Chapter 6
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Transcript of Chapter 6
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Franchising and the Franchising and the EntrepreneurEntrepreneur
Franchising and the Franchising and the EntrepreneurEntrepreneur
CHAPTER CHAPTER 66
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 2Ch. 6: Franchising and the Entrepreneur
The Franchising BoomThe Franchising Boom More than 3,000 franchisors operate More than 3,000 franchisors operate
more than 909,000 outlets in the more than 909,000 outlets in the United States.United States.
Each year, franchises produce goods Each year, franchises produce goods and services that are worth $881 and services that are worth $881 billion, 4.4% of the U.S. GDP. billion, 4.4% of the U.S. GDP.
Franchises employ one in every 12 Franchises employ one in every 12 workers in the U.S. in more than 230 workers in the U.S. in more than 230 major industries. major industries.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 3Ch. 6: Franchising and the Entrepreneur
The Franchising BoomThe Franchising Boom
Economic impact of franchising Economic impact of franchising on the U.S. economy: $2.3 trillion.on the U.S. economy: $2.3 trillion.
A new franchise opens A new franchise opens somewhere in the world somewhere in the world every 8 minutes.every 8 minutes.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 4Ch. 6: Franchising and the Entrepreneur
FranchisingFranchising
A system in which semi-independent A system in which semi-independent business owners (franchisees) pay business owners (franchisees) pay fees and royalties to a parent fees and royalties to a parent company (franchiser) in return for company (franchiser) in return for the right to become identified with the right to become identified with its trademark, to sell its products or its trademark, to sell its products or services, and often to use its services, and often to use its business format and system. business format and system.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 5Ch. 6: Franchising and the Entrepreneur
The Franchising RelationshipThe Franchising RelationshipThe Franchiser The FranchiseeOversees 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 and suppliers
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 and purchaseonly from approved suppliers
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
FIGURE 6.1Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 6Ch. 6: Franchising and the Entrepreneur
Types of FranchisingTypes of Franchising
TradenameTradename
Product distributionProduct distribution
Pure (Business format) Pure (Business format)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 7Ch. 6: Franchising and the Entrepreneur
Franchising BasicsFranchising Basics
Franchisee gets the right to use all of Franchisee gets the right to use all of the elements of a fully integrated the elements of a fully integrated business operation.business operation.
Essence of what franchisees purchase Essence of what franchisees purchase from the franchisors: from the franchisors: ExperienceExperience..
Key Question: “What can a franchise Key Question: “What can a franchise do for me that I cannot do for myself?” do for me that I cannot do for myself?”
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 8Ch. 6: Franchising and the Entrepreneur
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 9Ch. 6: Franchising and the Entrepreneur
Benefits of FranchisingBenefits of Franchising
A business systemA business system Management training and supportManagement training and support
Start-upStart-up OngoingOngoing
Brand name appealBrand name appeal ““Cloning”Cloning”
Standardized quality of goods and Standardized quality of goods and servicesservices
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 10Ch. 6: Franchising and the Entrepreneur
Benefits of FranchisingBenefits of Franchising
National advertising programsNational advertising programs Franchisees contribute 1% to 5% of Franchisees contribute 1% to 5% of
salessales Financial assistanceFinancial assistance
Only 20% of franchisors offer direct Only 20% of franchisors offer direct financial assistance to franchisees. financial assistance to franchisees.
SBA – Franchise RegistrySBA – Franchise Registry Proven products and Proven products and
business formatsbusiness formats
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 11Ch. 6: Franchising and the Entrepreneur
FIGURE 6.3 Franchisor Financial AssistanceSource: The Profile of Franchising 2006, International Franchise Association (Washington, DC: 2007), p. 70.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 12Ch. 6: Franchising and the Entrepreneur
Benefits of FranchisingBenefits of Franchising
Centralized buying powerCentralized buying power Site selection and territorial protectionSite selection and territorial protection
Important issue: Important issue: Territorial encroachmentTerritorial encroachment
Greater chance for successGreater chance for success
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 13Ch. 6: Franchising and the Entrepreneur
Drawbacks of FranchisingDrawbacks of Franchising
Franchise fees and ongoing royaltiesFranchise fees and ongoing royalties Average upfront franchise fee = $25,147Average upfront franchise fee = $25,147 Royalties range from 1% to 11% of Royalties range from 1% to 11% of
franchisees’ salesfranchisees’ sales Average royalty = 6.7% of salesAverage royalty = 6.7% of sales
Strict adherence to standardized Strict adherence to standardized operationsoperations
Restrictions on purchasingRestrictions on purchasing Approved suppliers onlyApproved suppliers only
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 14Ch. 6: Franchising and the Entrepreneur
Drawbacks of FranchisingDrawbacks of Franchising
Limited product lineLimited product line Contract terms and renewalContract terms and renewal
Average term = 10.3 yearsAverage term = 10.3 years Unsatisfactory training programsUnsatisfactory training programs Market saturationMarket saturation Less freedom – Less freedom –
““No independence”No independence” ““Happy prisoners”Happy prisoners”
(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 15Ch. 6: Franchising and the Entrepreneur
Ten Myths of FranchisingTen Myths of Franchising
1.1. Franchising is the safest way to go into Franchising is the safest way to go into business because franchises never fail.business because franchises never fail.
2.2. I’ll be able to open my franchise for less I’ll be able to open my franchise for less money than the franchiser estimates. money than the franchiser estimates.
3.3. The bigger the franchise organization, the The bigger the franchise organization, the more successful I’ll be. more successful I’ll be.
