chapter 10 franchising and the entrepreneur -esbm10e 04

C4 FranchisingC4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-11

Franchising and the Entrepreneur


The Franchising The Franchising Boom!!!Boom!!! Shoppers can now buy virtually Shoppers can now buy virtually

every product or service every product or service imaginable through franchisesimaginable through franchises

More than 854,000 franchise More than 854,000 franchise outlets in the United States outlets in the United States employ almost 9.6 million peopleemploy almost 9.6 million people generate $835 billion in annual generate $835 billion in annual

output – an amount that is 5.8% of output – an amount that is 5.8% of the country’s GDPthe country’s GDP


Global FranchisingGlobal Franchising 52% of U.S. franchisers have 52% of U.S. franchisers have

international outlets international outlets Of the U.S. franchisers who operate Of the U.S. franchisers who operate

globally, 30% of their total outlets are globally, 30% of their total outlets are located in other countrieslocated in other countries

Hot markets: Europe and Pacific Rim Hot markets: Europe and Pacific Rim


FranchisingFranchising Franchising – semi-independent business Franchising – semi-independent business

owners pay fees and royalties to a parent owners pay fees and royalties to a parent company in exchange for the right to sell its company in exchange for the right to sell its products and services under the franchiser’s products and services under the franchiser’s trade name and often to use its business trade name and often to use its business format and system format and system

Figure 4.1 The Franchising RelationshipFigure 4.1 The Franchising Relationship

The Franchiser The 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; provides list of approved suppliers; may requirefranchisees to purchase from the franchisor

Develops and coordinates national adcampaign; may require minimum level ofspending on local advertising

Sets quality standards and enforces themwith inspections; trains franchisees

Provides support through an establishedbusiness 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; must purchaseonly from approved suppliers; must purchasefrom supplier if required

Pays for national ad campaign; complies withlocal advertising requirements; gets franchisorapproval on local ads

Maintains quality standards; trains employeesto implement quality systems

Operates business on a day-to-day basis withfranchiser’s support

Site selection

Design

Employees

Products and services

Prices

Purchasing

Advertising

Quality control

Support

Element

Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice ofPriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.


Types of Types of FranchisingFranchising

TradenameTradename Product distributionProduct distribution Pure (Business format)Pure (Business format)


Why Buy a Franchise?Why Buy a Franchise? Franchisees are buying the franchiser’s Franchisees are buying the franchiser’s

experience experience ““Going into business Going into business forfor yourselfyourself but but notnot byby

yourselfyourself” ” Franchisees get a proven business system Franchisees get a proven business system

and avoid having to learn by trial-and-errorand avoid having to learn by trial-and-error Before buying, ask: “What can a franchise do Before buying, ask: “What can a franchise do

for me that I cannot do for myself?” for me that I cannot do for myself?”


Benefits of Benefits of FranchisingFranchising

Business systemBusiness system Management training and supportManagement training and support Brand name appealBrand name appeal

““Cloning”Cloning” Standardized quality of goods and Standardized quality of goods and

servicesservices National advertising programNational advertising program


Benefits of Benefits of FranchisingFranchising

Financial assistanceFinancial assistance Franchise RegistryFranchise Registry

Proven products and business Proven products and business formatsformats

Centralized buying powerCentralized buying power Site selection and territorial Site selection and territorial

protectionprotection Greater chance for successGreater chance for success

http://www.franchiseregistry.com/


Greater Chance for Greater Chance for SuccessSuccess

Study: After 5 years, 90% of Study: After 5 years, 90% of franchises are still in business franchises are still in business compared to 40% of compared to 40% of independent businesses independent businesses

The difference?The difference? Services, assistance, and Services, assistance, and

guidance that experienced guidance that experienced franchisers offer their franchisees franchisers offer their franchisees

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

N e w 1 2 3 4 5 6 7 8 9 10

Ye a rs in B us ine s s

Success Rate Comparison

% F ra nc his e s S urv iv ing

% Inde pe nde nt B us ine s s e s S urv iv ing

Source: National Federation of Independent Businesses and U.S. Department of Commerce.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-11Chapter 4 Franchising


What Franchisers Want What Franchisers Want in Franchiseesin Franchisees1.1. People skillsPeople skills 94%94%2.2. Ability to be coachedAbility to be coached 87%87%3.3. General business skillsGeneral business skills 86%86%4.4. Access to capitalAccess to capital 84%84%5.5. Entrepreneurial mindsetEntrepreneurial mindset 76%76%6.6. Specific industry skillsSpecific industry skills 29%29%


Drawbacks of FranchisingDrawbacks of Franchising

Franchise fees and revenue Franchise fees and revenue sharingsharing Start-up costs range from $2,000 to Start-up costs range from $2,000 to

$250,000$250,000 Royalty: 1% to 11% of salesRoyalty: 1% to 11% of sales

Strict adherence to standardized Strict adherence to standardized operationsoperations

