7 - 1 Copyright © 2016 Pearson Education, Inc. Franchising and the Entrepreneur 7 Section 2: The Entrepreneurial Journey Begins

 About 3,000 franchisors operate more than 770,000 outlets in the United States.  Franchises generate more than $800 billion in annual sales and account for 4.1% of the U.S. GDP.  Franchises employ 8.1 million workers in the United States in more than 300 major industries Copyright © 2016 Pearson Education, Inc.

7 - 3 Copyright © 2016 Pearson Education, Inc.

7 - 4 Copyright © 2016 Pearson Education, Inc.

 Franchising:  A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system Copyright © 2016 Pearson Education, Inc.

 Franchisee gets the right to use all of the elements of a fully integrated business operation.  Essence of what franchisees purchase from the franchisors: Experience.  Key Question: “What can a franchise do for me that I cannot do for myself?” Copyright © 2016 Pearson Education, Inc.

7 - 7 Copyright © 2016 Pearson Education, Inc.

6 - 8  Trade-name  Product distribution  Pure (Business format)

 A business system  Management training and support  Start-up  Ongoing  Brand name appeal  “Cloning”  Standardized quality of goods and services Copyright © 2016 Pearson Education, Inc.

 National advertising programs  Franchisees contribute 1% to 5% of sales.  Financial assistance  About 20% of franchisors offer direct financial assistance to franchisees.  SBA – Franchise Registry Copyright © 2016 Pearson Education, Inc. (continued)

Copyright © 2016 Pearson Education, Inc.

 Proven products and business formats  Centralized buying power  Site selection and territorial protection  Important issue: Territorial encroachment  Greater chance for success Copyright © 2016 Pearson Education, Inc. (continued from 7-13)

 Franchise fees and ongoing royalties  Average upfront franchise fee = $25,147  Royalties range from 1% to 11% of franchisees’ sales  Average royalty = 6.7% of sales Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc.

 Strict adherence to standardized operations  Restrictions on purchasing  Approved suppliers only  Limited product line  Contract terms and renewal  Average term = 10.3 years Copyright © 2016 Pearson Education, Inc. (continued from 7-16)

 Unsatisfactory training programs  Market saturation  Less freedom  “No independence”  “Happy prisoners” Copyright © 2016 Pearson Education, Inc. (continued)

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. 4.I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how. 5.All franchises are the same Copyright © 2016 Pearson Education, Inc.

6.I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful. 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 fee. 10.Once I open my franchise, I’ll be able to run things the way I want to Copyright © 2016 Pearson Education, Inc. (continued)

 Franchise Disclosure Document (FDD)  Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC)  Requires franchisors to disclose to potential franchisees information on 23 important topics  Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions Copyright © 2016 Pearson Education, Inc.

 Evaluate yourself: What do you like and dislike?  Research your market.  Consider your franchise options.  Get a copy of the Franchisor’s FDD – and read it! Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Number of Franchisees from which Prospective Franchisees Solicit Information Before Selecting a Franchise

 Unique concept or marketing approach  Profitability  Registered trademark  Business system that works  Solid training program  Affordability  Positive relationship with franchisees Copyright © 2016 Pearson Education, Inc.

 Evaluate yourself: What do you like and dislike?  Research your market.  Consider your franchise options.  Get a copy of the Franchisor’s FDD – and read it!  Talk to existing franchisees.  Ask the franchiser some tough questions.  Make your choice Copyright © 2016 Pearson Education, Inc. (continued from 7-23)

 International opportunities  Many franchises are focusing on international markets as a source of growth.  Yum! earns 75% of its revenues from international franchises.  McDonald’s earns 70% of its sales internationally Copyright © 2016 Pearson Education, Inc.

 Smaller, nontraditional locations  Intercept marketing: putting a franchise’s products or services directly in the paths of potential consumers, wherever they may be.  Conversion franchising  Owners of independent businesses become franchisees to gain the advantage of name recognition.  72% of North American franchisors use it as a growth strategy Copyright © 2016 Pearson Education, Inc. (continued)

 Refranchising  Franchisors sell their company-owned outlets to franchisees.  Multi-unit franchising  IFA: 20% of franchise owners are multiple-unit owners.  Typical multiple-unit franchises own five outlets Copyright © 2016 Pearson Education, Inc. (continued)

 Area development and master franchising  Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time.  Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees Copyright © 2016 Pearson Education, Inc. (continued)

 Co-branding  Aka piggyback or combination franchising:  Two or more franchises team up to sell complementary products or services under one roof Copyright © 2016 Pearson Education, Inc. (continued)

 Franchising:  Is a key part of the small business sector  Increases the chance of business success for the entrepreneur  Growth continues Copyright © 2016 Pearson Education, Inc.