1. International Franchise Association
Where else [but franchising] can we find a job creator, an economic simulator, and a personal wealth creator that gives [people] the opportunity to realize their dreams and financial security for their families beyond their wildest expectations?
Don DeBolt
Head,
International Franchise Association
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2. Learning objectives
Describe the three types of franchising: trade name, product distribution, and pure.
Explain (A) the benefits and (B) the drawbacks of buying a franchise.
Explain the laws covering franchise purchases.
Discuss the right way to buy a franchise.
Outline the major trends shaping franchise.
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3. franchising
It is a system of distribution 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.
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4. Franchising growth Source: Entrepreneur’s Franchise 500 database
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5. The franchising relationship
Element
The Franchiser
The Franchisee
Site Selection
Oversees & approves; may choose site
Chooses site with franchiser’s approval
Design
Provides prototype design
Pays for & implements design
Employees
Makes general recommendations & training suggestions
Hires, manages & fires employees
Products & Services
Determines product or service line
Modifies only with franchiser’s approval
Prices
Can only recommend prices
Sets final prices
Purchasing
Establishes quality standards; provides list of approved suppliers; may require franchises to purchase from the franchiser
Must meet quality standards; must purchase from approved suppliers; must purchase from franchiser if required
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6. Maintains quality standards; employees to implement quality systems
Element
The Franchiser
The Franchisee
Advertising
Develops & coordinates national Ad campaign; may require minimum level of spending on local advertising
Pays for national Ad campaign; complies with local advertising requirements; gets franchiser’s approval on local ads
Quality Control
Sets quality standards & enforces them with inspections; trains franchisees
Maintains quality standards; employees to implement quality systems
Support
Provides support through an established business system
Operates business on day-to-day basis with franchiser’s support
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7. Types of franchising Three basis types of Franchising:
Trade Name franchising
Product Distribution franchising
Pure or Business Format franchising
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8. Trade name franchising
It is a system of franchising in which a franchisee purchases the right to use the franchiser’s trade name without distributing particular products exclusively under the franchiser’s name.
Involves use of a Brand Name eg. Western Auto.
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9. Product distribution franchising
It is a system of franchising in which a franchiser licenses a franchisee to sell its products under the franchiser’s brand name and trademark through a selective, limited distribution network.
Commonly used for marketing of automobiles, appliances, cosmetics etc.
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10. Pure franchising
It is a system of franchising in which a franchiser sells a franchisee a complete business format and system.
Franchiser provides with a license for trade name, products or services to be sold, methods of operation, support services etc.
Common in the fast food industry, hotel industry, educational institutions etc.
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11. Benefits of buying a franchise
Management Training and Support
Brand Name Appeal
Standardized Quality of Goods and Service
National Advertising Programs
Financial Assistance
Proven Products and Business Formats
Centralized Buying Power
Site Selection and Territorial Protection
Great Chance for Success
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12. illustration Management Training and Support McDonald’s:
McDonald’s has opened its very own training facility known as the Hamburger University at Oak Brook, Illinois. Founded in 1961, Hamburger University includes 19 full-time faculty members, classroom space, an auditorium, kitchen labs, service training labs, and more. Here the franchises are offered training on how to operate a McDonald’s restaurant.
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13. illustration Standardized Quality of Goods and Service
Papa John’s Pizza: John Schnatter, founder of Papa John’s Pizza, is a sticker for quality among his company’s franchises. Schnatter visits several franchises each week to make sure that they are performing up to the company’s quality standards. This has enabled the company to successfully run several of its franchises while keeping the customers and the franchisees happy.
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14. illustration Financial Assistance US Franchise Systems:
Franchiser of Microtel Inn and Hawthron Suties hotels, has set up a subsidiary, US Funding Corporation, which makes available to its franchisees $200 million in construction and mortgage financing. Not only has the in-house financing program cut the time required to open a new hotel franchise, but it also has accelerated the franchise’s growth rate.
