Beruflich Dokumente
Kultur Dokumente
A solid training program. One of the most valuable components of a franchise sys-
tem is the training that it offers franchisees. The system should be relatively easy to
teach.
A positive relationship with franchisees. The most successful franchises are those
that see their franchisees as partners . . . and treat them accordingly.
The UFOC covers the 23 items discussed in the previous section and includes a copy
of the companys franchise agreement and any contracts accompanying it. Although the
law requires a UFOC to be written in plain English rather than legalese, it is best to have
an attorney experienced in franchising to review the UFOC and discuss its provisions
with you. Watch for clauses that give the franchiser absolute control and discretion. The
franchise contract summarizes the details that will govern the franchiserfranchisee
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 207
relationship over its life. It outlines exactly the rights and the obligations of each party and
sets the guidelines that govern the franchise relationship. Because franchise contracts typ-
ically are long term (50 percent run for 15 years or more), it is extremely important for
prospective franchisees to understand their terms before they sign them.
One of the most revealing items in the UFOC is the franchisee turnover rate, the rate
at which franchisees leave the system. If the turnover rate is less than 5 percent, the fran-
chise is probably sound. However, a franchise turnover rate approaching 20 percent is a
sign of serious, underlying problems in a franchise. Satisfied franchisees are not inclined
to leave a successful system.
Another important aspect of investigating a potential franchise is judging how well
you fit into the company culture. Unfortunately, the UFOC isnt much help here. The best
way to determine this is to actually work for a unit for a time (even if its without pay).
Doing so not only gives prospective franchisees valuable insight into the company culture,
but it also enables them to determine how much they enjoy the daily activities involved in
operating the franchise. Many people dont do enough research, digging into what a com-
pany is about, what they believe in, what theyre trying to accomplish, and whether they
will fit into the culture, says Kevin Hogan, a consultant who works with the Whattaburger
franchise.
30
Talk to Existing Franchisees
One of the best ways to evaluate the reputation of a franchiser is to interview (in person, if
possible) several franchise owners who have been in business at least one year about the
positive and the negative features of the agreement and whether the franchiser delivered
what was promised. Did the franchise estimate their start-up costs accurately? Do they get
the support the franchiser promised them? Was the training the franchiser provided help-
ful? How long did it take to reach the break-even point? Have they incurred any unex-
pected expenses? What risks are involved in purchasing a franchise? Has the franchise met
their expectations concerning sales, profitability, and return on investment? What is
involved in operating the franchise on a typical day? Knowing what they know now, would
they buy the franchise again?
208 SECTION II BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
franchisee turnover rate
the rate at which franchisees leave
a franchise system.
Ranch 1
Bob Phillips, a CPA looking to make a career change, wanted to make sure that he pur-
chased the right franchise, so he invested time poring over the UFOCs he had collected
from the dozen franchises that interested him. Rather than rely on the documents alone
to judge the franchises, Phillips made calls to franchisees that he randomly selected from
the lists included in the UFOCs (item 20). His conversations with franchisees convinced
him that Ranch 1, a chain of fast food grilled chicken stores, was the best choice for him.
Almost every one wanted a second location, he says. Thats indicative of a healthy
franchise system. Phillips is convinced that his thorough research led him to the right
franchise. Today he owns two Ranch 1 franchises that generate more than $2 million in
sales, and he plans to open eight more outlets within three years.
31
Interviewing past franchisees to get their perspectives on the franchiserfranchisee
relationship is also helpful. Why did they leave? Franchisees of some companies have
formed associations, which might provide prospective franchisees with valuable informa-
tion. Other sources of information include the American Association of Franchisees and
Dealers, the American Franchise Association, and the International Franchise Association.
Ask the Franchiser Some Tough Questions
Take the time to ask the franchiser questions about the company and its relationship with
its franchisees. You will be in this relationship a long time, and you need to know as much
about it as you possibly can beforehand. What is its philosophy concerning the relation-
ship? What is the company culture like? How much input do franchisees have into the sys-
tem? What are the franchises future expansion plans? How will they affect your franchise?
Are you entitled to an exclusive territory? Under what circumstances can either party
terminate the franchise agreement? What happens if you decide to sell your franchise in
the future? Under what circumstances would you not be entitled to renew the agreement?
What kind of earnings can you expect? (If the franchiser made no earnings claims in item
19 of the UFOC, why not?) Does the franchiser have a well-formulated strategic plan?
