Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 1 Franchising and the Entrepreneur

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 2 The Franchising Boom!!! Sales exceeding $1 trillion from virtually every product or service imaginable. 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. One out of 12 retail businesses in the U.S. is a franchised operation. Franchise sales account for 40% of total retail sales. Franchise sales account for 40% of total retail sales. A new franchise opens somewhere in the world every six-and-a-half minutes and in the United States every eight minutes. A new franchise opens somewhere in the world every six-and-a-half minutes and in the United States every eight minutes.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 3

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 4 Franchising Franchising – semi-independent business owners 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. Franchising – semi-independent business owners 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.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 5 Types of Franchising Tradename Tradename Product distribution Product distribution Pure (Business format) Pure (Business format)

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 6 Why Buy a Franchise? Franchisees benefit from the franchiser’s experience. Franchisees benefit from the franchiser’s experience. Franchisees get a proven business system and avoid having to learn by trial-and-error. Franchisees get a proven business system and avoid having to learn by trial-and-error. Franchisees earn a great deal of satisfaction from their work. Franchisees 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?”

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 7 Benefits of Franchising Business system Business system Management training and support Management training and support Brand name appeal Brand name appeal Standardized quality of goods and services Standardized quality of goods and services National advertising program National advertising program

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 8 Benefits of Franchising Financial assistance Financial assistance Proven products and business formats Proven products and business formats Centralized buying power Centralized buying power Site selection and territorial protection Site selection and territorial protection Greater chance for success Greater chance for success

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 9 Drawbacks of Franchising Franchise fees and profit sharing Franchise fees and profit sharing Strict adherence to standardized operations Strict adherence to standardized operations Restrictions on purchasing Restrictions on purchasing Limited product line Limited product line Unsatisfactory training programs Unsatisfactory training programs Market saturation Market saturation Less freedom Less freedom

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 10 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.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 11 Ten Myths of Franchising 4. I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon it by substituting my experience and know-how. 5. All franchises are the same. 6. I don’t have to be a “hands-on” manager. I can be an absentee owner and be very successful.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 12 Ten Myths of Franchising 7. Anyone can be a satisfied, successful franchise owner. 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 on-going royalty. 10. Once I open my franchise, I’ll be able to run things the way I want to.

What Do Franchisers Look 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? YesNoMaybe

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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look 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? YesNoMaybe What Do Franchisers Look for in a Franchisee?

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 22 Franchising and the Law Key protection is the Uniform Franchise Offering Circular (UFOC). Key protection is the Uniform Franchise Offering Circular (UFOC). Franchisers must deliver a copy of UFOC before any offer or sale of a franchise. Franchisers must deliver a copy of UFOC before any offer or sale of a franchise.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 23 Franchising and the Law The UFOC contains information on 23 topics, including: 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

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 24 Detecting Dishonest Franchisers Claims that the contract is “standard; no need to read it.” Claims that the contract is “standard; no need to read it.” Failure to provide a copy of the required disclosure documents. Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Marginally successful prototype or no prototype. Poorly prepared operations manual. Poorly prepared operations manual. Unsolicited testimonial from “a highly successful franchisee.” Unsolicited testimonial from “a highly successful franchisee.”

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 25 Unusual amount of litigation by franchisees. Unusual amount of litigation by franchisees. Promises of future earnings with no documentation. Promises of future earnings with no documentation. High franchisee turnover or termination rate. High franchisee turnover or termination rate. Attempts to discourage your attorney from evaluating the contract before signing it. Attempts to discourage your attorney from evaluating the contract before signing it. (Continued) Detecting Dishonest Franchisers

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 26 No written documentation. No written documentation. High pressure sale. High pressure sale. Claims to be exempt from federal disclosure laws. Claims to be exempt from federal disclosure laws. "Get rich quick" schemes, promising huge profits with minimal effort. "Get rich quick" schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions. Evasive, vague answers to your questions. Detecting Dishonest Franchisers (Continued)

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 27 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? Evaluate yourself - What do you like and dislike? Research the market. Research the market. Consider your franchise options. Consider your franchise options. Get a copy of the franchiser’s Uniform Franchise Offering Circular (UFOC) and study it. Get a copy of the franchiser’s Uniform Franchise Offering Circular (UFOC) and study it.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 28 What Should You Look For? A unique concept or marketing approach A unique concept or marketing approach Profitability Profitability A registered trademark A registered trademark

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 29 What Should You Look For? A business system that works A business system that works A solid training program A solid training program Affordability Affordability A positive relationship with franchisees A positive relationship with franchisees (Continued)

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 30 How to Buy a Franchise Talk to existing franchisees. Talk to existing franchisees. Ask the franchiser some tough questions. Ask the franchiser some tough questions. Make your choice. Make your choice. (Continued)

Table 4.4 Advantages and Disadvantages of Buying a New vs. an Established Franchise ProsCons New Franchise  Can be new and exciting  Business concept can be fresh and different in the market  Possibility of getting lower fees as a “pioneer” of the concept  Potential for a high return on investment  Business is not tested or established in the market  Unknown brand and trademark  Possibility that the concept is a fad with no staying power  Franchiser may lack the experience to deliver valuable services to franchisees Established Franchise  Business concept likely is well- known to consumers and market for the products or services is already established.  Franchiser has experience in delivering services to franchisees  Franchiser has had time to work the “bugs” out of the business system  High franchise fees and costs that often are non-negotiable  Concept may be on the wane in the market  Franchiser’s brand and trademark may remind customers of an outdated concept  Franchiser’s “trade dress” may be in need of updating and redesigning Source: Based on Andrew A. Caffey, “Age Issues,” Entrepreneur, January p. 118.

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 32 Franchise Contracts Note clauses covering: Termination Termination Renewal Renewal Transfers and Buybacks Transfers and Buybacks 40% of New Franchisees Sign Contracts Without Reading Them !!! Contract

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 33 Trends Shaping Franchising International opportunities International opportunities Smaller, nontraditional locations Smaller, nontraditional locations Conversion franchising Conversion franchising Multiple-unit franchising Multiple-unit franchising Master franchising Master franchising Piggybacking (Combination franchising) Piggybacking (Combination franchising) Serving aging baby boomers Serving aging baby boomers

Chapter 4 Franchising Copyright 2006 Prentice Hall Publishing Company 34 Franchising Web Sites Entrepreneur’s Franchise Zone se_Zone/FZ_FrontDoor/0,4670,,00.ht ml Entrepreneur’s Franchise Zone se_Zone/FZ_FrontDoor/0,4670,,00.ht ml se_Zone/FZ_FrontDoor/0,4670,,00.ht ml se_Zone/FZ_FrontDoor/0,4670,,00.ht ml Subway Sandwiches and Salads Subway Sandwiches and Salads Auntie Anne’s Pretzels Auntie Anne’s Pretzels