7 - 1 copyright © 2016 pearson education, inc. franchising and the entrepreneur 7 section 2: the...

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Franchising and the Entrepreneur

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Section 2: The Entrepreneurial Journey Begins

About 3,000 franchisors operate more than 770,000 outlets in the United States.

Franchises generate more than $800 billion in annual sales and account for 4.1% of the U.S. GDP.

Franchises employ 8.1 million workers in the United States in more than 300 major industries.

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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.

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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.

Key Question: “What can a franchise do for me that I cannot do for myself?”

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Trade-name

Product distribution

Pure (Business format)

A business systemManagement training and support

Start-upOngoing

Brand name appeal“Cloning”

Standardized quality of goods and services

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National advertising programsFranchisees contribute 1% to 5% of sales.

Financial assistanceAbout 20% of franchisors offer direct financial assistance to franchisees.

SBA – Franchise Registry

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Proven products and business formats

Centralized buying power

Site selection and territorial protection

Important issue: Territorial encroachment

Greater chance for success

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Franchise fees and ongoing royaltiesAverage upfront franchise fee =

$25,147Royalties range from 1% to 11% of

franchisees’ salesAverage royalty = 6.7% of sales

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Strict adherence to standardized operations

Restrictions on purchasingApproved suppliers only

Limited product lineContract terms and renewal

Average term = 10.3 years

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Unsatisfactory training programsMarket saturationLess freedom

“No independence”“Happy prisoners”

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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.

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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.

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.

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Franchise Disclosure Document (FDD)Established in 2008 to replace the Uniform

Franchise Offering Circular (UFOC)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.

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Evaluate yourself: What do you like and dislike?

Research your market.Consider your franchise options.Get a copy of the Franchisor’s FDD –

and read it!

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Number of Franchisees from which Prospective Franchisees Solicit Information Before Selecting a Franchise

Unique concept or marketing approach

Profitability

Registered trademark

Business system that works

Solid training program

Affordability

Positive relationship with franchisees

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Evaluate yourself: What do you like and dislike?

Research your market. Consider your franchise options. Get a copy of the Franchisor’s FDD – and

read it! Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice.

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International opportunitiesMany franchises are focusing on

international markets as a source of growth.Yum! earns 75% of its revenues from

international franchises.McDonald’s earns 70% of its sales

internationally.

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Smaller, nontraditional locationsIntercept marketing: putting a franchise’s

products or services directly in the paths of potential consumers, wherever they may be.

Conversion franchising

Owners of independent businesses become franchisees to gain the advantage of name recognition.

72% of North American franchisors use it as a growth strategy.

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RefranchisingFranchisors sell their company-owned

outlets to franchisees.

Multi-unit franchising

IFA: 20% of franchise owners are multiple-unit owners.

Typical multiple-unit franchises own five outlets.

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Area development and master franchising

Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time.

Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.

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Co-brandingAka piggyback or combination

franchising:

Two or more franchises team up to sell complementary products or services under one roof.

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Franchising: Is a key part of the small

business sectorIncreases the chance of

business success for the entrepreneur

Growth continues

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