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Chapter 4 FranchisingChapter 4 Franchising Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 11

Franchising and the

Entrepreneur




The FranchisingThe Franchising

Boom!!!Boom!!! Sales exceeding $1 trillion from virtuallySales exceeding $1 trillion from virtually

every product or service imaginable.every product or service imaginable.

One out of 12 retail businesses in theOne out of 12 retail businesses in theU.S. is a franchised operation.U.S. is a franchised operation.

Franchise sales account for 40% of totalFranchise sales account for 40% of totalretail sales.retail sales.

A new franchise opens somewhere in A new franchise opens somewhere inthe world every sixthe world every six--andand--aa--half minuteshalf minutesand in the United States every eight and in the United States every eight minutes.minutes.




274,265

290,605

310,044

341,579 337,693351,459

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

N u m b e r o f F r a n c h i s e d

U n i t s ( i n

T h o u s a n d s )

2000 2001 2002 2003 2004 2005

Year

Franchising Growth

Number of Units (in Thousands)




FranchisingFranchising FranchisingFranchising semisemi--independent businessindependent business

owners pay fees and royalties to a parent owners pay fees and royalties to a parent

company in exchange for the right to sell itscompany in exchange for the right to sell itsproducts and services under the franchisersproducts and services under the franchiserstrade name and often to use its businesstrade name and often to use its businessformat and system.format and system.




Types ofTypes of

FranchisingFranchising TradenameTradename

Product distributionProduct distribution

Pure (Business format)Pure (Business format)




W

hy Buy a Franchise?W

hy Buy a Franchise? Franchisees benefit from the franchisersFranchisees benefit from the franchisers

experience.experience.

Franchisees get a proven business system andFranchisees get a proven business system andavoid having to learn by trialavoid having to learn by trial--andand--error.error.

Franchisees earn a great deal of satisfactionFranchisees earn a great deal of satisfactionfrom their work.from their work.

Before buying, ask: What can a franchise doBefore buying, ask: What can a franchise dofor me that I cannot do for myself?for me that I cannot do for myself?




Benefits of FranchisingBenefits of Franchising

Business systemBusiness system

Management training and support Management training and support

Brand name appealBrand name appeal

Standardized quality of goods andStandardized quality of goods andservicesservices

National advertising programNational advertising program




Benefits of FranchisingBenefits of Franchising

Financial assistanceFinancial assistance

Proven products and businessProven products and businessformatsformats

Centralized buying powerCentralized buying power

Site selection and territorialSite selection and territorial

protectionprotection

Greater chance for successGreater chance for success




Drawbacks of FranchisingDrawbacks of Franchising

Franchise fees and profit sharingFranchise fees and profit sharing

Strict adherence to standardizedStrict adherence to standardized

operationsoperations Restrictions on purchasingRestrictions on purchasing

Limited product lineLimited product line

Unsatisfactory training programsUnsatisfactory training programs Market saturationMarket saturation

Less freedomLess freedom




Ten Myths of FranchisingTen Myths of Franchising

1.1. Franchising is the safest way to goFranchising is the safest way to gointo business because franchisesinto business because franchises

never fail.never fail.

2.2. Ill be able to open my franchise forIll be able to open my franchise forless money than the franchiserless money than the franchiser

estimates.estimates.3.3. The bigger the franchise organization,The bigger the franchise organization,

the more successful Ill be.the more successful Ill be.





4.4. Ill use 80 percent of the franchisersIll use 80 percent of the franchisersbusiness system, but Ill improvebusiness system, but Ill improve

upon it by substituting myupon it by substituting myexperience and knowexperience and know--how.how.

5.5. All franchises are the same. All franchises are the same.

6.6. I dont have to be a handsI dont have to be a hands--ononmanager. I can be an absenteemanager. I can be an absenteeowner and be very successful.owner and be very successful.





7.7. Anyone can be a satisfied, successful Anyone can be a satisfied, successfulfranchise owner.franchise owner.

8.8. Franchising is the cheapest way to get Franchising is the cheapest way to get into business for yourself.into business for yourself.

9.9. The franchiser will solve my businessThe franchiser will solve my business

problems for me; after all, thats why Iproblems for me; after all, thats why Ipay an onpay an on--going royalty.going royalty.

10.10. Once I open my franchise, Ill be ableOnce I open my franchise, Ill be ableto run things the way I want to.to run things the way I want to.



What Do Franchisers LookWhat Do Franchisers Look

for in a Franchisee?for in a Franchisee? Experienced?Experienced?

Hard Working?Hard Working?

Team Player?Team Player?

Leadership & Management Skills?Leadership & Management Skills?

Risk Averse?Risk Averse?

Educated?Educated? Financially Stable?Financially Stable?

A Desire to Succeed? A Desire to Succeed?

Yes No Maybe



Experienced?Experienced?







Yes No Maybe


for in a Franchisee?for in a Franchisee?










Yes No Maybe






Franchising and the LawFranchising and the Law

K ey protection is the Uniform FranchiseK ey protection is the Uniform FranchiseOffering Circular (UFOC).Offering Circular (UFOC).

FranchisersFranchisers must must deliver a copy of deliver a copy of UFOC before any offer or sale of aUFOC before any offer or sale of afranchise.franchise.




