Thursday, December 27, 2018

Franchising



What do we learn?
a.     What is franchising and how does it works?
Ø  What is franchising?
·         The word “franchise” comes from an old dialect of French and means privilege or freedom.
·         Franchising: form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment.
Ø  How does franchise works?
·         2 types of franchise systems:
1.      Product and trademark franchise:
o   An arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name.
o   connects a single manufacturer with a network of dealers or distributors.
2.      Business format franchise:
o   An arrangement under which the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance.
o   Fast-food restaurants, convenience stores, and motels are well-known examples of business format franchises.
·         3 types of franchise agreements:
1.      Individual franchise agreement: involves the sale of single franchise or specific location.
2.      Area franchise agreement: allows a franchisee to own and operate a specific number of franchises in a particular geographic area.
3.      Master franchise agreement: allows a franchisee to own and operate a specific number of franchises in a particual geographical area and providesthe franchisee the right to sell to others (subfranchisees).

b.    Steps entrepreneurs take to establish a franchise system.
Ø  When to franchise?
·         Appropriate when a firm has a strong or potentially strong trademark, a well-designed business method, and a desire to grow.
·         Establishing a franchise system should be approached carefully and deliberately. 
Ø  Steps to franchising a business:
1.      Develop a franchise business plan.
2.      Get professional advice.
3.      Conduct an intellectual property audit.
4.      Develop franchise document.
5.      Prepare operating manuals.
6.      Plan an advertising strategy and a franchise training program.
7.      Put together a team for opening new franchise units.
8.      Plan a strategy for solicitating prospective franchisees.
9.      Help franchisees with site selection and the grand opening of their franchise outlets.
Ø  Selecting and developing effective franchises
·         Qualities to look for:
o   Good work ethic.
o    Ability to follow instructions.
o    Ability to operate with minimal supervision.
o    Team oriented.
o    Experience in the industry in which the franchise competes
o    Adequate financial resources and good credit history.
o    Ability to make suggestions without becoming upset if the suggestions are not adopted.
o    Represents the franchisor in a positive manner.
·         Ways franchisors can develop the potential of their franchisees:
o   Provide mentoring that supersedes routing training.
o    Keep operating manuals up-to-date.
o    Keep product, services, and business systems up-to-date.
o    Solicit input from franchisees to reinforce their importance in the larger franchise system.
o    Encourage franchisees to develop a franchise association.
o    Maintain the franchise system’s integrity.

c.      Advantages and disadvantages of franchising.
Ø Advantages:
·         Rapid, low-cost market expansion.
·          Income from franchise fees and royalties.
·          Franchisee motivation.
·          Access to ideas and suggestions.
·          Cost savings.
·          Increased buying power.
Ø  Disadvantages:
·         Profit sharing.
·          Loss of control.
·          Friction with franchisees.
·          Managing growth.
·          Differences in required business skills.
·          Legal expenses.
Ø  Before deciding to franchise, a firm should consider:
·         The uniqueness of its product or service.
·         The consistent profitability of the firm.
·         The firm’s year round profitability.
·         The degree of refinement of the firm’s business systems.
·         The clarity of the business proporsition.

d.    Actions and issues associated with a decision to buy a franchise.
Ø  Purchasing a franchise is an important business decision involving a substantial financial commitment.
Ø  Is franchising right for you?
·         Franchises are typically very particular about how outlets operate.
Ø  The cost of franchise:
·         Initial franchise fee: The initial fee varies depending on the franchisor.
·         Capital requirements: The costs vary but may include the cost of buying real estate, the cost of putting up a building, the purchase of inventory, and the cost of obtaining a business license.
·         Continuing royalty payment: Typically 3% to 7% of monthly gross income.
·         Advertising fees: Franchisees are often required to pay into a national or regional advertising fund.
·         Other fees: Other fees may be charged for various activities
Ø  Finding a franchise
Ø  Advantage and disadvantage of buying a franchise:
·         Advantages:
o   A  proven product or service within an established market.
o    An established trademark or business system.
o    Franchisor’s training, technical support, and managerial expertise.
o    An established marketing network.
o    Availability of financing (varies).
o    Potential for business growth.
·         Disadvantages:
o   Cost of the franchise.
o    Restrictions on creativity.
o    Duration and nature of commitment.
o    Risk of fraud, misunderstandings, or lack of franchisor commitment.
o    Poor performance on the part of other franchisees.
o    Potential for failure.

e.      Steps entrepreneur goes through to buy a franchise.
Ø 7 steps:
1.      Visit several of the franchisor’s outlets.
2.      Meet with a franchise attorney.
3.      Meet with the franchisor and check the franchisor’s references.
4.      Review all franchise documents with the attorney.
5.      Sign the franchise agreement.
6.      Attend training.
7.      Open the franchise business.
Ø Common misconceptions:
·         Franchising is a safe investment.
·          A strong industry ensures franchise success.
·          A franchise is a “proven” business system.
·          There is no need to hire a franchise attorney or an accountant.
·          The best systems grow rapidly and it is best to be part of a rapid-growth system.
·          I can operate my franchise outlet for less than the franchisor predicts.
·          The franchisor is a nice person, he’ll help me out if I need it.

f.      The various legal aspects associated with franchise relationship.
Ø  Federal rules and regulations:
·         The offer and sale of a franchise is regulated at the federal level.
·         According to Federal Trade Commission (FTC) rule 436, franchisors must furnish potential franchisees with written disclosures that provides information about the franchisor, the franchised business, and the franchise relationship.
·         , the disclosures are made through a lengthy document referred to as the Franchisor Disclosure Document (FDD).
·         The FDD contains 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor.

g.     Franchise ethics and international franchising.
Ø franchising ethics:
·         The majority of franchisors and franchisees are highly ethical. 
·         There are certain features of franchising, however, the make it subject to ethical abuse. These features are as follows:
o   The get rich quick mentality.
o   The false assumption that buying a franchise is a guarantee of business success.
o   Conflicts of interest between franchisors and franchisees.
Ø  International franchising:
·         International opportunities for franchising are becoming more prevalent for the following 2 reasons:
1.      The markets for certain franchised products in the U.S. have become saturated.
2.      The trend towards globalization continues. 
·         Steps to take before buying a franchise overseas:
o   Consider the value of the franchisor’s name in the foreign country.
o   Get a good lawyer.
o   Determine whether the product or service is salable in the foreign country.
o   Find out how much training and support you will receive from the franchisor.
o   Evaluate currency restrictions.