1. Chapter 3 3-1 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint Presentation by Thomas M c Kaig, Ryerson University Franchising Opportunities 3

2. Chapter 3 3-2 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Looking Ahead After studying this chapter, you should be able to: 1. Describe the significance of franchising in Canada. 2.Identify the major advantages and limitations of franchising 3.Discuss the process for evaluating a franchise opportunity. 4.Evaluate franchising for the franchisor’s perspective. 5.Describe the franchisor/franchisee relationship.

3. Chapter 3 3-3 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Franchising Terms Franchising  A marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchise contract  The legal agreement between franchisor and franchisee Franchise  The privileges conveyed in the franchise contract …continued

4. Chapter 3 3-4 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Franchising Terms Franchisee  An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor  The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party

5. Chapter 3 3-5 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Types of Franchises Product and Trade Name Franchise  Grants the right to use a widely recognized product or name Business Format Franchise  Provides an entire marketing system and ongoing guidance from the franchisor Piggyback Franchising  The operation of a retail franchise within the physical facilities of a host store …continued

6. Chapter 3 3-6 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Types of Franchises Master Licensee  An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory Multiple-Unit Ownership  Holding by a single franchisee of more than one franchise from the same company Area Developers  Individuals or firms that obtain the legal right to open several franchised outlets in a given area

7. Chapter 3 3-7 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Figure 3-2 The Pros and Cons of Franchising

8. Chapter 3 3-8 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. The Advantages of Franchising Proven marketing concept and customer base Training Financial assistance Operating assistance

9. Chapter 3 3-9 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Financial Assistance Start-up business costs are normally high and thus by teaming up with a franchise organization, the individual can increase her/his chance of receiving financial help. The franchisor might chose to use liberal payment schemes to the franchisee in order to get over the initial financial hurdle.

10. Chapter 3 3-10 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Operating Assistance The franchisor provides a range of operating services including site selection, bulk purchasing of equipment, and inventory. Other areas of assistance include the use of an established, nation-wide brand

11. Chapter 3 3-11 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Pros and Cons of Franching Advantages –Probability of success Proven line of business Pre-qualification of franchisee –Training Franchisor-provided –Financial assistance Franchisor assistance –Operating benefits Franchisor-aided Limitations –Franchise costs Initial franchise fee Investment costs Royalty payments Advertising costs –Restrictions on Business Operations –Loss of independence

12. Chapter 3 3-12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Limitations of Franching: Restriction of Business Operations Restricting of sales territory Requiring site approval and imposing requirement on the outlet’s appearance Restricting the goods/ services that can be sold Restricting the resale of the franchise without their permission Restricting advertising and hours of operation

13. Chapter 3 3-13 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Evaluating Franchise Opportunities Locating a Franchise Opportunity Investigating the Potential Franchise  Information sources Independent, third-party sources Franchisors themselves Existing and previous franchisees

14. Chapter 3 3-14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Explanation of Costs Franchise fee First and Last Month’s Rent Leasehold Improvements Equipment Furniture and Fixtures Signage Insurance, Licences and Permits Training Initial Inventory Working Capital Royalty

15. Chapter 3 3-15 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Global Franchising Opportunities Historically, many Canadian franchisors have expanded into the United States. Canadian franchising enterprises are now expanding into countries beyond North America.

16. Chapter 3 3-16 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Investigating the Franchise Candidate Three sources of information: –independent third party sources –franchisors –existing and previous franchisees

17. Chapter 3 3-17 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Selling a Franchise Why would a businessperson wish to become a franchisor? Three benefits can be identified: 1.Reduction of capital requirements 2.Increase in management motivation 3.Speed of expansion …continued

18. Chapter 3 3-18 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Selling a Franchise Drawbacks associated with franchising from the franchisor’s perspective. 1.Reduction in control 2.Sharing of profits 3.Increase in operating support

19. Chapter 3 3-19 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. Franchising Frauds The Rented Rolls Royce Syndrome The Hustle The Cash-Only Transaction The Boast The Big-Money Claim The Couch Potato’s Dream Location, Location, Location The Disclosure Dance