1. Copyright © 2016 Pearson Education, Inc.

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

3. Copyright © 2016 Pearson Education, Inc.
Learning Objectives
Describe the three types of franchising: trade name, product distribution, and pure.
Explain the benefits of buying a franchise.
Explain the drawbacks of buying a franchise.
Understand the laws covering franchise purchases.
Discuss the right way to buy a franchise.
Outline the major trends shaping franchising.
Copyright © 2016 Pearson Education, Inc.

4. Copyright © 2016 Pearson Education, Inc.
The Franchising Boom
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.

5. Number of Franchised Outlets in the United States
Copyright © 2016 Pearson Education, Inc.

6. Franchised Outlets by Industry
Copyright © 2016 Pearson Education, Inc.

7. Copyright © 2016 Pearson Education, Inc.
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 © 2016 Pearson Education, Inc.

8. Copyright © 2016 Pearson Education, Inc.
Franchising Basics
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.

9. The Franchising Relationship
Copyright © 2016 Pearson Education, Inc.

10. Copyright © 2016 Pearson Education, Inc.
Types of Franchising
Trade-name:
A franchisee purchases the right to use the franchisor’s trade name without distributing particular products exclusively under the franchisor’s name.
Product distribution:
A franchisor licenses a franchisee to sell its products under the franchisor’s brand name and trademark through a selective, limited distribution network.
Pure:
A franchisor sells a franchisee a complete business format and system.
Copyright © 2016 Pearson Education, Inc.

11. Franchise Business Index
Copyright © 2016 Pearson Education, Inc.

12. Benefits of Franchising
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.

13. Benefits of Franchising
(continued)
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.

14. The Franchise Lending Gap
Copyright © 2016 Pearson Education, Inc.

15. Benefits of Franchising
(continued from 7-13)
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.

16. Drawbacks of Franchising
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.

17. Planned Sources of Financing for Prospective Franchisees
Copyright © 2016 Pearson Education, Inc.

18. Drawbacks of Franchising
(continued from 7-16)
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.

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

20. Ten Myths of Franchising
Franchising is the safest way to go into business because franchises never fail.
I’ll be able to open my franchise for less money than the franchiser estimates.
The bigger the franchise organization, the more successful I’ll be.
I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how.
All franchises are the same.
Copyright © 2016 Pearson Education, Inc.

21. Ten Myths of Franchising
(continued)
I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful.
Anyone can be a satisfied, successful franchise owner.
Franchising is the cheapest way to get into business for yourself.
The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee.
Once I open my franchise, I’ll be able to run things the way I want to.
Copyright © 2016 Pearson Education, Inc.

22. Franchising and the Law
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.

23. The Right Way to Buy a Franchise
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.

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

25. Factors That Make a Franchise Appealing
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.

26. The Right Way to Buy a Franchise
(continued from 7-23)
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.

27. Trends Shaping Franchising
Changing face of franchisees
Minorities own 20.5% of all franchises compared to 14.2% of independent businesses.
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.

28. Trends Shaping Franchising
(continued)
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.

29. Trends Shaping Franchising
(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.

30. Trends Shaping Franchising
(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.

31. Trends Shaping Franchising
(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.

32. Copyright © 2016 Pearson Education, Inc.
Conclusion
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.