1. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall Franchising and the Entrepreneur CHAPTER 6

2. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 2 Ch. 6: Franchising and the Entrepreneur The Franchising Boom More than 3,000 franchisors operate more than 909,000 outlets in the United States. More than 3,000 franchisors operate more than 909,000 outlets in the United States. Each year, franchises produce goods and services that are worth $881 billion, 4.4% of the U.S. GDP. Each year, franchises produce goods and services that are worth $881 billion, 4.4% of the U.S. GDP. Franchises employ one in every 12 workers in the U.S. in more than 230 major industries. Franchises employ one in every 12 workers in the U.S. in more than 230 major industries.

3. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 3 Ch. 6: Franchising and the Entrepreneur The Franchising Boom Economic impact of franchising on the U.S. economy: $2.3 trillion. Economic impact of franchising on the U.S. economy: $2.3 trillion. A new franchise opens somewhere in the world every 8 minutes. A new franchise opens somewhere in the world every 8 minutes.

4. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 4 Ch. 6: Franchising and the Entrepreneur 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.

5. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 5 Ch. 6: Franchising and the Entrepreneur The Franchising Relationship The FranchiserThe Franchisee Oversees and approves; may choose site Provides prototype design Makes general recommendations and training suggestions Determines product or service line Can only recommend prices Establishes quality standards and suppliers Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Sets quality standards and enforces them with inspections; trains franchisees Provides support through an established business system Chooses site with franchiser’s approval Pays for and implements design Hires, manages, and fires employees Modifies only with franchiser’s approval Sets final prices Must meet quality standards and purchase only from approved suppliers Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads Maintains quality standards; trains employees to implement quality systems Operates business on a day-to-day basis with franchiser’s support Site Selection Design Employees Products and Services Prices Purchasing Advertising Quality Control Support Element FIGURE 6.1 Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.

6. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 6 Ch. 6: Franchising and the Entrepreneur Types of Franchising Tradename Tradename Product distribution Product distribution Pure (Business format) Pure (Business format)

7. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 7 Ch. 6: Franchising and the Entrepreneur Franchising Basics Franchisee gets the right to use all of the elements of a fully integrated business operation. 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. Essence of what franchisees purchase from the franchisors: Experience. Key Question: “What can a franchise do for me that I cannot do for myself?” Key Question: “What can a franchise do for me that I cannot do for myself?”

8. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 8 Ch. 6: Franchising and the Entrepreneur

9. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 9 Ch. 6: Franchising and the Entrepreneur Benefits of Franchising A business system A business system Management training and support Management training and support Start-up Start-up Ongoing Ongoing Brand name appeal Brand name appeal “Cloning” “Cloning” Standardized quality of goods and services Standardized quality of goods and services

10. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 10 Ch. 6: Franchising and the Entrepreneur Benefits of Franchising National advertising programs National advertising programs Franchisees contribute 1% to 5% of sales Franchisees contribute 1% to 5% of sales Financial assistance Financial assistance Only 20% of franchisors offer direct financial assistance to franchisees. Only 20% of franchisors offer direct financial assistance to franchisees. SBA – Franchise Registry SBA – Franchise Registry Proven products and business formats Proven products and business formats

11. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 11 Ch. 6: Franchising and the Entrepreneur FIGURE 6.3 Franchisor Financial Assistance Source: The Profile of Franchising 2006, International Franchise Association (Washington, DC: 2007), p. 70.

12. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 12 Ch. 6: Franchising and the Entrepreneur Benefits of Franchising Centralized buying power Centralized buying power Site selection and territorial protection Site selection and territorial protection Important issue: Territorial encroachment Important issue: Territorial encroachment Greater chance for success Greater chance for success

13. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 13 Ch. 6: Franchising and the Entrepreneur Drawbacks of Franchising Franchise fees and ongoing royalties Franchise fees and ongoing royalties Average upfront franchise fee = $25,147 Average upfront franchise fee = $25,147 Royalties range from 1% to 11% of franchisees’ sales Royalties range from 1% to 11% of franchisees’ sales Average royalty = 6.7% of sales Average royalty = 6.7% of sales Strict adherence to standardized operations Strict adherence to standardized operations Restrictions on purchasing Restrictions on purchasing Approved suppliers only Approved suppliers only

14. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 14 Ch. 6: Franchising and the Entrepreneur Drawbacks of Franchising Limited product line Limited product line Contract terms and renewal Contract terms and renewal Average term = 10.3 years Average term = 10.3 years Unsatisfactory training programs Unsatisfactory training programs Market saturation Market saturation Less freedom – Less freedom – “No independence” “No independence” “Happy prisoners” “Happy prisoners” (continued)

15. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 15 Ch. 6: Franchising and the Entrepreneur Ten Myths of Franchising 1.Franchising is the safest way to go into business because franchises never fail. 2.I’ll be able to open my franchise for less money than the franchiser estimates. 3.The bigger the franchise organization, the more successful I’ll be. 4.I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how.

16. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 16 Ch. 6: Franchising and the Entrepreneur Ten Myths of Franchising 5. All franchises are the same. 6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful. 7. Anyone can be a satisfied, successful franchise owner. (continued)

17. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 17 Ch. 6: Franchising and the Entrepreneur Ten Myths of Franchising 8. Franchising is the cheapest way to get into business for yourself. 9. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee. 10.Once I open my franchise, I’ll be able to run things the way I want to. (continued)

18. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 18 Ch. 6: Franchising and the Entrepreneur Franchising and the Law Franchise Disclosure Document (FDD) Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC) Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC) Requires franchisors to disclose to potential franchisees information on 23 important topics 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 Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions

19. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 19 Ch. 6: Franchising and the Entrepreneur Detecting Dishonest Franchisers Claims that the contract is “standard; no need to read it.” Claims that the contract is “standard; no need to read it.” Failure to provide a copy of the required disclosure documents. Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Marginally successful prototype or no prototype. Poorly prepared operations manual. Poorly prepared operations manual. Promises of future earnings with no documentation. Promises of future earnings with no documentation. High franchisee turnover or termination rate. High franchisee turnover or termination rate. Unusual amount of litigation by franchisees. Unusual amount of litigation by franchisees. In addition to the text

20. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 20 Ch. 6: Franchising and the Entrepreneur Attempts to discourage your attorney from evaluating the contract before signing it. Attempts to discourage your attorney from evaluating the contract before signing it. No written documentation. No written documentation. A high pressure sale. A high pressure sale. Claims to be exempt from federal disclosure laws. Claims to be exempt from federal disclosure laws. “Get rich quick” schemes, promising huge profits with minimal effort. “Get rich quick” schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions. Evasive, vague answers to your questions. (continued) Detecting Dishonest Franchisers In addition to the text

21. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 21 Ch. 6: Franchising and the Entrepreneur The Right Way to Buy a Franchise Evaluate yourself - What do you like and dislike? Evaluate yourself - What do you like and dislike? Research your market. Research your market. Consider your franchise options. Consider your franchise options. Get a copy of the Franchisor’s FDD – and read it! Get a copy of the Franchisor’s FDD – and read it! Talk to existing franchisees. Talk to existing franchisees. Ask the franchiser some tough questions. Ask the franchiser some tough questions. Make your choice. Make your choice.

22. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 22 Ch. 6: Franchising and the Entrepreneur Factors That Make a Franchise Appealing Unique concept or marketing approach Unique concept or marketing approach Profitability Profitability Registered trademark Registered trademark Business system that works Business system that works Solid training program Solid training program Affordability Affordability Positive relationship with franchisees Positive relationship with franchisees In addition to the text

23. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 23 Ch. 6: Franchising and the Entrepreneur Trends Shaping Franchising Changing face of franchisees Changing face of franchisees Better educated with more business acumen Better educated with more business acumen Multiple-unit franchising Multiple-unit franchising 52% of franchisees operate multiple outlets (and growing) 52% of franchisees operate multiple outlets (and growing) International opportunities International opportunities IFA Survey: 52% of U.S. franchisors have an international presence IFA Survey: 52% of U.S. franchisors have an international presence Master franchising Master franchising

24. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 24 Ch. 6: Franchising and the Entrepreneur Trends Shaping Franchising Smaller, nontraditional locations Smaller, nontraditional locations Intercept marketing Intercept marketing Conversion franchising Conversion franchising 72% of North American franchisors use as a growth strategy 72% of North American franchisors use as a growth strategy Piggybacking (or combination or multi-branded franchising) Piggybacking (or combination or multi-branded franchising) Serving dual-career couples and baby boomers Serving dual-career couples and baby boomers

25. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 25 Ch. 6: Franchising and the Entrepreneur Conclusion Franchising: Is a key part of the small business sector Is a key part of the small business sector Increases the chance of business success for the entrepreneur Increases the chance of business success for the entrepreneur Growth continues Growth continues

26. Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 26 Ch. 6: Franchising and the Entrepreneur All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.