Lesson 4.2 OWN A FRANCHISE OR START A BUSINESS GOALS Evaluate franchise ownership. Recognize the advantages and disadvantages of starting a new business. Chapter 4

FRANCHISE OWNERSHIP A franchise is a legal agreement that gives an individual the right to market a company’s products or services in a particular area. A franchisee is the person who purchases a franchise agreement. A franchisor is the person or company that offers a franchise for purchase. Chapter 4

Franchise Ownership More than 500,000 people in the US owne franchises and the number is growing. Franchising opportunities are available in virtually every field, from motels to pet stores to video outlets Sources you can find information about franchises include Consumer Guides Books Wall Street Journal Magazines Chapter 4

OPERATING COSTS OF A FRANCHISE Initial franchise fee Fee the franchise owner pays in return for the right to run the franchise Usually non-refundable and a few thousand to a few hundred thousand dollars Start-up costs Costs associated with beginning a business Royalty fees Weekly or monthly paymnets made by the owner of the franchise to the seller of the franchise Usually a percentage of the franchises income Advertising fees Fees paid to support TV, magazine or other advertising of the franchise as a whole Chapter 4

ADVANTAGES OF OWNING A FRANCHISE An entrepreneur is provided with an established product or service. Can compete with giant companies Franchisors offer management, technical, and other assistance. Onsite training or classes and tips Equipment and supplies can be less expensive. Because franchises are part of large chains, they are able to purchase in huge quantities Discounts passed on to individual franchisee A guarantee of consistency attracts customers. Customers know quality of franchise Chapter 4

DISADVANTAGES OF OWNING A FRANCHISE Franchises can cost a lot of money and cut down on profits. Initial capital to buy franchise is high Often profits you receive as franchisee must be reutrned to franchisor as royalty fees Owners of franchises have less freedom to make decisions than other entrepreneurs. Franchisees can only offer certain products and services that have already been decided by franchisor Franchisees are dependent on the performance of other franchisees in the chain. Customers opinions and other franchise reputations follow you around The franchisor can terminate the franchise agreement. If franchisee fails to pay royalty fees, or meet other agreements, the franchise can be lost Chapter 4

EVALUATING A FRANCHISE Demand for product or service Exclusive territory Costs Profitability Longevity Services provided by franchisor Loss of independence Cancellation Chapter 4