sufficiently understand the system’s economic realities simply review the
listings contained in publications like the Entrepreneur 500, determine what the competition is
charging their franchisees, and set their fees lower. If all you have to offer a franchisee is lower
fees, do you really have anything worthwhile to offer? If the fees you select are too low or too
high, the impact on the future franchise system can be dramatic.
As an inelastic method of distribution, that is, one governed by long-term contracts where
changes in the fee structure during the term will be difficult if not impossible, franchisors will
have to live with the fees they set initially, at least for those franchisees that enter under that
contract. In addition, setting ongoing fees simply as a percentage of gross sales may be routine
for most franchisors, but it may be the wrong structure for your system. Changing how you
charge royalty fees will be equally disruptive.
The feasibility examination should provide some assurances that once developed, the franchise
system will be able to meet the financial expectations of the franchisor and future franchisees.
During the strategic process, when all of the variables are examined in detail and the costs are
better known, the final rate and structure of the fees can then be determined.
YOUR ABILITY TO EXPAND
By definition, the reason companies enter into a franchised method of distribution is to expand.
What are your goals for expansion? Are they realistic and achievable?
Few franchisors come out of the box and successfully develop into a national chain overnight.
Many, because they do not have a market development strategy, allow the phone calls to
determine their expansion strategy and find themselves with one location here and the next
one a thousand miles away. Spending all of your royalty in travel to a distant franchisee or
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 12
worse, not visiting that franchisee because you can’t afford to is a reality for some new
franchisors.
Making certain that you have available markets where you can economically support growth
and achieve the required critical mass to sustain franchisee profitability is extremely important
for new franchisors. At a bare minimum, market studies to determine that you have available
expansion options and where and when you should expand will be required. You will also need
to decide how you will expand into the markets. Entering core markets and tertiary markets will
likely require different strategies. Will franchisees that meet the requirements of each type of
market be available?
None of the elements of a franchise system really stands on its own. Each element rests to
some degree on your ability to achieve the others. However, realistically assessing your
potential through a feasibility examination will enable you to determine not only whether you
should expand, but will also assist you in determining what may still need to be accomplished
before you are ready.
But conducting a feasibility examination is only your first step in franchise development.
Developing legal agreements is still far down the path.
DESIGNING THE FRANCHISE SYSTEM
You should view the feasibility examination as a 30,000-foot high look at your future franchise
system. The process of designing and developing a franchise program will bring you down to
ground zero.
The design and development of a franchise system will require that you evaluate each element
of the future franchise system, determine how it integrates with other elements, make changes
based upon the information collected, and begin the development of the tactical elements you
will require.
The process will differ for each company and each industry, but the elements will contain
similarities. If the feasibility examination was conducted properly, you will be able to build and
expand on the elements you reviewed during the feasibility process.
Some of the broad strategic and tactical elements will include:
• Existing management’s capabilities and other staff that you will require in managing and
growing the franchise system.
• Competition both at the franchise and consumer level.
• Potential conflicts between the franchisor and franchisee, and methods to reduce or
eliminate these problem areas.
• Economic impact of franchising on the franchisor and franchisees including investment,
cash flows, and return on investment.
• Financing requirements and exit strategies for the franchisor and franchisees.
FRANCHISING 12
worse, not visiting that franchisee because you can’t afford to is a reality for some new
franchisors.
Making certain that you have available markets where you can economically support growth
and achieve the required critical mass to sustain franchisee profitability is extremely important
for new franchisors. At a bare minimum, market studies to determine that you have available
expansion options and where and when you should expand will be required. You will also need
to decide how you will expand into the markets. Entering core markets and tertiary markets will
likely require different strategies. Will franchisees that meet the requirements of each type of
market be available?
None of the elements of a franchise system really stands on its own. Each element rests to
some degree on your ability to achieve the others. However, realistically assessing your
potential through a feasibility examination will enable you to determine not only whether you
should expand, but will also assist you in determining what may still need to be accomplished
before you are ready.
But conducting a feasibility examination is only your first step in franchise development.
Developing legal agreements is still far down the path.
DESIGNING THE FRANCHISE SYSTEM
You should view the feasibility examination as a 30,000-foot high look at your future franchise
system. The process of designing and developing a franchise program will bring you down to
ground zero.
The design and development of a franchise system will require that you evaluate each element
of the future franchise system, determine how it integrates with other elements, make changes
based upon the information collected, and begin the development of the tactical elements you
will require.
