1. Entrepreneurship and Small Business Management
Chapter 2
Franchising

2. Ch. 2 Performance Objectives
Define and describe franchising.
Identify the positive and negative aspects of franchising.
Understand the structure of the franchise industry.
Recognize the legal aspects of franchising.
Learn how to research franchise opportunities.
Explore international franchising.

3. What Is Franchising?
Franchise—a business that markets a product/service developed by a franchisor
Franchising—the system of operating a franchise governed by a legal agreement
Franchisor—person or company who develops/sells a franchise and specifies the terms and methods of the agreement
Franchisee—owner of a franchise unit or territory rights

4. Main Types of Franchises
Product and trade-name franchising—licensing or production of the product, and use of the franchise trade mark, logo, or identity
Business-format franchising—purchase of an entire business model and system, including access to management expertise

5. Other Franchise Variations
Master franchise—allows individuals and organizations to buy the right to sub-franchise within a defined geographic territory
Area franchise or multiple-unit franchise—gives exclusive rights to open franchisee-operated units within specific areas

6. Positive and Negative Aspects of Franchising
Advantages
Start-up assistance
Instant recognition
Purchasing power
Advertising and promotional support
Operating guidelines
Record of success
Drawbacks
Constraints on creativity and freedom
Costs
Standards and obligations

7. Franchise Industry Structure
A few large franchisors, with worldwide franchisees, control most of the industry.
Many smaller franchisors have local and regional franchisees.
U.S. franchises provide over 9.5 million jobs.

8. Additional Types of Franchises
Internet franchise—”virtual” franchise that is not dependent on a physical location
Conversion franchising—an existing stand-alone business or local chain becomes part of a franchise operation
Piggybacking or co-branding—two franchises share locations and resources

9. Legal Aspects of Franchising
State and federal regulations govern franchises.
Federal Trade Commission (FTC)—primary agency involved in oversight
Franchise Disclosure Document (FDD)—primary source of data for prospective franchisees regarding franchisors
Franchise agreement—legal contract between the parties in a franchise

10. Information Included in a FDD
Overview and background
Fees and costs
Contractual obligations
Territory
Financial performance
Data on existing units
Financial statements and contracts
Termination, renewal, and other policies

11. Information Included in a Franchise Agreement
Term of agreement (length of time)
Standards of quality and performance
Royalties
Non-compete, “hold harmless,” and integration clauses; choice of venue
Clauses regarding termination, renewal, and transfer of the franchise
Territories

12. Steps for Franchise Selection
Take time to reflect and engage core supporters.
Identify potential franchises.
Do research to narrow the list of options.
Decide if to use a franchise broker.
Visit and observe franchise operator(s).

13. Steps for Franchise Selection (continued)
Request preliminary information from franchise companies.
Perform due diligence on a specific franchise.
Explore financing options.
Make a decision, engage professional counsel, and negotiate an agreement.
Make it work!

14. International Franchising
Opportunities exist worldwide.
The decision to go global is more complex than domestic franchising.
Ethnic, cultural, and religious diversity impact business format and operations.
Policies must be altered for differences in governing law and custom.