Copyright 2008 Prentice Hall Publishing 1 Chapter 6: Franchising Franchising and the Entrepreneur

Copyright 2008 Prentice Hall Publishing 2 Chapter 6: Franchising 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 2008 Prentice Hall Publishing 3 Chapter 6: Franchising What is a franchise? License to use an established brand License to use an established brand Use is very restrictive – many rules to be followed. Use is very restrictive – many rules to be followed. Provide a proven successful business format Provide a proven successful business format Entrepreneurship for people that are not particularly entrepreneurial. Entrepreneurship for people that are not particularly entrepreneurial.

The Franchising Relationship The Franchiser The Franchisee Oversees and approves; may choose site Provides sample 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.

Copyright 2008 Prentice Hall Publishing 5 Chapter 6: Franchising Advantages of Franchising Buying a name/reputation Buying a name/reputation Established markets Established markets Technical/management assistance Technical/management assistance Standardized procedures Standardized procedures Quality standards Quality standards Selection of location Selection of location Facility design Facility design Quicker cash flow Quicker cash flow

Copyright 2008 Prentice Hall Publishing 6 Chapter 6: Franchising Disadvantages of franchising Loss of independence Loss of independence High initial fees High initial fees High royalties and advertising allowances High royalties and advertising allowances Contractual restrictions Contractual restrictions Inapplicable advertising Inapplicable advertising Termination clauses Termination clauses Not receiving promised help Not receiving promised help Unsuitable products Unsuitable products Lack of competitive advantage Lack of competitive advantage

Copyright 2008 Prentice Hall Publishing 7 Chapter 6: Franchising

Copyright 2008 Prentice Hall Publishing 8 Chapter 6: Franchising

Copyright 2008 Prentice Hall Publishing 9 Chapter 6: Franchising 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. Poorly prepared operations manual. Poorly prepared operations manual. 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. Unusual amount of litigation by franchisees. Unusual amount of litigation by franchisees.

Copyright 2008 Prentice Hall Publishing 10 Chapter 6: Franchising The Right Way to Buy a Franchise Evaluate yourself - What do you like and dislike? Evaluate yourself - What do you like and dislike? Research your market. Research your market. Consider your franchise options. Consider your franchise options. Get a copy of the franchiser’s Uniform Franchise Offering Circular (UFOC) and read it. Get a copy of the franchiser’s Uniform Franchise Offering Circular (UFOC) and read it. 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.