Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-1 Franchising and the Entrepreneur

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-2 The Franchising Boom!!! Shoppers can now buy virtually every product or service imaginable through franchises Shoppers can now buy virtually every product or service imaginable through franchises More than 854,000 franchise outlets in the United States More than 854,000 franchise outlets in the United States  employ almost 9.6 million people  generate $835 billion in annual output – an amount that is 5.8% of the country’s GDP

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-3 Global Franchising 52% of U.S. franchisers have international outlets 52% of U.S. franchisers have international outlets Of the U.S. franchisers who operate globally, 30% of their total outlets are located in other countries Of the U.S. franchisers who operate globally, 30% of their total outlets are located in other countries Hot markets: Europe and Pacific Rim Hot markets: Europe and Pacific Rim

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-4 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

Figure 4.1 The Franchising Relationship The Franchiser The Franchisee Oversees and approves; may choose site Provides prototype design Makes general recommendations and training suggestions Determines product or service line Can only recommend prices Establishes quality standards; provides list of approved suppliers; may require franchisees to purchase from the franchisor Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Sets quality standards and enforces them with inspections; trains franchisees Provides support through an established business system Chooses site with franchiser’s approval Pays for and implements design Hires, manages, and fires employees Modifies only with franchiser’s approval Sets final prices Must meet quality standards; must purchase only from approved suppliers; must purchase from supplier if required Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads Maintains quality standards; trains employees to implement quality systems Operates business on a day-to-day basis with franchiser’s support Site selection Design Employees Products and services Prices Purchasing Advertising Quality control Support Element Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-6 Types of Franchising Tradename Tradename Product distribution Product distribution Pure (Business format) Pure (Business format)

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-7 Why Buy a Franchise? Franchisees are buying the franchiser’s experience Franchisees are buying the franchiser’s experience “Going into business for yourself but not by yourself” “Going into business for yourself but not by yourself” 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 Before buying, ask: “What can a franchise do for me that I cannot do for myself?” Before buying, ask: “What can a franchise do for me that I cannot do for myself?”

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-8 Benefits of Franchising Business system Business system Management training and support Management training and support Brand name appeal Brand name appeal  “Cloning” Standardized quality of goods and services Standardized quality of goods and services National advertising program National advertising program

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-9 Benefits of Franchising Financial assistance Financial assistance  Franchise Registry Franchise Registry Franchise Registry 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-10 Greater Chance for Success Study: After 5 years, 90% of franchises are still in business compared to 40% of independent businesses Study: After 5 years, 90% of franchises are still in business compared to 40% of independent businesses The difference? The difference?  Services, assistance, and guidance that experienced franchisers offer their franchisees

Source: National Federation of Independent Businesses and U.S. Department of Commerce. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-11Chapter 4 Franchising

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-12 What Franchisers Want in Franchisees 1. People skills94% 2. Ability to be coached87% 3. General business skills86% 4. Access to capital84% 5. Entrepreneurial mindset76% 6. Specific industry skills29%

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-13 Drawbacks of Franchising Franchise fees and revenue sharing Franchise fees and revenue sharing  Start-up costs range from $2,000 to $250,000  Royalty: 1% to 11% of sales Strict adherence to standardized operations Strict adherence to standardized operations Restrictions on purchasing Restrictions on purchasing

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-14 Drawbacks of Franchising Limited product line Limited product line Unsatisfactory training programs Unsatisfactory training programs Market saturation Market saturation Less freedom Less freedom  “Happy prisoners”

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-15 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-16 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-17 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 ongoing royalty 10. Once I open my franchise, I’ll be able to run things the way I want to

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-18 Franchising and the Law Key tool for protection is the Uniform Franchise Disclosure Document (UFDD) Key tool for protection is the Uniform Franchise Disclosure Document (UFDD) Franchisers must deliver a copy of UFDD before any offer or sale of a franchise Franchisers must deliver a copy of UFDD before any offer or sale of a franchise

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-19 Franchising and the Law The UFDD contains information on 23 topics, including: The UFDD 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-20 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-21 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-22 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-23 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 Disclosure Document (UFDD) and study it Get a copy of the franchiser’s Uniform Franchise Disclosure Document (UFDD) and study it

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-24 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-25 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 ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-26 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 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice HallChapter 4 Franchising4-27

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-28 Franchise Contracts Note clauses covering: Termination Termination Renewal Renewal Transfers and Buybacks Transfers and Buybacks FTC Study: 40% of New Franchisees Sign Contracts Without Reading Them!!! Contract

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-29 Trends Shaping Franchising International opportunities International opportunities  Global markets offer fast-growth opportunities especially China and India  Other major markets: Canada, Europe, Pacific Rim countries, South America  Key to success: Adaptation Smaller, nontraditional locations Smaller, nontraditional locations  Intercept marketing

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-30 Trends Shaping Franchising Changing face of franchisees Changing face of franchisees  Minorities own 19.3% of all franchises and women own 25% of them Conversion franchising Conversion franchising  72% of North American franchisers use as a growth strategy Multiple-unit franchising Multiple-unit franchising  19.8% of franchisees operate multiple outlets (and growing) multiple outlets (and growing)

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-31 Trends Shaping Franchising Master franchising Master franchising Piggybacking (or combination or multi- branded franchising) Piggybacking (or combination or multi- branded franchising)  “Buddy system” Serving aging baby boomers Serving aging baby boomers

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-32 Franchising as a Growth Strategy Issues to consider: Issues to consider:  Do you have a unique concept?  Is your business model replicable?  Have you developed an expansion plan?  Have you performed due diligence?  Do you have proper legal guidance? Initial cost to launch a franchise business is $100,000 to $750,000 Initial cost to launch a franchise business is $100,000 to $750,000

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-33 Franchising Web Sites Entrepreneur’s Franchises and Opportunities ortunities/index.html Entrepreneur’s Franchises and Opportunities ortunities/index.html ortunities/index.html ortunities/index.html Inc.’s Franchise Resource Center Inc.’s Franchise Resource Center International Franchise Association International Franchise Association FRANdata FRANdata

Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall 4-34 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall