Scarb Eesbm6e PPT 06

CHAPTER
Franchising
Franchising and
and the
the
Entrepreneur
Entrepreneur
Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall
The Franchising Boom
More than 3,000 franchisors operate

more than 909,000 outlets in the
United States.
Each year, franchises produce goods
and services that are worth $881
billion, 4.4% of the U.S. GDP.
Franchises employ one in every 12
workers in the U.S. in more than 230
major industries.
Ch. 6: Franchising and the Entrepreneur
6-2
The Franchising Boom
Economic impact of franchising

on the U.S. economy: $2.3 trillion.
A new franchise opens

somewhere in the world
every 8 minutes.
6-3
Franchising
A system in which semi-independent
business owners (franchisees) pay
fees and royalties to a parent
company (franchiser) in return for
the right to become identified with
its trademark, to sell its products or
services, and often to use its
business format and system.
6-4
The Franchising Relationship

Element
The Franchiser
The Franchisee
Site Selection
Oversees and approves; may choose site
Chooses site with franchisers approval
Design
Provides prototype design
Pays for and implements design
Employees
Makes general recommendations and

training suggestions
Hires, manages, and fires

employees
Products and Services
Determines product or service line
Modifies only with franchisers approval
Prices
Can only recommend prices
Sets final prices
Purchasing
Establishes quality standards and suppliers
Must meet quality standards and purchase

only from approved suppliers
Advertising
Develops and coordinates national ad

campaign; may require minimum level of
spending on local advertising
Pays for national ad campaign; complies with

local advertising requirements; gets franchisor
approval on local ads
Quality Control
Sets quality standards and enforces them

with inspections; trains franchisees
Maintains quality standards; trains employees

to implement quality systems
Support
Provides support through an established

business system
Operates business on a day-to-day basis with

franchisers support
FIGURE 6.1
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.
6-5
Types of Franchising
Tradename
Product distribution
Pure (Business format)
6-6
Franchising Basics
Franchisee gets the right to use all of

the elements of a fully integrated
business operation.
Essence of what franchisees purchase

from the franchisors: Experience.
Key Question: What can a franchise do

for me that I cannot do for myself?
6-7
6-8
Benefits of Franchising
A business system
Management training and support
Start-up
Ongoing
Brand name appeal
Cloning
Standardized quality of goods and

services
6-9
National advertising programs
Franchisees contribute 1% to 5% of sales
Financial assistance
Only 20% of franchisors offer direct
financial assistance to franchisees.
SBA Franchise Registry
Proven products and

business formats
6 - 10
FIGURE 6.3 Franchisor Financial Assistance

Source: The Profile of Franchising 2006, International Franchise Association
(Washington, DC: 2007), p. 70.
6 - 11
Centralized buying power
Site selection and territorial protection
Important issue:
Territorial encroachment
Greater chance for success
6 - 12
Drawbacks of Franchising
Franchise fees and ongoing royalties

Average upfront franchise fee = $25,147
Royalties range from 1% to 11% of
franchisees sales
Average royalty = 6.7% of sales
Strict adherence to standardized

operations
Restrictions on purchasing
Approved suppliers only
6 - 13
Drawbacks of Franchising
(continued)
Limited product line

Contract terms and renewal
Average term = 10.3 years
Unsatisfactory training programs

Market saturation
Less freedom
No independence
Happy prisoners
6 - 14
Ten Myths of Franchising

1. Franchising is the safest way to go into
business because franchises never fail.
2. Ill be able to open my franchise for less
money than the franchiser estimates.
3. The bigger the franchise organization, the
more successful Ill be.
4. Ill use 80 percent of the franchisers
business system, but Ill improve upon by
substituting my experience and know-how.
6 - 15

(continued)
5. All franchises are the same.

6. I dont have to be a hands-on manager.
I can be an absentee owner and still be very
successful.
7.
Anyone can be a satisfied,

successful franchise owner.
6 - 16

(continued)
8. Franchising is the cheapest way to get into

business for yourself.
9. The franchiser will solve my business
problems for me; after all, thats why I pay an
ongoing royalty fee.
10. Once I open my franchise,
Ill be able to run things
the way I want to.
6 - 17
Franchising and the Law

Franchise Disclosure Document (FDD)
Established in 2008 to replace the Uniform
Franchise Offering Circular (UFOC)
Requires franchisors to disclose to
potential franchisees information on 23
important topics
Objective: To give franchisees the
information they need to protect
themselves from dishonest franchisees
and to make good investment decisions
6 - 18
Detecting Dishonest Franchisers

In addition to the text
Claims that the contract is standard; no need to

read it.
Failure to provide a copy of the required disclosure

documents.
Marginally successful prototype or no prototype.
Poorly prepared operations manual.
Promises of future earnings with no documentation.
High franchisee turnover or termination rate.
Unusual amount of litigation by franchisees.
6 - 19
Detecting Dishonest Franchisers

(continued)
Attempts to discourage your attorney from

evaluating the contract before signing it.
No written documentation.
A high pressure sale.
Claims to be exempt from federal disclosure laws.
Get rich quick schemes, promising huge profits

with minimal effort.
Reluctance to provide a list of existing franchisees.
Evasive, vague answers to your questions.
6 - 20
The Right Way to

Buy a Franchise
Evaluate yourself - What do you like and

dislike?
Research your market.
Consider your franchise options.
Get a copy of the Franchisors FDD and
read it!
Talk to existing franchisees.
Ask the franchiser some tough questions.
Make your choice.
6 - 21
Factors That Make a

Franchise Appealing
Unique concept or marketing approach
Profitability
Registered trademark
Business system that works
Solid training program
Affordability
Positive relationship with franchisees
6 - 22
Trends Shaping Franchising
Changing face of franchisees
Multiple-unit franchising
52% of franchisees operate multiple outlets

(and growing)
International opportunities
Better educated with more business

acumen
IFA Survey: 52% of U.S. franchisors have

an international presence
Master franchising
6 - 23
Trends Shaping Franchising
Smaller, nontraditional locations
Intercept marketing
Conversion franchising
72% of North American franchisors use

as a growth strategy
Piggybacking (or combination or

multi-branded franchising)
Serving dual-career couples and

baby boomers
6 - 24
Conclusion
Franchising:
Is a key part of the small business

sector
Increases the chance of business

success for the entrepreneur
Growth continues
6 - 25
All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.
6 - 26

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CHAPTER

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Franchising Boom

More than 3,000 franchisors operate

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Franchising Boom

Economic impact of franchising

A new franchise opens

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

The Franchising Relationship

Oversees and approves; may choose site

Chooses site with franchisers approval

Provides prototype design

Pays for and implements design

Makes general recommendations and

Hires, manages, and fires

Products and Services

Determines product or service line

Modifies only with franchisers approval

Can only recommend prices

Sets final prices

Establishes quality standards and suppliers

Must meet quality standards and purchase

Develops and coordinates national ad

Pays for national ad campaign; complies with

Sets quality standards and enforces them

Maintains quality standards; trains employees

Provides support through an established

Operates business on a day-to-day basis with

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Pure (Business format)

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Franchisee gets the right to use all of

Essence of what franchisees purchase

Key Question: What can a franchise do

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Brand name appeal

Standardized quality of goods and

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

National advertising programs

Franchisees contribute 1% to 5% of sales

Proven products and

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

FIGURE 6.3 Franchisor Financial Assistance

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Centralized buying power

Site selection and territorial protection

Greater chance for success

Ch. 6: Franchising and the Entrepreneur

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Franchise fees and ongoing royalties