4.4. I’ll use 80 percent of the franchiser’s I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by business system, but I’ll improve upon by substituting my experience and know-how. substituting my experience and know-how.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 16Ch. 6: Franchising and the Entrepreneur
Ten Myths of FranchisingTen Myths of Franchising
5. 5. All franchises are the same.All franchises are the same.
6. 6. I don’t have to be a hands-on manager. I don’t have to be a hands-on manager. I can be an absentee owner and still be very I can be an absentee owner and still be very successful. successful.
7.7. Anyone can be a satisfied, Anyone can be a satisfied, successful franchise owner. successful franchise owner.
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 17Ch. 6: Franchising and the Entrepreneur
Ten Myths of FranchisingTen Myths of Franchising
8. 8. Franchising is the cheapest way to get into Franchising is the cheapest way to get into business for yourself. business for yourself.
9. 9. The franchiser will solve my business The franchiser will solve my business problems for me; after all, that’s why I pay problems for me; after all, that’s why I pay an ongoing royalty fee. an ongoing royalty fee.
10.10. Once I open my franchise, Once I open my franchise, I’ll be able to run things I’ll be able to run things the way I want to. the way I want to.
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 18Ch. 6: Franchising and the Entrepreneur
Franchising and the LawFranchising and the Law
Franchise Disclosure Document (FDD)Franchise Disclosure Document (FDD) Established in 2008 to replace the Uniform Established in 2008 to replace the Uniform
Franchise Offering Circular (UFOC)Franchise Offering Circular (UFOC) Requires franchisors to disclose to Requires franchisors to disclose to
potential franchisees information on 23 potential franchisees information on 23 important topicsimportant topics
Objective: To give franchisees the Objective: To give franchisees the information they need to protect information they need to protect themselves from dishonest franchisees themselves from dishonest franchisees and to make good investment decisionsand to make good investment decisions
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 19Ch. 6: Franchising and the Entrepreneur
Detecting Dishonest Franchisers Detecting Dishonest Franchisers
Claims that the contract is “standard; no need to Claims that the contract is “standard; no need to read it.”read it.”
Failure to provide a copy of the required Failure to provide a copy of the required disclosure documents.disclosure documents.
Marginally successful prototype or no prototype.Marginally successful prototype or no prototype.
Poorly prepared operations manual.Poorly prepared operations manual.
Promises of future earnings with no Promises of future earnings with no documentation.documentation.
High franchisee turnover or termination rate.High franchisee turnover or termination rate.
Unusual amount of litigation by franchisees.Unusual amount of litigation by franchisees.
In addition to the text
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 20Ch. 6: Franchising and the Entrepreneur
Attempts to discourage your attorney from Attempts to discourage your attorney from evaluating the contract before signing it.evaluating the contract before signing it.
No written documentation.No written documentation. A high pressure sale. A high pressure sale. Claims to be exempt from federal disclosure laws.Claims to be exempt from federal disclosure laws. ““Get rich quick” schemes, promising huge profits Get rich quick” schemes, promising huge profits
with minimal effort.with minimal effort. Reluctance to provide a list of existing Reluctance to provide a list of existing
franchisees.franchisees. Evasive, vague answers to your questions.Evasive, vague answers to your questions.
(continued)(continued)
Detecting Dishonest Franchisers Detecting Dishonest Franchisers In addition to the text
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 21Ch. 6: Franchising and the Entrepreneur
The The RightRight Way to Way to Buy a FranchiseBuy a Franchise
Evaluate yourself - What do you like and Evaluate yourself - What do you like and dislike?dislike?
Research your market.Research your market. Consider your franchise options.Consider your franchise options. Get a copy of the Franchisor’s FDD – Get a copy of the Franchisor’s FDD – and and
read it!read it! Talk to existing franchisees.Talk to existing franchisees. Ask the franchiser some tough questions.Ask the franchiser some tough questions. Make your choice.Make your choice.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 22Ch. 6: Franchising and the Entrepreneur
Factors That Make a Factors That Make a Franchise AppealingFranchise Appealing
Unique concept or marketing approachUnique concept or marketing approach ProfitabilityProfitability Registered trademarkRegistered trademark Business system that worksBusiness system that works Solid training programSolid training program AffordabilityAffordability Positive relationship with franchiseesPositive relationship with franchisees
In addition to the text
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 23Ch. 6: Franchising and the Entrepreneur
Trends Shaping FranchisingTrends Shaping Franchising
Changing face of franchiseesChanging face of franchisees Better educated with more business Better educated with more business
acumenacumen Multiple-unit franchisingMultiple-unit franchising
52% of franchisees operate multiple 52% of franchisees operate multiple outlets (and growing)outlets (and growing)
International opportunitiesInternational opportunities IFA Survey: 52% of U.S. franchisors IFA Survey: 52% of U.S. franchisors
have an international presencehave an international presence Master franchisingMaster franchising
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 24Ch. 6: Franchising and the Entrepreneur
Trends Shaping FranchisingTrends Shaping Franchising
Smaller, nontraditional locationsSmaller, nontraditional locations Intercept marketingIntercept marketing
Conversion franchisingConversion franchising 72% of North American franchisors use 72% of North American franchisors use
as a growth strategyas a growth strategy
Piggybacking (or combination or Piggybacking (or combination or multi-branded franchising)multi-branded franchising)
Serving dual-career couples and Serving dual-career couples and baby boomersbaby boomers
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 25Ch. 6: Franchising and the Entrepreneur
ConclusionConclusion
Franchising:Franchising:
Is a key part of the small business Is a key part of the small business sectorsector
Increases the chance of business Increases the chance of business success for the entrepreneursuccess for the entrepreneur
Growth continues Growth continues
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 26Ch. 6: Franchising and the Entrepreneur
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.