Small Business Management By Prof. Cameron A. Batmanghlich Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -1
Chapter 2: FRANCHISING Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -2
Learning Objectives n n n Define and describe franchising. Identify the positive and negative aspects of franchising. Understand the structure of the franchise industry. Recognize the legal aspects of franchising. Learn how to research franchise opportunities. Explore international franchising. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -3
What Is Franchising? n n Franchise—a business that markets a product/service developed by a franchisor. Franchising—the system of operating a franchise governed by a legal agreement. Franchisor—person or company who develops/sells a franchise and specifies the terms and methods of the agreement. Franchisee—owner of a franchise unit or territory rights. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -4
Main Types of Franchises n Product and trade-name franchising— licensing or production of the product, and use of the franchise trade mark, logo, or identity. n n Auto dealership Business-format franchising—purchase of an entire business model and system, including access to management expertise. n Circle K, Pizza Hut Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -5
Other Franchise Variations n n Master franchise—allows individuals and organizations to buy the right to sub-franchise within a defined geographic territory. Area franchise or multiple-unit franchise—gives exclusive rights to open franchisee-operated units within specific areas. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -6
Before You Invest…. n n n Pick a franchise you’re familiar with. Know the upfront costs. Know your restrictions. If you want to get rich, plan to expand. Read the fine print. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -7
Positive and Negative Aspects of Franchising Advantages n Start-up assistance n Instant recognition n Purchasing power n Advertising and promotional support n Operating guidelines n Record of success Drawbacks n Constraints on creativity and freedom n Costs n Standards and termination Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -8
Franchise Industry Structure n n n A few large franchisors, with worldwide franchisees, control most of the industry. Many smaller franchisors have local and regional franchisees. In 2012, U. S. franchises had revenues of $769 billion provided over 8. 1 million jobs. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -9
Additional Types of Franchises n n n Internet franchise—”virtual” franchise that is not dependent on a physical location. Conversion franchising—an existing stand -alone business or local chain becomes part of a franchise operation. Piggybacking or co-branding—two franchises share locations and resources. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -10
Legal Aspects of Franchising n n State and federal regulations govern franchises. Federal Trade Commission (FTC)— primary agency involved in oversight. Franchise Disclosure Document (FDD) —primary source of data for prospective franchisees regarding franchisors. Franchise agreement—legal contract between the parties in a franchise. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -11
Information Included in a FDD n n n n Overview and background Fees and costs Contractual obligations Territory Financial performance Data on existing units Financial statements and contracts Termination, renewal, and other policies Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -12
Information Included in a Franchise Agreement n n n Term of agreement (length of time) Standards of quality and performance Royalties Non-compete, “hold harmless, ” and integration clauses; choice of venue Clauses regarding termination, renewal, and transfer of the franchise Territories Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -13
Steps for Franchise Selection 1. 2. 3. 4. 5. Take time to reflect and engage core supporters. Identify potential franchises. Do research to narrow the list of options. Decide whether to use a franchise broker. Visit and observe franchise operator(s). Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -14
Steps for Franchise Selection (continued) 6. 7. 8. 9. 10. Request preliminary information from franchise companies. Perform due diligence on a specific franchise. Explore financing options. Make a decision, engage professional counsel, and negotiate an agreement. Make it work! Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -15
International Franchising n n Opportunities exist worldwide. The decision to go global is more complex than domestic franchising. n n Ethnic, cultural, and religious diversity impact business format and operations. Policies must be altered for differences in governing law and custom. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2 -16
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