The process will differ for each company and each industry, but the elements will contain
similarities. If the feasibility examination was conducted properly, you will be able to build and
expand on the elements you reviewed during the feasibility process.
Some of the broad strategic and tactical elements will include:
• Existing management’s capabilities and other staff that you will require in managing and
growing the franchise system.
• Competition both at the franchise and consumer level.
• Potential conflicts between the franchisor and franchisee, and methods to reduce or
eliminate these problem areas.
• Economic impact of franchising on the franchisor and franchisees including investment,
cash flows, and return on investment.
• Financing requirements and exit strategies for the franchisor and franchisees.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 13
• Market strategy including market approach, targeted markets, critical mass
requirements, franchisee profile, structures of the franchise relationships used,
selection criteria as well as marketing, closure, and sales compliance strategies.
• System information and management, including accounting, IT and point of sale systems
among others, and the use the system makes of the information available.
• Policy formation, including real estate, advertising, territorial rights, supply chain
management, terms of the franchise offering, equipment, signage, etc.
• Training programs and manuals, including what is included in the training programs and
manuals, participants who will attend training, other training required or offered, costs
for training, locations, procedures, training staff, etc.
• Monitoring mechanisms, including site selection and development, operating standards,
financial management, sales and marketing, trademark usage, in-system operating and
qualitative evaluation, competitive analysis, etc.
• Support programs, including headquarters support, field support, ongoing visits, contact
reports, research and development, motivation programs, franchise relations programs,
system communication, etc.
• Ongoing services and programs, including cooperatives, counsels advises, etc.
This is only a preliminary list, but only after these and a host of other elements are evaluated
for inclusion into the system, their cost for development and implementation is determined,
and their impact on the revenue and expenses for the system at all levels are determined, can
you properly determine the fee and other structural elements of the franchise system. Only
then can you truly provide proper information to your legal counsel for the development of the
required franchise legal documents.
The reason usually given for why franchisees are better prepared to operate their new
businesses than independent business owners is that the franchisor is prepared to provide
them with the necessary tools and structure. When new franchisors shortcut the process, skip
the necessary evaluations and the development of the underlying components, and move
directly into the development of legal documents, it is unlikely that the benefits of franchising
can truly be realized for either them or the franchisees. Planning and evaluating the underlying
system is the first step in providing franchisees with the tools they require to succeed.
FRANCHISING 13
• Market strategy including market approach, targeted markets, critical mass
requirements, franchisee profile, structures of the franchise relationships used,
selection criteria as well as marketing, closure, and sales compliance strategies.
• System information and management, including accounting, IT and point of sale systems
among others, and the use the system makes of the information available.
• Policy formation, including real estate, advertising, territorial rights, supply chain
management, terms of the franchise offering, equipment, signage, etc.
• Training programs and manuals, including what is included in the training programs and
manuals, participants who will attend training, other training required or offered, costs
for training, locations, procedures, training staff, etc.
• Monitoring mechanisms, including site selection and development, operating standards,
financial management, sales and marketing, trademark usage, in-system operating and
qualitative evaluation, competitive analysis, etc.
• Support programs, including headquarters support, field support, ongoing visits, contact
reports, research and development, motivation programs, franchise relations programs,
system communication, etc.
• Ongoing services and programs, including cooperatives, counsels advises, etc.
This is only a preliminary list, but only after these and a host of other elements are evaluated
for inclusion into the system, their cost for development and implementation is determined,
and their impact on the revenue and expenses for the system at all levels are determined, can
you properly determine the fee and other structural elements of the franchise system. Only
then can you truly provide proper information to your legal counsel for the development of the
required franchise legal documents.
The reason usually given for why franchisees are better prepared to operate their new
businesses than independent business owners is that the franchisor is prepared to provide
them with the necessary tools and structure. When new franchisors shortcut the process, skip
the necessary evaluations and the development of the underlying components, and move
directly into the development of legal documents, it is unlikely that the benefits of franchising
can truly be realized for either them or the franchisees. Planning and evaluating the underlying
system is the first step in providing franchisees with the tools they require to succeed.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 14
A. Preparing for Franchising
1. Preparing for Franchising
Concepts of Franchise Ability
1. Profitability
Is the primary goal of all business ventures, without it the business will not survive
in the long run. To most franchise owners, profitability is the single definition of success.
