Entrepreneurship and Small Business Management Chapter 2 Franchising

Ch. 2 Performance Objectives Define and describe franchising. Identify the positive and negative aspects of franchising. Understand the structure of the franchise industry. Recognize the legal aspects of franchising. Learn how to research franchise opportunities. Explore international franchising.

What Is Franchising? Franchise—a business that markets a product/service developed by a franchisor Franchising—the system of operating a franchise governed by a legal agreement Franchisor—person or company who develops/sells a franchise and specifies the terms and methods of the agreement Franchisee—owner of a franchise unit or territory rights

Main Types of Franchises Product and trade-name franchising—licensing or production of the product, and use of the franchise trade mark, logo, or identity Business-format franchising—purchase of an entire business model and system, including access to management expertise

Other Franchise Variations Master franchise—allows individuals and organizations to buy the right to sub-franchise within a defined geographic territory Area franchise or multiple-unit franchise—gives exclusive rights to open franchisee-operated units within specific areas

Positive and Negative Aspects of Franchising Advantages Start-up assistance Instant recognition Purchasing power Advertising and promotional support Operating guidelines Record of success Drawbacks Constraints on creativity and freedom Costs Standards and obligations

Franchise Industry Structure A few large franchisors, with worldwide franchisees, control most of the industry. Many smaller franchisors have local and regional franchisees. U.S. franchises provide over 9.5 million jobs.

Additional Types of Franchises Internet franchise—”virtual” franchise that is not dependent on a physical location Conversion franchising—an existing stand-alone business or local chain becomes part of a franchise operation Piggybacking or co-branding—two franchises share locations and resources

Legal Aspects of Franchising State and federal regulations govern franchises. Federal Trade Commission (FTC)—primary agency involved in oversight Franchise Disclosure Document (FDD)—primary source of data for prospective franchisees regarding franchisors Franchise agreement—legal contract between the parties in a franchise

Information Included in a FDD Overview and background Fees and costs Contractual obligations Territory Financial performance Data on existing units Financial statements and contracts Termination, renewal, and other policies

Information Included in a Franchise Agreement Term of agreement (length of time) Standards of quality and performance Royalties Non-compete, “hold harmless,” and integration clauses; choice of venue Clauses regarding termination, renewal, and transfer of the franchise Territories

Steps for Franchise Selection Take time to reflect and engage core supporters. Identify potential franchises. Do research to narrow the list of options. Decide if to use a franchise broker. Visit and observe franchise operator(s).

Steps for Franchise Selection (continued) Request preliminary information from franchise companies. Perform due diligence on a specific franchise. Explore financing options. Make a decision, engage professional counsel, and negotiate an agreement. Make it work!

International Franchising Opportunities exist worldwide. The decision to go global is more complex than domestic franchising. Ethnic, cultural, and religious diversity impact business format and operations. Policies must be altered for differences in governing law and custom.