How many franchisees own multiple outlets? (A significant percentage of multiple-unit
franchisees is a good sign that a franchises brand name and business system are strong.)
Has the franchiser terminated any franchisees contracts? If so, why? Have any franchisees
failed? If so, why? How are disputes between the franchiser and franchisees settled?
Make Your Choice
The first lesson in franchising is, Do your homework before you get out your checkbook.
Once you have done your research, you can make an informed choice about which fran-
chise is right for you. Then it is time to put together a solid business plan that will serve as
your road map to success in the franchise you have selected. The plan is also a valuable
tool to use as you arrange the financing for your franchise.
Appendix A at the end of this chapter offers a checklist of questions a potential fran-
chisee should ask before entering into any franchise agreement.
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 209
Select the Ideal Franchise
For You!
After working extra hours and many weekends as a
buyer in the retail industry, Gina Frerich began to think
that she should be the beneficiary of her hard work
rather than some corporate giant. She was confident
that her work ethic and business experience would help
her succeed in business, but because she did not know
how to launch a business from scratch, Frerich began
looking at franchises as the gateway to business owner-
ship. Franchises already have the proven product, they
do marketing, and, [sometimes] they provide a lot of
training and support, she says. Following is a chronicle
of how Frerich made her franchise selection and lessons
that every prospective franchisee can learn from her
experience.
Lesson 1. Dont be in a rush; start with a
self-evaluation and then research the
most suitable franchise opportunities
thoroughly. After examining the activities and
work that she enjoyed most, Frerich decided that
she did not want a franchise in the clothing or
fashion business. Over the course of a year, she
and her husband, Kevin, considered their franchise
options. Frerich did not rush into a decision; she
and Kevin spent more than two years studying and
researching before narrowing their choice down to
an ice cream franchise.
Lesson 2. Use the power of the internet in
your research. From their New Jersey home, the
Frerichs used the Internet to research several fran-
chise operations in the retail ice cream industry.
Based on the research, Gina was intrigued by the
Gina Frerich evaluated many franchise options before deciding to
purchase a Stone Cold Creamery francise. What steps should
entrepreneurs who are considering buying a franchise take to make
sure their choice is the right one?
210 SECTION II BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Cold Stone Creamery franchise, a retail ice cream
shop that features freshly made ice cream to which
customers can add a multitude of toppings.
Because the chain had not yet established any out-
lets in the New Jersey area, Frerich did almost all of
her preliminary research online. It wasnt until she
was visiting family in San Diego that she actually
went into a Cold Stone Creamery franchise and
tasted the product. That visit confirmed all of her
research about the franchise, clinching the deci-
sion. I called my husband and said, You know
that Cold Stone [concept] we were looking at? I
just had it, and its amazing super-premium ice
cream. It was so good.
Lesson 3. Review the Uniform Franchise
Offering Circular (UFOC) with the help of
an experienced attorney. Frerich found the
franchisers UFOC to be an extremely useful, com-
prehensive document. Poring over the document
alone can be frustrating, however, because it cov-
ers so much. The typical UFOC is about the size
of a telephone book, says Eric Karp, an attorney
who teaches franchising courses at Babson
College. It is enormously complex because it is so
multifaceted. Karp says that some franchisees are
so overwhelmed by the size of the UFOC that they
make the mistake of not reading it at all.
Lesson 4. Dont be shy about asking LOTS
of questions. When Frerich returned from San
Diego, she contacted the Cold Stone Creamery
headquarters in Scottsdale, Arizona, and asked
plenty of questions. She was excited to hear that
the company was about to open a flagship store in
New York Citys Times Square. Frerich thought that
opening this high-profile store would increase the
awareness of the Cold Stone Creamery brand
name in the Northeast, benefiting any stores that
she might open in nearby New Jersey. She submit-
ted her official application to become a Cold Stone
Creamery franchisee.
In the meantime, of course, the franchiser was eval-
uating Frerich to make sure that she met the com-
panys criteria for its franchisees. The Creamery is
very selective [to] whom they award franchises,
she explains. They had to make sure it was the
right fit.
Lesson 5. Talk to existing franchisees
about what its like to operate a
franchise. Frerich was able to attend the Cold
Stone Creamery annual franchise convention, a
gathering of franchisees from all across the
country. The convention was a prime opportunity
for Frerich to spend a week talking to lots of vet-
eran franchisees about the advantages and the
disadvantages of owning and operating a Cold
Stone Creamery franchise. It was one of the
greatest experiences throughout this adventure,
she says.
