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.
