Chapter 4Copyright © 2010 by Nelson Education Ltd. Chapter 6 - Franchising After studying this chapter, you should be able to: 1.Describe the significance of franchising in Canada. 2.Identify the major advantages and limitations of franchising 3.Discuss the process for evaluating a franchise opportunity. 4.Evaluate franchising from the franchisor’s perspective. 5. Describe the critical franchisor/franchisee relationship. 6. Understand issues related to franchise regulation in Canada and know the warning signs of franchise fraud 4-1

Chapter 4Copyright © 2010 by Nelson Education Ltd. Franchising in Canada Franchising is a way to finance growth for and attract talent to a small business Franchising has grown since the 1950’s Allows a proven concept to be duplicated 40% of retail sales from Franchises – with predicted growth More than 100 Canadian companies now franchising internationally

Chapter 4Copyright © 2010 by Nelson Education Ltd. Booster Juice

Chapter 4Copyright © 2010 by Nelson Education Ltd. Franchising Terms Franchising  A marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchise contract  The legal agreement between franchisor and franchisee Franchise  The privileges conveyed in the franchise contract 4-4 …continued

Chapter 4Copyright © 2010 by Nelson Education Ltd. Franchising Terms Franchisee  An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor  The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party 4-5

Chapter 4Copyright © 2010 by Nelson Education Ltd. Types of Franchises Product and Trade Name Franchise  Grants the right to use a widely recognized product or name (i.e. gas stations) Business-Format Franchise  Provides an entire marketing system and ongoing guidance from the franchisor (i.e. fast-food) Piggyback Franchising  The operation of a retail franchise within the physical facilities of a host store (i.e. complementary food service in a fast food store) 4-6 …continued

Chapter 4Copyright © 2010 by Nelson Education Ltd. Types of Franchises Master Licensee  An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory Multiple-Unit Ownership  Holding by a single franchisee of more than one franchise from the same company Area Developers  Individuals or firms that obtain the legal right to open several franchised outlets in a given area 4-7

Chapter 4Copyright © 2010 by Nelson Education Ltd. Exhibit 4-2 The Pros and Cons of Franchising

Chapter 4Copyright © 2010 by Nelson Education Ltd. Pros and Cons of Franchising 4-9 AdvantagesAdvantages –Probability of success Proven line of business Pre-qualification of franchisee –Training Franchisor-provided –Financial Assistance Franchisor assistance –Operating assistance Franchisor-aided LimitationsLimitations –Franchise costs Initial franchise fee Investment costs Royalty payments Advertising costs –Restrictions on Business Operations –Loss of independence

Chapter 4Copyright © 2010 by Nelson Education Ltd. The Advantages of Franchising Proven marketing concept and customer base – The use of an established, nation-wide brand. Training – May help alleviate managerial weaknesses. Financial assistance – Start-up business costs are normally high and thus by teaming up with a franchise organization, the individual can increase her/his chance of receiving financial help. Operating assistance – The franchisor provides a range of operating services including site selection, bulk purchasing of equipment, and inventory. 4-10

Chapter 4Copyright © 2010 by Nelson Education Ltd. Limitations of Franchising: Restriction of Business Operations Franchise costs Restrictions – Sales territory – Site approval required – Outlet appearance – Goods/services to be sold – Resale of franchise – Advertising and hours of operation Loss of independence 4-11

Chapter 4Copyright © 2010 by Nelson Education Ltd. Evaluating Franchise Opportunities Locating a Franchise Opportunity Investigating the Potential Franchise  Information sources Independent, third-party sources Franchisors themselves Existing and previous franchisees 4-12

Chapter 4Copyright © 2010 by Nelson Education Ltd. Explanation of Costs Franchise fee First and Last Month’s Rent Leasehold Improvements Equipment Furniture and Fixtures Signage Insurance, Licences and Permits Training Initial Inventory Working Capital Royalty

Chapter 4Copyright © 2010 by Nelson Education Ltd. Global Franchising Opportunities Historically, many Canadian franchisors have expanded into the United States. Canadian franchising enterprises are now expanding into countries beyond North America. – Yogen Fruz – 1,580 stores in 30 countries Attractive growth prospects: – Industrializing countries with large populations – Countries with an expanding middle class and higher disposable income 4-14

Chapter 4Copyright © 2010 by Nelson Education Ltd. Investigating the Franchise Candidate Three sources of information: – independent third party sources – franchisors – existing and previous franchisee This is a 2-way effort 4-15

Chapter 4Copyright © 2010 by Nelson Education Ltd. Franchisor as a Source of Information Disclosure document – a detailed statement of information such as the franchisor’s finances, experience, size, and involvement in litigation 4-16

Chapter 4Copyright © 2010 by Nelson Education Ltd. Selling a Franchise Why would a businessperson wish to become a franchisor? Three benefits can be identified: 1.Reduction of capital requirements 2.Increase in management motivation 3.Speed of expansion Drawbacks associated with franchising from the franchisor’s perspective: 1.Reduction in control 2.Sharing of profits 3.Increase in operating support 4-17 …continued

Chapter 4Copyright © 2010 by Nelson Education Ltd. Franchise Relationship Elements to look for in a franchise relationship: Responsiveness Empathy Communication Dependability Accessibility Give and take Anticipation Structure Open-mindedness 4-18