PowerPoint Presentation by Charlie Cook The University of West Alabama chapter 11 Part 3: Enterprising Strategies © 2008 Cengage Learning All rights reserved. Franchising

© 2008 Cengage Learning. All rights reserved.11–2 Key Concepts 1. 1.Buying a franchise enables enterprisers to sell brand-name goods and services by entering into a contractual business relationship with a franchisor, the parent business. Franchisees can own one unit or obtain the rights to develop multiple units in a territory. The Federal Trade Commission regulates the offer and sale of franchises, and many states have their own franchise laws Choosing a franchise requires the same careful due diligence process as other prospective business ventures. Franchising’s benefits include training, help and support, system synergies, financing assistance, and economies of scale. However, the franchisee must comply with the franchisor’s operating restrictions and contractual obligations and pay the franchisor an initial fee as well as ongoing fees and royalties.

© 2008 Cengage Learning. All rights reserved.11–3 Key Concepts (cont’d) 3. 3.Entrepreneurs with an easily replicated business model, a strong brand or trademark, and a unique concept can use franchising to grow their businesses quickly. Other enterprisers become franchisees and provide talent and capital. While becoming a franchisor can be quite profitable, the franchisor loses some profits to the franchisees and also gives up a degree of operating control. Successful franchisors know what it takes to be a good franchisee, have systems in place to recruit and train franchisees, and work closely with system members.

© 2008 Cengage Learning. All rights reserved.11–4 The Franchise Route to Business Ownership FranchiseFranchise  The rights to offer specific products or services under explicit guidelines at a certain location for a declared period of time. FranchisingFranchising  A type of business ownership where a parent business (the franchisor) provides an investor (the franchisee) with the rights to sell its products or services and use its trademark and operating procedures.

© 2008 Cengage Learning. All rights reserved.11–5 exhibit 11.1Franchises by Industry Category Source: The Profile of Franchising (Washington, DC: Frandata Corp. and IFA Educational Foundation, February 2000), pp. 26–27. Note: The Fast Food category includes fast food and frozen desserts. Retail includes beauty, clothing, computer, party, pet, photo, and video. Services includes health and fitness, publications, security. Building includes building, construction, home décor.

© 2008 Cengage Learning. All rights reserved.11–6 exhibit 11.2Direct Contribution of Franchising to the U.S. Economy Source: Economic Impact of Franchised Businesses, a study conducted by PricewaterhouseCoopers for the IFA Educational Foundation, 2004.

© 2008 Cengage Learning. All rights reserved.11–7 How Franchising Works Franchise FormatsFranchise Formats  Business format franchise  A type of franchise where the franchisee purchases a product and a complete system to operate the business.  Affiliation or conversion franchising  A business format franchise in which an operating business becomes part of a franchise system to take advantage of the brand but has more flexibility with regard to operating format.  The unit name may reflect both the franchisor and the local entity.

© 2008 Cengage Learning. All rights reserved.11–8 How Franchising Works (cont’d) Franchise Formats (cont’d)Franchise Formats (cont’d)  Product and trademark (product distribution) franchise  Franchise arrangement under which manufacturers grant franchisees, or dealers, the right to buy, sell, and advertise the products under the manufacturer’s trademarked name.

© 2008 Cengage Learning. All rights reserved.11–9 How Franchising Works (cont’d) Unit Franchise Area Development Franchise Master Franchise (subfranchising) Franchise Purchase Options

© 2008 Cengage Learning. All rights reserved.11–10 Legal Aspects of Franchising Federal Regulation of Franchise SalesFederal Regulation of Franchise Sales  Rule 436  Federal Trade Commission regulation that governs disclosure requirements for the offer and sale of franchises in all 50 states.  Uniform Franchise Offering Circular (UFOC)  A document prepared by franchisor for prospective franchisees that includes 23 issues that disclose background information and financial condition of the franchisor.