Lesson 6. Take an active role in the
training program. After attending the
convention, Frerich enrolled in the franchisers Ice
Cream University in Scottsdale, where she spent
two weeks immersed in the details of making ice
cream and running a successful franchise. The
course involved both classroom instruction and
hands-on experience operating a real store. Most
evenings she spent studying for the final exam,
which paid off when Frerich made the highest
score on the exam, garnering her Scoopa Cum
Laude status. Franchisees must recognize that
they are paying the franchiser to train them to
operate their outlets successfully and it is their
responsibility to make the most of the opportu-
nity to learn.
Lesson 7. Utilize the franchisers
experience and support. Smart franchisees
use their franchisers experience to their benefit.
For instance, Stone Cold Creamery helped Frerich
with one of the most important tasks in retail
operations: finding an ideal location for her store.
She also drew on the franchisers support when it
came to hiring and training her staff.
Despite Frerichs thorough analysis, research, and
preparation, opening day for her franchise brought
unexpected challenges. A walk-in freezer went into
defrost mode and refused to come out, posing a huge
threat to the stores inventory of freshly made ice cream.
Despite the glitch, Frerichs grand opening was a suc-
cess, as is her store, whose sales exceeded the chains
average unit volume of $375,000 within two years.
Although some days are stressful, Frerich believes that
franchising was the right choice for her. In fact, she
already has opened two more Stone Cold Creamery
franchises, one in Madison and the other in Summit,
New Jersey.
Sources: Adapted from Franchisee Profiles, Cold Stone Creamery,
http://www.coldstonecreamery.com/images/news/Franchisee_Profiles_
737.pdf; Anne Fisher, Risk Reward, FSB, December 2005/January
2006, pp. 4561; Nichole L. Torres, The Inside Scoop, Entrepreneur,
January 2005, pp. 96102.
Trends Shaping Franchising
Franchising has experienced three major growth waves since its beginning. The first wave
occurred in the early 1970s when fast food restaurants used the concept to grow rapidly.
The fast food industry was one of the first to discover the power of franchising, but other
businesses soon took notice and adapted the franchising concept to their industries. The
second wave took place in the mid-1980s as the U.S. economy shifted heavily toward the
service sector. Franchises followed suit, springing up in every service business imaginable
from maid services and copy centers to mailing services and real estate. The third wave
began in the early 1990s and continues today. It is characterized by new, low-cost fran-
chises that focus on specific market niches. In the wake of major corporate downsizing and
the burgeoning costs of traditional franchises, these new franchises allow would-be entre-
preneurs to get into proven businesses faster and at lower costs. These companies feature
start-up costs in the $2,000 to $250,000 range and span a variety of industriesfrom leak
detection in homes and auto detailing to daycare and tile glazing.
Other significant trends affecting franchising include the following.
Changing Face of Franchisees
Franchisees today are better educated, are more sophisticated, have more business acumen,
and are more financially secure than those of just 20 years ago. Franchising is attracting
skilled, experienced businesspeople whose goal is to own multiple outlets that cover entire
states or regions. Many of them are former corporate managerseither corporate castoffs
or corporate dropoutslooking for a new start on a more meaningful and rewarding
career. They have the financial resources, management skills and experience, and motiva-
tion to operate their franchises successfully.
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 211
LEARNING OBJECTIVES
5. Outline the major trends
shaping franchising.
Bevinco
After spending 23 years with a large financial services company, Marc Weinbergs job was
eliminated in a corporate restructuring move. Rather than view the layoff as a devastating
blow, however, Weinberg saw it as an opportunity to fulfill his dream of operating a fran-
chise. I didnt want to start a new business from scratch, Weinberg says. After research-
ing his options, Weinberg settled on a Bevinco franchise, a business that helps restaurants
and bars maintain control over their beverage inventories and the cash generated from
beverage sales. After eight years, Weinbergs franchise has become so successful that the
Bevinco has enlisted him to help other franchisees operate their businesses. Owning a
franchise is terrific, he says. I get to reap the rewards of my own work instead of hav-
ing to contribute them all to the company.
32
Multiple-Unit Franchising
Twenty years ago, the typical franchisee operated a single outlet. Today, however, modern
franchisees increasingly have as a goal operating multiple franchise units. In multiple-unit
franchising (MUF), a franchisee opens more than one unit in a broad territory within a
specific time period. It is no longer unusual for a single franchisee to own 25, 75, or even
100 units. According to FRANDATA, about 11 percent of franchisees operate multiple
units, and that number is expected to grow rapidly over the next several years.