2. Flexibility
The lack of flexibility inhibits the growth of the franchise and eventually makes it
an unviable business proposition. The flexibility of the franchise system should allow the
franchisors to tailor all their marketing efforts to meet not only the legal requirements of
the local market, but also the cultural and behavioral aspects of the local market
3. Transferability of a Business Model
A firm that intends to implement growth strategy through franchising route
should be able to ensure whether the business model is transferable to the franchisee.
The transferability of a franchise model depends on the degree of complexity of a
system.
4. Standardization
The franchise manual contains all minute details about the conduct of the
business. The standardization of the product/service offerings and other related areas
help franchisors maintain uniformity of operation across the system and consistency in
the quality of services being provided by the franchisees.
5. Prototype
The firm willing to franchise out its business must develop a successful prototype
in order to train the potential franchisees the way of carrying out its business
6. Trustworthiness
The firm must, in order to sell franchises, establish its creditworthiness in the
eyes of its prospective franchisees.
Function of several variables such as:
• Size of the organization
• Number of years of operation
• Number of franchised units in operation
FRANCHISING 14
A. Preparing for Franchising
1. Preparing for Franchising
Concepts of Franchise Ability
1. Profitability
Is the primary goal of all business ventures, without it the business will not survive
in the long run. To most franchise owners, profitability is the single definition of success.
2. Flexibility
The lack of flexibility inhibits the growth of the franchise and eventually makes it
an unviable business proposition. The flexibility of the franchise system should allow the
franchisors to tailor all their marketing efforts to meet not only the legal requirements of
the local market, but also the cultural and behavioral aspects of the local market
3. Transferability of a Business Model
A firm that intends to implement growth strategy through franchising route
should be able to ensure whether the business model is transferable to the franchisee.
The transferability of a franchise model depends on the degree of complexity of a
system.
4. Standardization
The franchise manual contains all minute details about the conduct of the
business. The standardization of the product/service offerings and other related areas
help franchisors maintain uniformity of operation across the system and consistency in
the quality of services being provided by the franchisees.
5. Prototype
The firm willing to franchise out its business must develop a successful prototype
in order to train the potential franchisees the way of carrying out its business
6. Trustworthiness
The firm must, in order to sell franchises, establish its creditworthiness in the
eyes of its prospective franchisees.
Function of several variables such as:
• Size of the organization
• Number of years of operation
• Number of franchised units in operation
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 15
• Brand awareness
• Brand equity
• Reputation of the management of the firm
• Commitment to relationships
7. Management competency
It is essential that the management should be competent enough to identify the
right entrepreneurial talents at various places, convert them as territory business partners
(franchisees) and establish a strong relationships with them in order to ensure a system-
wide success.
2. Assessing a Potential franchise
1. Ability to perform without supervision
• Familiarities
• Prioritize works
• Focus on not only who will do it but when it has to be done
• Unit supervisor has responsibility for long range plan including total
component budget
2. Being self-disciplined
• A franchisee should be self-disciplined with regard to time management and
should be able to allocate time for paperwork, meetings, and moving in the
market
3. Ability to work under pressure
• No franchise guarantees income and profit without putting any efforts. Initial
years of setting up a business may be very difficult and full of teething
problems. A franchise should be able to work under such pressures.
4. Attitude to learn from failures
• Failures are but stepping stone to success.
• There is no mistakes in life, only lessons
• Every failure is a lesson in learning
• Failing is not bad staying down is.
• No failure is final
5. Ability to meet standards
• A franchise should be able to create standards and continuously strive to
achieve them.
6. Ability to take difficult decisions
• Not everything would be smooth while running a franchise. Sometimes a
franchisee is required to take difficult decisions for the smooth functioning of
the franchise.
7. Ability to take a balanced view
FRANCHISING 15
• Brand awareness
• Brand equity
• Reputation of the management of the firm
• Commitment to relationships
7. Management competency
It is essential that the management should be competent enough to identify the
right entrepreneurial talents at various places, convert them as territory business partners
(franchisees) and establish a strong relationships with them in order to ensure a system-
wide success.
2. Assessing a Potential franchise
1. Ability to perform without supervision
• Familiarities
• Prioritize works
• Focus on not only who will do it but when it has to be done
• Unit supervisor has responsibility for long range plan including total
component budget
2. Being self-disciplined
• A franchisee should be self-disciplined with regard to time management and
should be able to allocate time for paperwork, meetings, and moving in the
market
3. Ability to work under pressure
• No franchise guarantees income and profit without putting any efforts. Initial
years of setting up a business may be very difficult and full of teething
problems. A franchise should be able to work under such pressures.