© 2008 Cengage Learning. All rights reserved.11–11 exhibit 11.4State Regulation of Franchises Source: “State Offices Administering Franchise Disclosure Laws,” Federal Trade Commission, (February 15, 2007).

© 2008 Cengage Learning. All rights reserved.11–12 Why Buy a Franchise? Proven Business Model Training and Support Brand Name and Recognition Financing System Synergies Economies of Scale Benefits of Franchising

© 2008 Cengage Learning. All rights reserved.11–13 Why Buy a Franchise? (cont’d) Operating Restrictions Interdependence Costs Contractual Obligations Business Risks Missed Expectations The Downside to Franchising

© 2008 Cengage Learning. All rights reserved.11–14 Franchise Costs Cost Categories for Business Format FranchisesCost Categories for Business Format Franchises 1. Initial Franchise Fee 2. Capital costs 3. Other start-up costs 4. Royalty payments 5. Advertising fees 6. Other fees 7. Purchase of supplies

© 2008 Cengage Learning. All rights reserved.11–15 exhibit 11.5Costs to Buy a Franchise Source: Entrepreneur magazine’s Franchise Zone,

© 2008 Cengage Learning. All rights reserved.11–16 Evaluating a Franchise Opportunity Due Diligence Guidelines for Evaluating the Franchise:Due Diligence Guidelines for Evaluating the Franchise:  Demand  Competition  Brand equity  Franchisor’s background  Training and support  Operating restrictions  Other questions  Site visits

© 2008 Cengage Learning. All rights reserved.11–17 Acquiring a Franchise The Franchise License AgreementThe Franchise License Agreement  Gives the franchisee the right to use the franchisor’s registered brands and trademarks together with a specific business operating system.  Will clearly state that the franchise company retains all ownership rights to the brand, trademarks, and proprietary business operating systems. The Purchase ProcessThe Purchase Process  Sign the agreement only after you and your attorney are comfortable with the terms and conditions of the agreement.

© 2008 Cengage Learning. All rights reserved.11–18 Starting a Franchise System Why Become a Franchisor?Why Become a Franchisor?  Expand the business through the use of other people’s capital and talents.  Shorten the time to bring the business concept to a larger market.  Generate income through fees and royalties from franchisees.  Harness the effort and creativity of motivated owner/managers.  Share costs of advertising and other expenses.  Increase buying power.

© 2008 Cengage Learning. All rights reserved.11–19 Starting a Franchise System (cont’d) Downside to Becoming a FranchisorDownside to Becoming a Franchisor  Lose a portion of profits to franchisees.  Lose some control over operations to franchisees.  Face the difficulty of keeping franchisees happy as the franchise grows and changes over time.  Expend significant time and energy to grow the franchise system.  Incur significant legal costs to develop the franchise system.

© 2008 Cengage Learning. All rights reserved.11–20 Starting a Franchise System (cont’d) Developing a Franchise System Requires:Developing a Franchise System Requires:  A business model that can be replicated in other areas.  A business that will have a strong brand or trademark.  A unique concept.  A business that can be taught easily to others who may not have experience in the industry.  A business that others can manage.

© 2008 Cengage Learning. All rights reserved.11–21 Starting a Franchise System (cont’d) Steps in Franchising a Business:Steps in Franchising a Business: 1. Develop a business plan for the franchise system. 2. Hire a franchise attorney and a franchise development consultant. 3. Identify the intellectual property that serves as the basis for the franchise system. 4. Develop the UFOC and the franchise agreement. 5. Develop all operating manuals and procedures necessary for a potential franchisee to successfully run a franchise unit.

© 2008 Cengage Learning. All rights reserved.11–22 Starting a Franchise System (cont’d) Steps in Franchising a Business (cont’d):Steps in Franchising a Business (cont’d): 6. Identify your franchise development team. 7. Create a process for attracting prospective franchisees. 8. Work closely with franchisees.