33
Franchisers are finding that it is far more efficient in the long run to have one well-trained
franchisee operate a number of units than to train many franchises to operate that same
number of outlets. A multiple-unit strategy also accelerates a franchises growth rate. For
instance, to reach its goal of adding 5,000 new outlets within five years, Allied Domecq
Quick Service Restaurants, the company that sells Baskin-Robbins, Dunkin Donuts, and
Togos franchises, began recruiting multiple-unit franchisees in 17 major markets in the
United States. Many of the franchisees the company selected were existing franchisees
looking to expand their businesses, but others were newcomers to the chain.
34
The popularity of multiple-unit franchising has paralleled the trend toward increas-
ingly experienced, sophisticated franchisees, who set high performance goals that a single
outlet cannot meet. The typical multiple-unit franchisee owns between three and six units,
but some franchisees own many more.
multiple-unit franchising
(MUF)
a method of franchising in which a
franchisee opens more than one
unit in a broad territory within a
specific time period.
Although operating multiple units offers advantages for both franchisers and fran-
chisees, there are dangers. Operating multiple units requires franchisers to focus more
carefully on selecting the right franchiseesthose who are capable of handling the addi-
tional requirements of multiple units. The impact of selecting the wrong franchise owners
is magnified when they operate multiple units and can create huge headaches for the entire
chain. Franchisees must be aware of the dangers of losing their focus and becoming dis-
tracted if they take on too many units. In addition, operating multiple units means more
complexity because the number of business problems franchisees face also is multiplied.
International Opportunities
One of the major trends in franchising is the internationalization of American franchise
systems. Increasingly, franchising is becoming a major export industry for the United
States. Franchising is strong overseas, says an executive at the International Franchise
Association. The number of U.S. franchise companies expanding outside the U.S. border
is growing steadily.
36
U.S. franchises are moving into international markets to boost sales
and profits as the domestic market becomes saturated. More than 500 U.S.-based franchis-
ers now have an international presence, and more domestic franchisers are looking to
expand abroad. The International Franchise Association reports that over the last decade,
nearly half of all units established by U.S.-based franchisers were opened outside of the
United States.
37
For example, in 1980, McDonalds had restaurants in 28 countries; today,
the company operates more than 10,000 outlets in 119 nations. Canada is the primary mar-
ket for U.S. franchisers, with Mexico, Japan, and Europe following. These markets are
most attractive to franchisers because they are similar to the U.S. marketrising personal
incomes, strong demand for consumer goods, growing service economies, and spreading
urbanization.
As they venture into foreign markets, franchisers have learned that adaptation is one
key to success. Although a franchises overall business format may not change in foreign
markets, some of the details of operating its local outlets must. For instance, fast-food
chains in other countries often must make adjustments to their menus to please locals
palates. In Japan, McDonalds (known as Makudonarudo) outlets sell teriyaki burgers,
rice burgers, and katsu burgers (cheese wrapped in a roast pork cutlet topped with katsu
sauce and shredded cabbage) in addition to their traditional American fare. In the
Philippines, the McDonalds menu includes a spicy Filipino-style burger, spaghetti, and
chicken with rice. In China, KFC quickly learned that residents were not interested in cole
slaw, so the company dropped the item from its menu and added local delicacies such as
shredded carrots, fungus, and bamboo shoots.
38
As Chinas economy continues to grow and its capital markets expand, increasing
numbers of franchisers are opening locations there. Currently, more than 1,900 franchise
systems operate some 82,000 outlets in China, an average of 43 units per chain (still far
below the average of 540 units per chain in the United States).
39
Fast-growing Subway is
the third largest U.S.-based fast food chain in China behind McDonalds and KFC. Known
as Sai Bei Wei (which translates as tastes better than others in Mandarin), Subway has
learned the importance of patience in building a franchise presence in challenging interna-
tional markets. When the company opened its first outlet in China, managers had to print
212 SECTION II BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Buffalo Wild Wings
After working as executive vice-president of marketing for Wendys and then operating
his own advertising agency for 18 years, Bill Welter moved to Las Vegas, Nevada. When
he arrived, he noticed the absence of his favorite restaurant back East, Buffalo Wild
Wings, a franchise with which he had become familiar while working at Wendys. Sensing
an opportunity, Welter investigated the franchise and the local market thoroughly and, at
age 52, decided to launch a new career as a Buffalo Wild Wings franchisee. Welter pur-
chased the license for the entire Las Vegas area and has already opened six franchises in
the area with plans to open four more within the next few years. The most satisfying
thing to me, says Welter, is to wear a Buffalo Wild Wings shirt anywhere in this town,
and people come up and say, Thats my favorite place. That means more to me than
anything.