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15. illustration Proven Products and Business Formats Z Pizza:
Mike and Erin Harms decided to take up the franchise for Z pizza restaurant offering toppings ranging from lime chicken to pin nuts to sun dried tomatoes. The features that drew the Harms to Z Pizza are the company’s high quality product line and proven business system. “I’d never seen such toppings,” says Harm, who chose Reno, Nevada, as the location for their franchise. Harm learned to rely on the Z Pizza system to make his restaurant successful. “Letting go and trusting the system that Z Pizza has put into effect was the hardest part,” he admits. But, he adds, “I’m very happy. Its been more than I could ever dream of.” Business has been so good that the Harms are now opening a second location in Reno.
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16. 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% of the franchiser’s business system, but I’ll improve on it by substantiating my experience and know-how.
All franchises are basically the same.
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17. Myths of Franchising Contd…
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.
Once I open my franchise, I’ll be able to run things the way I want.
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18. Success Rate Comparison
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19. Drawbacks of buying a franchise
Franchise Fees and Ongoing Royalties
Restrictions on Purchasing
Strict Adherence to Standardized Operations
Limited Product Line
Contract Terms and Renewal
Unsatisfactory Training Programs
Market Saturation
Less Freedom
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20. Franchising and the law
In 1971, in California the first Franchisee Investment Law was enacted.
To control fraud in the industry; and
To control deception inherent in a franchising relationship.
Under this law the Franchisers have to register a Uniform Franchise Offering Circular (UFOC).
The UFOC give full disclosure guidelines for any company selling a franchise.
Provide a copy of the UFOC to prospective franchises before any offer or sale of a franchise.
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21. Franchising and the law contd…
In Oct 1979, the Federal Trade Commission enacted the Trade Regulation Rule.
Requiring all franchisers to disclose detailed information about their operations.
The Trade Regulation Rule requires 23 major topics to covered by a franchiser in its disclosure.
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22. The right way to buy a franchise
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23. Consider your franchise options Get a Copy of the Franchiser’s UFOC
Evaluate yourself
Research your market
Consider your franchise options
Get a Copy of the Franchiser’s UFOC
Talk to existing Franchisees
Ask the franchiser some tough questions
Make your choice
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24. Evaluate yourself Your Abilities:-
Do you have the technical experience such as Auto repair, if required.
What skills do you have?
What specialized knowledge or skill can you bring to the business?
Have you ever owned or managed a business?
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25. Evaluate yourself Your Goals:-
Do you require a specific level of annual income?
Are you interested in pursuing a particular field?
How many hours are you willing to work?
Do you want to operate the business yourself or hire a manager?
Would you like to own several outlets or only one?
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26. Evaluate yourself Your Investment:-
How much money do you have to invest?
How much money can you afford to lose?
Will you purchase the franchise your self or with partners?
Will you need financing?
Do you have a favorable credit rating?
Do you have additional income to live on while you start your franchise?
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27. Beware if the franchiser
Claims that the contract is a standard one and “you don’t need to read it.”
Fails to give you the Disclosure document.
A marginally successful prototype store or no prototype at all.
Oral promises of future earning without documentation.
A high franchise turnover or termination rate.
A high pressure sale – sign the contract now or lose the opportunity.
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28. Trends shaping franchising
Changing Face of Franchises
Multiple-Unit Franchising
International Opportunities
Smaller, Nontraditional Locations
Conversion Franchising
Master Franchising
Piggybacking or Combination or Multibranded Franchising
Serving Dual-Career Couples and Aging Baby Boomers
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29. illustration Changing Face of Franchisees Bevinco:
After being fired from his job Marc Weinberg set to fulfill his dream of operating a franchise. After doing his research Weinberg selected Bevinco franchise, a business that helps restaurants and bars maintain control over their beverage inventories and the cash generated from beverage sales. After 8 years Weinberg’s franchise has become so successful that the Bevinco enlisted him to help other franchisees operate their business.
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30. illustration Multiple-Unit Franchising Buffalo Wild Wings:
After moving to Las Vegas Welter realized that his favorite restaurant, Buffalo Wild Wings, did not have an outlet in the area. After conducting his research he decided launch his new career and purchased the license for the entire Las Vegas area for opening Buffalo Wild Wings franchises. He already owns six franchises in the area, with plans to open four more within the next few years.
