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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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-22
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-33
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-44
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.
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-66
Types of Types of FranchisingFranchising
TradenameTradename Product distributionProduct distribution Pure (Business format)Pure (Business format)
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-77
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?”
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-88
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-99
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1010
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1212
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%
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1313
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1414
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”
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1515
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1616
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1717
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1818
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-1919
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
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-2020
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)
Chapter 4 FranchisingChapter 4 Franchising Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall©2012 Pearson Education, Inc. publishing as Prentice Hall4-4-2121
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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