Restrictions on purchasingRestrictions on purchasing


Drawbacks of FranchisingDrawbacks of Franchising

Limited product lineLimited product line Unsatisfactory training programsUnsatisfactory training programs Market saturationMarket saturation Less freedomLess freedom

““Happy prisoners”Happy prisoners”


Ten Myths of Ten Myths of FranchisingFranchising

1.1. Franchising is the safest way to go Franchising is the safest way to go into business because franchises into business because franchises never failnever fail

2.2. I’ll be able to open my franchise for I’ll be able to open my franchise for less money than the franchiser less money than the franchiser estimatesestimates

3.3. The bigger the franchise organization, The bigger the franchise organization, the more successful I’ll bethe more successful I’ll be


Ten Myths of Ten Myths of FranchisingFranchising4.4. I’ll use 80 percent of the franchiser’s I’ll use 80 percent of the franchiser’s

business system, but I’ll improve business system, but I’ll improve upon it by substituting my experience upon it by substituting my experience and know-how and know-how

5.5. All franchises are the sameAll franchises are the same6.6. I don’t have to be a “hands-on” I don’t have to be a “hands-on”

manager. I can be an absentee manager. I can be an absentee owner and be very successful owner and be very successful


Ten Myths of Ten Myths of FranchisingFranchising7.7. Anyone can be a satisfied, successful Anyone can be a satisfied, successful

franchise ownerfranchise owner8.8. Franchising is the cheapest way to get Franchising is the cheapest way to get

into business for yourselfinto business for yourself9.9. The franchiser will solve my business The franchiser will solve my business

problems for me; after all, that’s why I problems for me; after all, that’s why I pay an ongoing royaltypay an ongoing royalty

10.10. Once I open my franchise, I’ll be able Once I open my franchise, I’ll be able to run things the way I want to to run things the way I want to


Franchising and the LawFranchising and the Law

Key tool for protection is the Uniform Key tool for protection is the Uniform Franchise Disclosure Document Franchise Disclosure Document (UFDD)(UFDD)

Franchisers Franchisers mustmust deliver a copy of deliver a copy of UFDD before any offer or sale of a UFDD before any offer or sale of a franchisefranchise


Franchising and the LawFranchising and the Law

The UFDD contains information on 23 The UFDD contains information on 23 topics, including:topics, including: Franchiser’s business experienceFranchiser’s business experience Franchise fees and costsFranchise fees and costs Lawsuits involving the franchiserLawsuits involving the franchiser Financial assistance availableFinancial assistance available Territorial protection grantedTerritorial protection granted Restrictions on purchasingRestrictions on purchasing


Detecting Dishonest Detecting Dishonest FranchisersFranchisers Claims that the contract is “standard; Claims that the contract is “standard;

no need to read it”no need to read it” Failure to provide a copy of the Failure to provide a copy of the

required disclosure documentsrequired disclosure documents Marginally successful prototype or no Marginally successful prototype or no

prototypeprototype Poorly prepared operations manualPoorly prepared operations manual Unsolicited testimonial from “a highly Unsolicited testimonial from “a highly

successful franchisee” successful franchisee”


Unusual amount of litigation by Unusual amount of litigation by franchiseesfranchisees

Promises of future earnings with no Promises of future earnings with no documentationdocumentation

High franchisee turnover or termination High franchisee turnover or termination raterate

Attempts to discourage your attorney Attempts to discourage your attorney from evaluating the contract before from evaluating the contract before signing itsigning it

(Continued)(Continued)

Detecting Dishonest Detecting Dishonest FranchisersFranchisers


No written documentationNo written documentation High pressure saleHigh pressure sale Claims to be exempt from federal Claims to be exempt from federal

disclosure lawsdisclosure laws "Get rich quick" schemes, promising "Get rich quick" schemes, promising

huge profits with minimal efforthuge profits with minimal effort Reluctance to provide a list of existing Reluctance to provide a list of existing

franchiseesfranchisees Evasive, vague answers to your Evasive, vague answers to your

questionsquestions

Detecting Dishonest Detecting Dishonest FranchisersFranchisers (Continued)(Continued)


How to Buy a FranchiseHow to Buy a Franchise

Preparation, common sense, and patience Preparation, common sense, and patience are vital ingredients in choosing the right are vital ingredients in choosing the right franchisefranchise

Evaluate yourself – What do you like and Evaluate yourself – What do you like and dislike?dislike?

