1. Franchising as a Marketing Channel

2. Major Topics I.Why? II.Before you sign up III.Franchise Contract* IV.The Plural Form* V.Concerns and Challenges

3. Franchising 12 - 3 A system of marketing and distribution where an independent businessperson (the franchisee) is granted the right to market the goods and services of another (the franchisor) ©McGraw-Hill Companies, Inc. 2002

4. I.Major Challenges in Service Businesses 1. Intangibility of Services: Differentiation through customer contact, decor, atmosphere, and other tangible cues. 2. Discretionary nature of service purchases: Convenience by location and hours of operation 3. Labor Intensity: Interaction with customer 4. Quality control: 5. Focus on operational issues 6. Small Size of many service firms

5. II. How Franchising Addresses These challenges 1. Capital generation and higher motivation 2. Multiple locations 3. Standard systems and procedures 4. Training improves labor and management skills 5. Marketing is centralized and promotion is system- wide 6. Service tangibility is increased.

6. III. Types of Franchising Product/trade name Business format 12 - 6 ©McGraw-Hill Companies, Inc. 2002

7. Franchising is Unique 12 - 7 Combination of Three Relationships: Legal Nonbusiness Business ©McGraw-Hill Companies, Inc. 2002

8. IV. Why Become a Franchisee? 12 - 8 ©McGraw-Hill Companies, Inc. 2002 I.The Start-Up Package I.Site Selection II.Facility Design III.Lease Negotiation IV.Operational Manuals V.Management Training VI.Employee Training II.Ongoing Supports I.Field Supervision II.Management Reports III.Merchandising and Promotional Materials IV.National Advertising V.Auditing and Record Keeping

9. V. A Check List Before Signing Up Local market conditions Self-evaluation Investigating the franchise Studying the disclosure document Checking out the disclosures Questioning earnings claims Obtaining professional advice Knowing your legal rights 12 - 9 ©McGraw-Hill Companies, Inc. 2002

10. VI. Four Steps To Follow to Improves the Odds of Franchising Success 12 - 10 Nail the Numbers. Franchisors should give franchisees a detailed statement of financial conditions and expectations no later than two weeks before any money is scheduled to change hands. Measure Management. Franchisees should seek and scrutinize disclosure forms that describe at least the last 10 years of work history of each of the franchisor’s officers and key managers. Cross-Examine Current Franchisees. Prospective franchisees should obtain a list of all franchisees, including those who have recently left. Randomly calling and visiting several will keep prospects from being steered toward franchisor favorites. Serving several days as an apprentice in one or two stores will yield tremendous insights. Comb the Contract. Franchise agreements establish control over most aspects of the business. Attorneys with franchising experience should look for inequities in the agreements and help franchisees secure a better deal. ©McGraw-Hill Companies, Inc. 2002

11. VII. The Franchise Contract 12 - 11 ©McGraw-Hill Companies, Inc. 2002 I. Rights and Responsibilities  Giving and Taking Hostages II.The Payment System: Two-part system III. Who will be the Landlord? IV. Termination

12. VIII. Benefits of the Plural Form 12 - 12 ©McGraw-Hill Companies, Inc. 2002 1. Modeling 2.Socialization 3. Ratcheting 4. Mutual Learning

13. IX. Franchising Concerns Franchisees: – Belief in guaranteed profit – Loss of franchise – Encroachment – Loss of independence – Conditions in franchise agreement – Spending promotional dollars – Pricing structures Franchisors: – Profits – Franchisees that “sit on a market” – Accurate reports of gross sales – Franchisees that reveal trade secrets, strategies, etc. 12 - 13 ©McGraw-Hill Companies, Inc. 2002

14. X. Ongoing Challenges 1.Survival 2.Gaining and Keeping Cooperative Atmosphere 3.Inherent Goal Conflict: Sales Focus versus Profit Focus*

15. TYPICAL SALES-TO-PROFIT RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEES Adapted from Carmen and Klein (1986)