Chapter #6 – Franchising - Elements of Entrepreneurship

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MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Definition:
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.
What are the three types of Franchising?
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Types of Franchising:
1. Trade-name
2.
Product distribution
3.
Pure (Business format)
Define Trade-name Franchising and give an example.
Ch. 6: Franchising
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Trade-name Franchising:
Franchisee purchases right to use the
Franchisor’s Tradename without distributing
particular products exclusively under the
Franchisor’s name.
Ex: True Value, Western Auto
Define Product Franchising and give an example.
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Product Distribution Franchising:
Franchisee purchases right to sell specific
products under the Franchisor’s
Brand Name and Trademark thru a
selective, limited distribution
network.
Ex: Lexus, Ford, Pepsi, Chevron, etc.
Define Pure / Business Format Franchising and give an example.
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Pure (Business format) Franchising:
Franchisee purchases a complete business system
including license for trade name use, products or
services to be sold or resold, operations methods,
marketing plan, quality control process, business
support services, etc.
Ex: Quiznos, B2B CFO, Stanley Steamer, Motel 6, etc.
What are some of the reasons that people purchase a Franchise?
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Why Buy a Franchise?
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?”
What are some Benefits of Franchising?
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Benefits of Franchising:
•
•
•
•
Business Systems
- Point of Sale
- Employee Training Manuals
Management training and support
- Start-up
- Ongoing
Brand name appeal - “Cloning”
Standardized quality of goods and services
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Benefits of Franchising:
• National advertising programs
Franchisees contribute 1% to 5% of
sales.
• Financial assistance
About 20% of franchisors offer direct
financial assistance to franchisees.
SBA – Franchise Registry
• Proven products and business formats
Ch. 6: Franchising
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Benefits of Franchising:
• Centralized buying power
• Site selection and territorial protection
Important issue:
Territorial encroachment
• Greater chance for success
What are some Drawbacks of Franchising?
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Drawbacks of Franchising:
• Franchise fees and ongoing royalties
Average upfront franchise fee = $25,147
Royalties range from 1% to 11% of
franchisees’ sales
Average royalty = 6.7% of sales
• Strict adherence to standardized operations
• Restrictions on purchasing from Approved
suppliers only
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Drawbacks of Franchising:
• Limited product line
• Contract terms and renewal
Average term = 10.3 years
• Unsatisfactory training programs
• Market saturation
• Less freedom –
“No independence”
“Happy prisoners”
Ch. 6: Franchising
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Ten Myths of Franchising:
1.
Franchising is the safest way to go into business.
2.
Cost Estimates are high. Actual costs are lower.
3.
Bigger Franchises are more successful.
4.
I can modify the Franchisor’s System as I see fit.
5.
All Franchises are the same.
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Ten Myths of Franchising:
6.
I can turn over management to someone else.
7.
Anyone can do it.
8.
Low cost way to get into business.
9.
Franchisor will solve problems that come up.
10. After I open I can do as I want.
What is a Franchise Disclosure Document and why do they exist?
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
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
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
The RIGHT way to buy a Franchise:
1. Evaluate yourself - What do you like and dislike?
2. Research your market.
3. Consider your franchise options.
4. Get a copy of the Franchisor’s FDD – and read it!
5. Talk to existing franchisees.
6. Ask the franchiser some tough questions.
7. Make your choice.
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Factors that make a Franchise Appealing:
1.
Unique concept or marketing approach
2.
Profitability
3.
Registered trademark
4.
Business system that works
5.
Solid training program
6.
Affordability
7.
Positive relationship with franchisees
Ch. 6: Franchising
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
BEWARE of these Franchisors:
1.
Claims that the contract is “standard; no need to read it.”
2.
Failure to provide a copy of the required disclosure documents.
3.
Marginally successful prototype or no prototype.
4.
Poorly prepared operations manual.
5.
Promises of future earnings with no documentation.
6.
High franchisee turnover or termination rate.
7.
Unusual amount of litigation by franchisees.
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
BEWARE of these Franchisors:
8.
Attempts to discourage your attorney from evaluating the contract
before signing it.
9.
No written documentation.
10. A high pressure sale.
11. Claims to be exempt from federal disclosure laws.
12. “Get rich quick” schemes, promising huge profits with minimal
effort.
13. Reluctance to provide a list of existing franchisees.
14. Evasive, vague answers to your questions.
MANA 3325 T-Th 7-8:30
Professor Lee Thurburn
Ch. 6: Franchising
Licensing vs Franchising:
As the Franchisor your cost to set up a Franchise program will start at
$50,000 and can go up to $500,000.
As a Licensor your cost to set up a Licensing Program is the cost of a
Good Attorney preparing a Good ‘Master Licensing’ document.
The difference between a License and a Franchise is the degree to which
you are willing to negotiate the individual elements of the License vs
requiring that everyone agree to a standard license agreement
(“Franchise”).
As a Licensor you can do the same thing as a Franchisor… for less $$$
but the trick is to individually negotiate each license and not to sell too
many of them.

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