Research the marketResearch the market Consider your franchise optionsConsider your franchise options Get a copy of the franchiser’s Uniform Get a copy of the franchiser’s Uniform

Franchise Disclosure Document (UFDD) Franchise Disclosure Document (UFDD) and study itand study it


What Should You Look What Should You Look For?For? A unique concept or marketing A unique concept or marketing

approachapproach ProfitabilityProfitability A registered trademarkA registered trademark


What Should You Look What Should You Look For?For? A business system that A business system that

worksworks A solid training programA solid training program AffordabilityAffordability A positive relationship A positive relationship

with franchiseeswith franchisees



How to Buy a FranchiseHow to Buy a Franchise

Talk to existing franchiseesTalk to existing franchisees Ask the franchiser some tough Ask the franchiser some tough

questionsquestions Make your choiceMake your choice


Table 4.4 Advantages and Disadvantages of Buying a New vs. an Established Franchise

Pros Cons

New Franchise

•Can be new and exciting•Business concept can be fresh and different in the market•Possibility of getting lower fees as a “pioneer” of the concept•Potential for a high return on investment

•Business is not tested or established in the market•Unknown brand and trademark•Possibility that the concept is a fad with no staying power•Franchiser may lack the experience to deliver valuable services to franchisees

Established Franchise

•Business concept likely is well-known to consumers and market for the products or services is already established•Franchiser has experience in delivering services to franchisees•Franchiser has had time to work the “bugs” out of the business system

•High franchise fees and costs that often are non-negotiable•Concept may be on the wane in the market•Franchiser’s brand and trademark may remind customers of an outdated concept•Franchiser’s “trade dress” may be in need of updating and redesigning

Source: Based on Andrew A. Caffey, “Age Issues,” Entrepreneur, January 2002. p. 118. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice HallChapter 4 Franchising

4-27


Franchise Franchise ContractsContracts

Note clauses covering:Note clauses covering: TerminationTermination RenewalRenewal Transfers and BuybacksTransfers and Buybacks

FTC Study: 40% of New Franchisees Sign FTC Study: 40% of New Franchisees Sign

Contracts Without Reading Them!!!Contracts Without Reading Them!!!

Contract


Trends Shaping Trends Shaping FranchisingFranchising International opportunitiesInternational opportunities

Global markets offer fast-growth Global markets offer fast-growth opportunities especially China and Indiaopportunities especially China and India

Other major markets: Canada, Europe, Other major markets: Canada, Europe, Pacific Rim countries, South America Pacific Rim countries, South America

Key to success: AdaptationKey to success: Adaptation Smaller, nontraditional locationsSmaller, nontraditional locations

Intercept marketingIntercept marketing


Trends Shaping Trends Shaping FranchisingFranchising Changing face of franchiseesChanging face of franchisees

Minorities own 19.3% of all franchises Minorities own 19.3% of all franchises and women own 25% of them and women own 25% of them

Conversion franchisingConversion franchising 72% of North American franchisers use 72% of North American franchisers use

as a growth strategyas a growth strategy Multiple-unit franchisingMultiple-unit franchising

19.8% of franchisees operate 19.8% of franchisees operate multiple outlets (and growing)multiple outlets (and growing)


Trends Shaping Trends Shaping FranchisingFranchising Master franchisingMaster franchising Piggybacking (or combination or multi-Piggybacking (or combination or multi-

branded franchising)branded franchising) ““Buddy system”Buddy system”

Serving aging baby boomersServing aging baby boomers


Franchising as a Growth Franchising as a Growth StrategyStrategy Issues to consider:Issues to consider:

Do you have a unique concept? Do you have a unique concept? Is your business model replicable?Is your business model replicable? Have you developed an expansion plan?Have you developed an expansion plan? Have you performed due diligence?Have you performed due diligence? Do you have proper legal guidance?Do you have proper legal guidance?

Initial cost to launch a franchise Initial cost to launch a franchise business is $100,000 to $750,000 business is $100,000 to $750,000


Franchising Web SitesFranchising Web Sites

Entrepreneur’sEntrepreneur’s Franchises and Franchises and OpportunitiesOpportunitieshttp://www.entrepreneur.com/franchiseopportunities/index.htmlhttp://www.entrepreneur.com/franchiseopportunities/index.html

Inc.’sInc.’s Franchise Resource Center Franchise Resource Centerhttp://www.inc.com/resources/franchise/http://www.inc.com/resources/franchise/

International Franchise Association International Franchise Association http://www.franchise.org/http://www.franchise.org/

FRANdataFRANdatahttp://www.frandata.com/http://www.frandata.com/

http://www.entrepreneur.com/franchiseopportunities/index.html

http://www.inc.com/resources/franchise/

http://www.franchise.org/

http://www.frandata.com/

C4 FranchisingC4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall©2012 Pearson Education, Inc. Publishing as Prentice Hall4-4-3434

All rights reserved. No part of this publication may be All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United written permission of the publisher. Printed in the United States of America.States of America.

Copyright ©2012 Pearson Education, Inc. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Publishing as Prentice Hall

chapter 10 franchising and the entrepreneur -esbm10e 04

Small Business & Entrepreneurship