4. Attitude to learn from failures
• Failures are but stepping stone to success.
• There is no mistakes in life, only lessons
• Every failure is a lesson in learning
• Failing is not bad staying down is.
• No failure is final
5. Ability to meet standards
• A franchise should be able to create standards and continuously strive to
achieve them.
6. Ability to take difficult decisions
• Not everything would be smooth while running a franchise. Sometimes a
franchisee is required to take difficult decisions for the smooth functioning of
the franchise.
7. Ability to take a balanced view
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 16
• A franchisee should be able to take a holistic perspective of any business
issues that may emerge during the currency of the franchise. A biased or a
narrow view may greatly hamper the business prospects.
8. Tolerance to ambiguity
• Business is a very complex system and clarity may prevail at all the aspects of
business
9. Receptiveness
• A franchise should be receptive and have an open mind in interaction with
franchisor. Franchisors offer a great deal of support to the franchisee for an
effective franchise operations.
10. Growth Orientation
• A franchisee should have a long term growth orientation rather than a short
term profit orientation. This helps in maintain a long term relation with the
franchisor.
11. Internal Locus of control
• A franchisee should be able to put in adequate efforts to be successful. A
tendency to attribute external factors for success-including luck-could be
unfavorable for effective functioning of a franchise. A franchise should have
an internal locus of control.
• A franchisor should be able to assess these qualities through an appropriate
mechanism.
12. Ability to delegate
• It is not possible to do everything on one’s own. A franchisee
therefore should be able to delegate tasks to others and get many
things done rather that doing things oneself. It is however, not easy
to delegate.
B. Investigating and Evaluating Franchise
1. Introduction
Some terms regarding franchising
Franchisor:
The licensing company in the franchise agreement.
Franchisee:
The independent owner of a franchise outlet who enters into an
agreement with a franchisor.
Franchise:
The right to use a specific business name and sell its goods or services in a
specific city, region or country.
FRANCHISING 16
• A franchisee should be able to take a holistic perspective of any business
issues that may emerge during the currency of the franchise. A biased or a
narrow view may greatly hamper the business prospects.
8. Tolerance to ambiguity
• Business is a very complex system and clarity may prevail at all the aspects of
business
9. Receptiveness
• A franchise should be receptive and have an open mind in interaction with
franchisor. Franchisors offer a great deal of support to the franchisee for an
effective franchise operations.
10. Growth Orientation
• A franchisee should have a long term growth orientation rather than a short
term profit orientation. This helps in maintain a long term relation with the
franchisor.
11. Internal Locus of control
• A franchisee should be able to put in adequate efforts to be successful. A
tendency to attribute external factors for success-including luck-could be
unfavorable for effective functioning of a franchise. A franchise should have
an internal locus of control.
• A franchisor should be able to assess these qualities through an appropriate
mechanism.
12. Ability to delegate
• It is not possible to do everything on one’s own. A franchisee
therefore should be able to delegate tasks to others and get many
things done rather that doing things oneself. It is however, not easy
to delegate.
B. Investigating and Evaluating Franchise
1. Introduction
Some terms regarding franchising
Franchisor:
The licensing company in the franchise agreement.
Franchisee:
The independent owner of a franchise outlet who enters into an
agreement with a franchisor.
Franchise:
The right to use a specific business name and sell its goods or services in a
specific city, region or country.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 17
The Main Purposes that are set to be achieved through business include the following:
▪ To restore individual entrepreneurship.
▪ To provide an easily recognized and accepted product or service.
▪ To compete with big business.
▪ To allow consumers to buy good quality items or services at the right price.
▪ To provide entrepreneurs a means to enter business with a low capital investment risk.
FRANCHISING 17
The Main Purposes that are set to be achieved through business include the following:
▪ To restore individual entrepreneurship.
▪ To provide an easily recognized and accepted product or service.
▪ To compete with big business.
▪ To allow consumers to buy good quality items or services at the right price.
▪ To provide entrepreneurs a means to enter business with a low capital investment risk.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 18
Benefits and Problems of Franchise
Benefits:
✓ Less stake of capital-installment and or deferred payment facility
✓ Easy to manage credit
✓ Easy/cost-free advises/Consultancy is available
✓ Available market and clients
✓ Promotion and advertisement cost is very minimum
Problems:
✓ Profits need be shared with parent company
✓ After initial agreement, unfavorable terms often impose
✓ Compliance of the technology, very little scope for any R&D and innovation
✓ If wants to remain only franchisee, franchise agreement may appear expensive
✓ Most important decision are taken by the parent company, hence no freedom of making such
decisions
✓ Most of the supplies are at the higher prices to be had from the parent in spite of better
alternatives.
