Scarb Eesbm6e PPT 06

CHAPTER 6
Franchising and the

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 Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 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.
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.
The Franchising Relationship
Element The Franchiser The Franchisee
Site Selection Oversees and approves; may choose site Chooses site with franchiser’s approval
Design Provides prototype design Pays for and implements design
Employees Makes general recommendations and Hires, manages, and fires

training suggestions employees
Products and Services Determines product or service line Modifies only with franchiser’s 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 Pays for national ad campaign; complies with
campaign; may require minimum level of local advertising requirements; gets franchisor
spending on local advertising approval on local ads
Quality Control Sets quality standards and enforces them Maintains quality standards; trains employees
with inspections; trains franchisees to implement quality systems
Support Provides support through an established Operates business on a day-to-day basis with
business system franchiser’s 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.
Types of Franchising
 Tradename
 Product distribution
 Pure (Business format)
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?”
Benefits of Franchising
 A business system
 Management training and support
 Start-up
 Ongoing
 Brand name appeal

 “Cloning”
 Standardized quality of goods and
services
 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
Ch. 6: Franchising and the Entrepreneur Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 10
FIGURE 6.3 Franchisor Financial Assistance
Source: The Profile of Franchising 2006, International Franchise Association (Washington, DC: 2007), p. 70.
 Centralized buying power
 Site selection and territorial protection
 Important issue:
Territorial encroachment
 Greater chance for success
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
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”
Ten Myths of Franchising
1. Franchising is the safest way to go into
business because franchises never fail.
2. I’ll be able to open my franchise for less
money than the franchiser estimates.
3. The bigger the franchise organization, the
more successful I’ll be.
4. I’ll use 80 percent of the franchiser’s
business system, but I’ll improve upon by
substituting my experience and know-how.
Ten Myths of Franchising (continued)
5. All franchises are the same.

6. I don’t 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.
Ten Myths of Franchising (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, that’s why I pay
an ongoing royalty fee.
10. Once I open my franchise,
I’ll be able to run things
the way I want to.
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
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.
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.
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 Franchisor’s FDD – and
read it!
 Talk to existing franchisees.
 Ask the franchiser some tough questions.
 Make your choice.
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
Trends Shaping Franchising
 Changing face of franchisees
 Better educated with more business
acumen
 Multiple-unit franchising
 52% of franchisees operate multiple
outlets (and growing)
 International opportunities
 IFA Survey: 52% of U.S. franchisors
have an international presence
 Master franchising
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
Conclusion
Franchising:
 Is a key part of the small business
sector
 Increases the chance of business
success for the entrepreneur
 Growth continues
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.

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CHAPTER 6

Franchising and the

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

 Economic impact of franchising

Design Provides prototype design Pays for and implements design

Employees Makes general recommendations and Hires, manages, and fires

Prices Can only recommend prices Sets final prices

 Franchisee gets the right to use all of

 Brand name appeal

 Proven products and

 Strict adherence to standardized

 Limited product line

5. All franchises are the same.

8. Franchising is the cheapest way to get into

 Claims that the contract is “standard; no need to

 Attempts to discourage your attorney from

 Unique concept or marketing approach

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