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31. illustration Smaller, Non Traditional Locations Dunkin’ Donuts:
Steve Siegel, owner of 35 Dunkin’ Donuts shops in the Boston area, recently began branching out into small, nontraditional locations where pedestrian traffic counts are high. One of his most profitable spots measures just 64 square feet, but because it is in a business district filled with office workers, it generates a high volume of sales. This examples outlines the concept of Intercept Marketing i.e. the principle of putting a franchise’s products or service directly in the path of potential customers, wherever they maybe.
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32. Conversion Franchising: It is a franchising trend in which owners of independent businesses become franchisees to gain the advantage of name recognition.
Master Franchising: Is a franchise that gives a franchisee the right to create a semi- independent organization in a particular territory to recruit, sell, and support other franchises.
Piggybacking: Is a method of franchising in which two or more franchises team up to sell complementary products or services under one roof.
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33. You be the consultant…. The opportunity of a lifetime
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34. Situation so far…
Joe Willingham, a victim of his company’s downsizing has recently lost his job and is looking for another job. But since he is 53 years old, he expects a higher salary than the young graduates that the company has decided to hire. He then decides to set up his own business rather than look for another job and instead of starting from scratch he chooses to open a franchise. One day Joe meets the representatives of a printing company offering him their franchise. But the only thing is that Joe will have to decide soon…
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35. Q1. What advice would you offer joe about investing in this franchise
Q1. What advice would you offer joe about investing in this franchise? Explain
Joe should not invest in this company unless he has completely investigated the company because they are in too much hurry. They are putting pressure on Joe to make a hasty decision so that he does not have enough time to think or to even check the credibility of the company.
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36. Q2. Map out a plan for joe to use in finding the right franchise for him. What can joe do to protect himself from making a bad franchise investment?
The first thing that Joe should do is ask the company for a copy of their UFOC. After thoroughly studying it. Joe should set about investigating the authenticity of the information provided in the UFOC. He should talk to other franchises of the company to learn about the support provided by the company in terms of training, advertising, promotions and the profitability. The information obtained from other franchises
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37. should then be cross checked with the company and all types on information should be sought from them. Such as the philosophy towards franchises, the company culture, what are the future expansion plans, how would they affect you etc. Incase Joe finds the proposition feasible, the next step should be to look for location options and evaluate the market and revenue. What would be the fixed costs, what would be the variable costs, what would be the profits, would they be sufficient for him and then based on all the above Joe should make his decision.
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38. Q3. Summarize the advantages & disadvantages Joe can expect if he buys a franchise
Joe can enjoy the training and support that the franchise would provide and would have the opportunity to learn the ways of trade from an experienced player.
He can incash on the Brand Name of the franchise firm, incase the company enjoys a goodwill within the industry.
The benefits of National level Advertising and Marketing done by the firm can be enjoyed by Joe, who on his own might not be able to incur the cost of such a campaign.
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39. The franchiser might have tie ups with financial institutes to provide financing to its franchisees at cheaper rates and quickly.
The product selected is a successful one and the business format followed is a proven one. Thus Joe can take advantage of the experience of the franchiser.
Joe can also expect to enjoy the discounts offered by the suppliers, that he would be entitled to by being associated with the franchiser. Which would have been difficult under normal circumstances.
Research proves that franchises have a greater chance of success as compared to new businesses.
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40. Disadvantages:
The major drawback for Joe is that Franchiser often asks for a huge Franchise Fees at the beginning and it will increase the cost of startup, especially when Joe is strained for finances. Even after he becomes successful, he will still have to continue to pay a Royalty to the franchiser.
Joe may have to strictly adhere to operating standards as outlined by the franchiser and this may be difficult for Joe to accept. Since he being a manager is used to working in his own way.
The franchiser may restrict the supplier from which Joe would have to purchase.
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41. The products sold may be limited to the product line of the franchiser
The products sold may be limited to the product line of the franchiser. Joe may not have the freedom to sell other products demanded in the local market.
The training provided by the franchiser may not be enough to understand the operations of the business.
The franchiser’s idea of quick growth and expansion may adversely affect Joe with saturated market.
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