FRANCHISING 18
Benefits and Problems of Franchise
Benefits:
✓ Less stake of capital-installment and or deferred payment facility
✓ Easy to manage credit
✓ Easy/cost-free advises/Consultancy is available
✓ Available market and clients
✓ Promotion and advertisement cost is very minimum
Problems:
✓ Profits need be shared with parent company
✓ After initial agreement, unfavorable terms often impose
✓ Compliance of the technology, very little scope for any R&D and innovation
✓ If wants to remain only franchisee, franchise agreement may appear expensive
✓ Most important decision are taken by the parent company, hence no freedom of making such
decisions
✓ Most of the supplies are at the higher prices to be had from the parent in spite of better
alternatives.
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 19
Some favors that a franchisee normally enjoys from his parent franchisor:
o Location selection and advice
o Product, product design and product development
o Marketing strategy, with emphasis on advertising
o Help in the development of uniform image creating advertising modes and languages
o Initial employee and management training
o Negotiation of leases
o Store design and equipment purchasing
o Standardized policies and procedures
o Centralized purchasing with savings
o Continued management counseling
o Develop a set of customer service standard
o Financing at the start-up and afterwards
The parties that desires to be involved in franchise business should be cautious about some points as
under:
• Consider the experience and reputation of the franchise
• Ask questions of several existing franchises
• Agree on management assistance and promotion
FRANCHISING 19
Some favors that a franchisee normally enjoys from his parent franchisor:
o Location selection and advice
o Product, product design and product development
o Marketing strategy, with emphasis on advertising
o Help in the development of uniform image creating advertising modes and languages
o Initial employee and management training
o Negotiation of leases
o Store design and equipment purchasing
o Standardized policies and procedures
o Centralized purchasing with savings
o Continued management counseling
o Develop a set of customer service standard
o Financing at the start-up and afterwards
The parties that desires to be involved in franchise business should be cautious about some points as
under:
• Consider the experience and reputation of the franchise
• Ask questions of several existing franchises
• Agree on management assistance and promotion
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 20
• Examine territory.
• Find out if they can open other outlets.
• Ask if they have participation in the decision site selection.
• Make sure they understand terminations, transfers, and renewals.
• Ask if prices to the customers are predetermined or flexible.
• Determine if the contract includes a “refine from entering similar business” clause.
Franchise Agreement
A good basic franchise agreement will stipulate the conditions for bothe parties and will contain
information on:
1. Fees and initial cost
2. Product service method stipulations
3. Rstriction upon purchase of materials
4. Record keeping requirements
5. Life of franchise
6. Termination
7. Royalties
8. Location and territorial rights
9. Training provisions
10. Controls of operations and performance standards
Obligation of the Franchiser and the Franchisee:
Franchisor Guarantees:
❖ Use of company name
❖ Management training
❖ Financial help
❖ Continuing management help
❖ Wholesale prices on purchases
FRANCHISING 20
• Examine territory.
• Find out if they can open other outlets.
• Ask if they have participation in the decision site selection.
• Make sure they understand terminations, transfers, and renewals.
• Ask if prices to the customers are predetermined or flexible.
• Determine if the contract includes a “refine from entering similar business” clause.
Franchise Agreement
A good basic franchise agreement will stipulate the conditions for bothe parties and will contain
information on:
1. Fees and initial cost
2. Product service method stipulations
3. Rstriction upon purchase of materials
4. Record keeping requirements
5. Life of franchise
6. Termination
7. Royalties
8. Location and territorial rights
9. Training provisions
10. Controls of operations and performance standards
Obligation of the Franchiser and the Franchisee:
Franchisor Guarantees:
❖ Use of company name
❖ Management training
❖ Financial help
❖ Continuing management help
❖ Wholesale prices on purchases
ASIAN INSTITUTE OF COMPUTER STIDUES (AICS)
FRANCHISING 21
Franchisee obligations:
❖ Paying franchise fees
❖ making minimum investment
❖ meeting quality standards
❖ following procedures
❖ maintaining business relationship
FRANCHISING 21
Franchisee obligations:
❖ Paying franchise fees
❖ making minimum investment
❖ meeting quality standards
❖ following procedures
❖ maintaining business relationship
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