Franchising and the LawFranchising and the Law

The UFOC contains information on 23The UFOC contains information on 23topics, including:topics, including:

Franchisers business experienceFranchisers business experience

Franchise fees and costsFranchise fees and costs

Lawsuits involving the franchiserLawsuits involving the franchiser

Financial assistance availableFinancial assistance available Territorial protection grantedTerritorial protection granted

Restrictions on purchasingRestrictions on purchasing




Detecting DishonestDetecting Dishonest

FranchisersFranchisers Claims that the contract is standard;Claims that the contract is standard;

no need to read it.no need to read it.

Failure to provide a copy of theFailure to provide a copy of therequired disclosure documents.required disclosure documents.

Marginally successful prototype or noMarginally successful prototype or noprototype.prototype.

Poorly prepared operations manual.Poorly prepared operations manual.

Unsolicited testimonial from a highlyUnsolicited testimonial from a highlysuccessful franchisee.successful franchisee.




Unusual amount of litigation byUnusual amount of litigation byfranchisees.franchisees.

Promises of future earnings with noPromises of future earnings with nodocumentation.documentation.

High franchisee turnover or terminationHigh franchisee turnover or terminationrate.rate.

Attempts to discourage your attorney Attempts to discourage your attorneyfrom evaluating the contract beforefrom evaluating the contract beforesigning it.signing it.

(Continued)(Continued)


FranchisersFranchisers




No written documentation.No written documentation. High pressure sale.High pressure sale.

Claims to be exempt from federalClaims to be exempt from federaldisclosure laws.disclosure laws. "Get rich quick" schemes, promising"Get rich quick" schemes, promising

huge profits with minimal effort.huge profits with minimal effort. Reluctance to provide a list of existingReluctance to provide a list of existing

franchisees.franchisees. Evasive, vague answers to yourEvasive, vague answers to your

questions.questions.


FranchisersFranchisers (Continued)(Continued)




How to Buy a FranchiseHow to Buy a Franchise

Preparation, common sense, and patiencePreparation, common sense, and patienceare vital ingredients in choosing the right are vital ingredients in choosing the right franchise.franchise.

Evaluate yourself Evaluate yourself -- What do you like andWhat do you like anddislike?dislike?

Research the market.Research the market.

Consider your franchise options.Consider your franchise options. Get a copy of the franchisers UniformGet a copy of the franchisers Uniform

Franchise Offering Circular (UFOC) andFranchise Offering Circular (UFOC) andstudy it.study it.




What Should You LookWhat Should You Look

For?For? A unique concept or marketing A unique concept or marketing

approachapproach

ProfitabilityProfitability

A registered trademark A registered trademark




What Should You LookWhat Should You Look

For?For? A business system that A business system that

worksworks

A solid training program A solid training program

Affordability Affordability

A positive relationship A positive relationshipwith franchiseeswith franchisees





How to Buy a FranchiseHow to Buy a Franchise

Talk to existing franchisees.Talk to existing franchisees.

Ask the franchiser some tough Ask the franchiser some toughquestions.questions.

Make your choice.Make your choice.




Table 4.4 Advantages and Disadvantages of Buying a New vs.

an Established Franchise

Pros Cons

New

Franchise

yCan be new and exciting

yBusiness concept can be fresh and

different in the market

yPossibility of getting lower fees as

a ³pioneer´ of the concept

yPotential for a high return oninvestment

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 theexperience to deliver valuable

services to franchisees

EstablishedFranchise

yBusiness concept likely is well-

known 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 ³bugs´ out of the business

system

yHigh franchise fees and costs that

often are non-negotiable

yConcept may be on the wane in the

marketyFranchiser¶s brand and trademark

may remind customers of an

outdated concept

yFranchiser¶s ³trade dress´ may be

in need of updating and redesigning

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




Franchise ContractsFranchise Contracts

Note clauses covering:Note clauses covering:

Termination

Termination

RenewalRenewal

Transfers and BuybacksTransfers and Buybacks

40% of New Franchisees Sign40% of New Franchisees Sign

Contracts Without Reading Them !!!Contracts Without Reading Them !!!

Contract




Trends ShapingTrends Shaping

FranchisingFranchising International opportunitiesInternational opportunities

Smaller, nontraditional locationsSmaller, nontraditional locations

Conversion franchisingConversion franchising

MultipleMultiple--unit franchisingunit franchising

Master franchisingMaster franchising

Piggybacking (Combination franchising)Piggybacking (Combination franchising)

Serving aging baby boomersServing aging baby boomers




FranchisingWeb SitesFranchisingWeb Sites

EntrepreneursEntrepreneurs Franchise ZoneFranchise Zonehttp://www.entrepreneur.com/Franchihttp://www.entrepreneur.com/Franchi

se_Zone/FZ_FrontDoor/0,4670,,00.ht se_Zone/FZ_FrontDoor/0,4670,,00.ht mlml

Subway Sandwiches and SaladsSubway Sandwiches and Salads

http://www.subway.com/http://www.subway.com/ Auntie Annes Pretzels Auntie Annes Pretzels

http://www.auntieannes.com/http://www.auntieannes.com/

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