Franchising and the Entrepreneur

Chapter 4 Franchising

Copyright 2006 Prentice Hall Publishing Company

The Franchising Boom!!!

   

Sales exceeding $1 trillion from virtually every product or service imaginable. One out of 12 retail businesses in the U.S. is a franchised operation. Franchise sales account for 40% of total retail sales. A new franchise opens somewhere in the world every six-and-a-half minutes six-andand in the United States every eight minutes.
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Chapter 4 Franchising

Franchising Grow th Number of Units (in Thousands)

400,000 Nu mber of Franchised Units (in Thousands) 350,000 300,000 250,000 200,000 150,000 100,000 50,000 2000 2001 2002 Year 2003 2004 2005
290,605 274,265 341,579 310,044 351,459 337,693

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Copyright 2006 Prentice Hall Publishing Company

Franchising


Franchising semi-independent business semiowners pay fees and royalties to a parent company in exchange for the right to sell its products and services under the franchiser s trade name and often to use its business format and system.

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Types of Franchising
  

Tradename Product distribution Pure (Business format)

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Why Buy a Franchise?

  

Franchisees benefit from the franchiser s experience. Franchisees get a proven business system and avoid having to learn by trial-and-error. trial-andFranchisees earn a great deal of satisfaction from their work. Before buying, ask: What can a franchise do for me that I cannot do for myself?

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Benefits of Franchising
Business system  Management training and support  Brand name appeal  Standardized quality of goods and services  National advertising program


Chapter 4 Franchising

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Benefits of Franchising
Financial assistance  Proven products and business formats  Centralized buying power  Site selection and territorial protection  Greater chance for success

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Drawbacks of Franchising
Franchise fees and profit sharing  Strict adherence to standardized operations  Restrictions on purchasing  Limited product line  Unsatisfactory training programs  Market saturation  Less freedom

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Ten Myths of Franchising

1.

2.

3.

Franchising is the safest way to go into business because franchises never fail. I ll be able to open my franchise for less money than the franchiser estimates. The bigger the franchise organization, the more successful I ll be.
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Chapter 4 Franchising

Ten Myths of Franchising

4.

5. 6.

I ll use 80 percent of the franchiser s business system, but I ll improve upon it by substituting my experience and know-how. knowAll franchises are the same. I don t have to be a hands-on handsmanager. I can be an absentee owner and be very successful.
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Chapter 4 Franchising

Ten Myths of Franchising

7. 8. 9.

10.

Anyone can be a satisfied, successful franchise owner. Franchising is the cheapest way to get into business for yourself. The franchiser will solve my business problems for me; after all, that s why I pay an on-going royalty. onOnce I open my franchise, I ll be able to run things the way I want to.
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Chapter 4 Franchising

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

What Do Franchisers Look for in a Franchisee?

Yes No Maybe
       

Experienced? Hard Working? Team Player? Leadership & Management Skills? Risk Averse? Educated? Financially Stable? A Desire to Succeed?

Franchising and the Law

Key protection is the Uniform Franchise Offering Circular (UFOC).  Franchisers must deliver a copy of UFOC before any offer or sale of a franchise.


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Copyright 2006 Prentice Hall Publishing Company

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Franchising and the Law



The UFOC contains information on 23 topics, including:

 Franchiser s

business experience  Franchise fees and costs  Lawsuits involving the franchiser  Financial assistance available  Territorial protection granted  Restrictions on purchasing
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Detecting Dishonest Franchisers

    

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. Unsolicited testimonial from a highly successful franchisee.
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Chapter 4 Franchising

Detecting Dishonest Franchisers

(Continued)

   

Unusual amount of litigation by franchisees. Promises of future earnings with no documentation. High franchisee turnover or termination rate. Attempts to discourage your attorney from evaluating the contract before signing it.
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Chapter 4 Franchising

Detecting Dishonest Franchisers

(Continued)

     

No written documentation. 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.
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Chapter 4 Franchising

How to Buy a Franchise

Preparation, common sense, and patience are vital ingredients in choosing the right franchise. Evaluate yourself - What do you like and dislike? Research the market. Consider your franchise options. Get a copy of the franchiser s Uniform Franchise Offering Circular (UFOC) and study it.
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Chapter 4 Franchising

What Should You Look For?

A unique concept or marketing approach  Profitability  A registered trademark


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What Should You Look For?

A business system that works  A solid training program  Affordability  A positive relationship with franchisees


(Continued)

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How to Buy a Franchise

(Continued)

Talk to existing franchisees.  Ask the franchiser some tough questions.  Make your choice.


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Table 4.4 Advantages and Disadvantages of Buying a New vs. an Established Franchise Pros
yCan be new and exciting yBusiness concept can be fresh and different in the market yPossibility of getting lower fees as a pioneer of the concept yPotential for a high return on investment yBusiness concept likely is wellknown to consumers and market for the products or services is already established. yFranchiser has experience in delivering services to franchisees yFranchiser has had time to work the bugs out of the business system

Cons
yBusiness is not tested or established in the market yUnknown brand and trademark yPossibility that the concept is a fad with no staying power yFranchiser may lack the experience to deliver valuable services to franchisees yHigh franchise fees and costs that often are non-negotiable yConcept may be on the wane in the market yFranchisers brand and trademark may remind customers of an outdated concept yFranchisers trade dress may be in need of updating and redesigning

New Franchise

Established Franchise

Source: Based on Andrew A. Caffey, Age Issues, Entrepreneur, January 2002. p. 118.

Franchise Contracts
40% of New Franchisees Sign Contracts Without Reading Them !!!

Note clauses covering:  Termination  Renewal  Transfers and Buybacks

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Contract

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Trends Shaping Franchising

      

International opportunities Smaller, nontraditional locations Conversion franchising MultipleMultiple-unit franchising Master franchising Piggybacking (Combination franchising) Serving aging baby boomers

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Franchising Web Sites

Entrepreneur s Franchise Zone http://www.entrepreneur.com/Franchi se_Zone/FZ_FrontDoor/0,4670,,00.ht ml  Subway Sandwiches and Salads http://www.subway.com/  Auntie Anne s Pretzels http://www.auntieannes.com/

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