chapter 4 franchising copyright ©2012 pearson education, inc. publishing as prentice hall 4-1...

Chapter 4 FranchisingChapter 4 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% output – an amount that is 5.8% of the country’s GDPof the 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 Of the U.S. franchisers who

operate globally, 30% of their total operate globally, 30% of their total outlets are located in other outlets are located in other countriescountries

Hot markets: Europe and Pacific Hot markets: Europe and Pacific Rim 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 company in exchange for the right to sell its products and services under the its products and services under the franchiser’s trade name and often to use franchiser’s trade name and often to use its business format and system its business format and system

Figure 4.1 The Franchising Figure 4.1 The Franchising RelationshipRelationship

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-and avoid having to learn by trial-and-errorerror

Before buying, ask: “What can a franchise Before buying, ask: “What can a franchise do for me that I cannot do for myself?” do for me that I cannot do for myself?”


Benefits of Benefits of FranchisingFranchising

Business systemBusiness system Management training and Management training and

supportsupport Brand name appealBrand name appeal

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

and servicesand services National advertising programNational advertising program


Benefits of Benefits of FranchisingFranchising

Financial assistanceFinancial assistance Franchise 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 franchises are still in business compared to 40% business compared to 40% of independent businesses of independent businesses

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

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

New 1 2 3 4 5 6 7 8 9 10

Years in Business

Success Rate Comparison

% Franchises Surviving

% Independent Businesses Surviving

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 What Franchisers Want in FranchiseesWant in Franchisees

1.1. 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 Drawbacks of FranchisingFranchising

Franchise fees and revenue Franchise fees and revenue sharingsharing Start-up costs range from Start-up costs range from

$2,000 to $250,000$2,000 to $250,000 Royalty: 1% to 11% of salesRoyalty: 1% to 11% of sales

Strict adherence to Strict adherence to standardized operationsstandardized operations

Restrictions on purchasingRestrictions on purchasing


Drawbacks of Drawbacks of FranchisingFranchising

Limited product lineLimited product line Unsatisfactory training Unsatisfactory training

programsprograms 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 The bigger the franchise organization, the more successful I’ll organization, the more successful I’ll bebe


Ten Myths of Ten Myths of FranchisingFranchising

4.4. I’ll use 80 percent of the I’ll use 80 percent of the franchiser’s business system, franchiser’s business system, but I’ll improve upon it by but I’ll improve upon it by substituting my experience and substituting my experience and know-how 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, Anyone can be a satisfied,

successful franchise ownersuccessful franchise owner8.8. Franchising is the cheapest way to Franchising is the cheapest way to

get into business for yourselfget into business for yourself9.9. The franchiser will solve my The franchiser will solve my

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

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


How to Buy a How to Buy a FranchiseFranchise

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

Evaluate yourself – What do you like Evaluate yourself – What do you like and dislike?and 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 Franchise Disclosure Document (UFDD) and study it(UFDD) and 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 A business system

that worksthat works A solid training A solid training

programprogram AffordabilityAffordability A positive relationship A positive relationship

with franchiseeswith franchisees

(Continued)(Continued)


How to Buy a How to Buy a FranchiseFranchise Talk to existing franchiseesTalk to existing franchisees Ask the franchiser some tough Ask the franchiser some tough

questionsquestions Make your choiceMake your choice

(Continued)(Continued)

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

Pros Cons

New Franchise

Can be new and excitingBusiness concept can be fresh and different in the marketPossibility of getting lower fees as a “pioneer” of the conceptPotential for a high return on investment

Business is not tested or established in the marketUnknown brand and trademarkPossibility that the concept is a fad with no staying powerFranchiser 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 establishedFranchiser has experience in delivering services to franchiseesFranchiser has had time to work the “bugs” out of the business system

High franchise fees and costs that often are non-negotiableConcept may be on the wane in the marketFranchiser’s brand and trademark may remind customers of an outdated conceptFranchiser’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

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chapter 4 franchising copyright ©2012 pearson education, inc. publishing as prentice hall 4-1...

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franchising boom

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