Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 6-1

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6-2 Chapter 6

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Shoppers can now buy virtually every product or service imaginable through franchises  More than 757,000 franchise outlets in the United States  Employ almost 8.2 million people  Generate $802 billion in annual economic output – adding $460 billion to the country’s GDP 6-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6-4 Franchised Businesses by Product or Service Line

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Franchising in Global Markets  International Franchise Association survey:  61% percent of members operate in international markets  74% plan to accelerate global growth  32% of the units of the 200 largest U.S. franchisors are located outside the U.S.  Hot markets: Brazil, Russia, India, China, and nations in the Middle East and North Africa 6-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 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  Going into business for yourself, but not by yourself 6-6

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Three basic types: 1.Trade-name franchising 2.Product distribution franchising 3.Pure franchising (or comprehensive franchising or business format franchising 6-7

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Primary reason to buy a franchise is the mutual benefits to the franchisor and franchisee  Franchisees are buying the franchiser’s experience  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?” 6-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6-9 The Franchise Relationship

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  What do you get when you buy a franchise?  A business system  Management training and support  Brand name appeal  Standardized quality of goods and services  National advertising program  Financial assistance  Proven products and business formats  Centralized buying power  Site selection and territorial protection  Increased chance for success 6-10

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall Franchise Lending Activity

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  What are the drawbacks of a franchise?  Franchise fees and ongoing royalties  Strict adherence to standardized operations  Restrictions on purchasing  Limited product line  Market saturation  Limited freedom  No guarantee of success 6-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall A Franchise Evaluation Quiz

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Franchisors are required to file a Franchise Disclosure Document (FDD)  Key tool for protection  Franchisers must deliver a copy of a FDD before any offer or sale of a franchise  The FTC requires that FDDs use ‘plain English’ 6-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  The FDD 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 6-15

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Preparation, common sense, and patience are vital ingredients in choosing the right franchise  Evaluate yourself  What do you like and dislike?  Research the market  Consider your franchise options  Get a copy of the FDD and study it 6-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  What should you look for?  A unique concept or marketing approach  A profitable business model  A solid brand name and a registered trademark  A business system that works  A solid training program  Affordability  A positive relationship with franchisees 6-17

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Preparation, common sense, and patience are vital ingredients in choosing the right franchise  Evaluate yourself  What do you like and dislike?  Research the market  Consider your franchise options  Get a copy of the FDD and study it  Franchise turnover rate  Talk to existing franchisees  Ask the franchisor some tough questions  Make your choice 6-18

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  A franchise contract summarizes the details that will govern the franchisor-franchisee relationship  Outlines the rights and obligations of each party  Often favors the franchisor  FTC requires that franchisees receive a complete and revised contract at least 5 days before signing it 6-19

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Three terms responsible for most disputes: 1.Termination  Franchisees are usually prohibited from terminating the agreement, but franchisors can terminate ‘with or without cause’ 2.Renewal  Franchisors usually have the right to renew or refuse contract renewal 3.Transfer and buybacks  Franchisees are usually not free to sell their business without approval 6-21

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Three major growth waves since the beginning of franchising 1.Early 1970s – fast food boom 2.Mid-1980s – shift to the service sector 3.Early 1990s – focus on specific market niches 6-22

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Changing face of franchisees  Today’s franchisees are:  More diverse  Better educated  More experienced  More financially secure  Multiple unit franchising  Multiple-unit franchising is more efficient  International opportunities  Key to success: Adaptation 6-23

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Smaller, nontraditional locations  Intercept marketing  Conversion franchising  Conversion franchising offers instant name recognition  Refranchising  Refranchising is reducing the number of company- owned stores 6-24

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Area development and master franchising  Area development offers exclusive rights to an area  Master franchises or subfranchises can be a good option in international markets  Cobranding  Cobranding or combination franchising involves teaming up with complementary products or services  Serving dual-career couples and aging baby boomers 6-25

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Entrepreneurs can use franchising as a growth strategy  To create a successful franchise operation you need:  A unique concept  A replicable concept  An expansion plan  To do due diligence  Legal guidance  Initial cost to launch a franchise business is $100,000 to $750,000  To provide support for franchisees 6-26

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6-27