35
signs explaining how to order a sandwich. Sales of tuna salad were dismal because resi-
dents, accustomed to seeing their fish whole, did not believe the salad was made from fish
at all. In addition, because Chinese diners do not like to touch their food, many of them
held their sandwiches vertically, peeled the paper wrapper away gradually, and ate the con-
tents as they would eat a banana!
40
Countries that only recently began welcoming the free market system are turning to
franchising to help them move toward a market economy. Some countries of Eastern
Europe, including Hungary, Poland, and Yugoslavia, are attracting franchises. Even Russia
is fertile ground for franchising. McDonalds has scored a hit with its 700-seat restaurant in
Moscow. Despite being one of the largest McDonalds outlets in the world, it is not uncom-
mon to see a line of hungry customers winding along busy Pushkin Square, waiting to get
in to purchase a Big Mac. Establishing franchises in these countries requires patience,
however. Lack of capital, archaic infrastructure, and a shortage of hard currencies mean
that profits are slow in coming. Most franchisers recognize the difficulties involved in
developing franchises in foreign markets and start slowly.
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 213
Since its beginning in the United States more than
125 years ago, franchising has become an important
part of the both the U.S. and the global economy. As
franchisers have found it increasingly difficult to con-
tinue to wring impressive growth rates from the domes-
tic market, they have begun to export their franchises to
international markets, including those with developing
economies. Indeed, franchising is ideally suited for
developing economies because it allows people with
limited business experience and financial resources to
become part of an established business. China, with a
population of 1.3 billion people and what is potentially
the largest consumer market in the world, is becoming
a target for many franchisers. Because the Chinese retail
sector is predicted to grow consistently at 8 to 10 per-
cent a year through 2010, many experts are calling
China the most important consumer market of the
twenty-first century.
Franchising is relatively new to China, but fast food
franchisers see a bright future there because the fast-
food industry is in its infancy and is growing very fast.
KFC (formerly Kentucky Fried Chicken) established the
first outlet in 1987, but it was a company-owned store
rather than a true franchise. The first franchised KFC
store opened in the city of Xian in 1993. Yum! Brands,
the owner of KFC, Pizza Hut, and other franchises, has
more than 1,200 KFC and 120 Pizza Hut restaurants in
China. Were the number one brand in China, says
Yum! Brands CEO David Novak. KFC makes almost as
much money in China today as it makes in the U.S.
McDonalds entered China in 1992 when it opened
a store in Beijing as part of a joint venture with a local
Chinese company. Working with this local partner,
McDonalds has expanded to more than 600 locations
across China. Meng Sun, a Chinese national who took a
part-time job at a McDonalds while working on her
MBA at the University of Calgary in Canada, opened
McDonalds first franchised store in 2004 in Tianjin, a
city of 10 million people about 70 miles southeast of
Beijing. Meng Sun used $360,000 (about three million
yuan) she had saved from working as a financial consul-
tant to open her franchised store. I thought it was a
very good start for an aspiring entrepreneur, she says
of her busy mall-based restaurant.
Both Yum! Brands and McDonalds have expanded
their franchising operations in China slowly, as have
most other successful franchisers. Jim Bryant, an inter-
national development manager for Subway, the sand-
wich franchise, says that when he started developing
franchises in China in 1995, there was no word in the
Chinese language for franchise. (Today, there is a
Chinese word for franchisejia meng, which
roughly translates into person joins group of other
Franchisers Forge New Ground in China
214 SECTION II BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
people.) U.S. franchisers are anxious to tap into the
knowledge of the nuances of doing business in the
diverse market segments that native Chinese fran-
chisees have developed. They understand that intimate
knowledge of local markets is key to their operations
success in China. Many U.S.-based franchisers say that
they receive inquiries daily from people interested in
opening franchises in China.
Some aspects of establishing franchises in China are
no different from selling them in the United States.
Finding the right businesspeople to become franchisees
is a top priority, as is selecting the best locations. For
instance, both KFC and McDonalds require prospective
franchisees to spend at least one year working at every
position in an existing restaurant. McDonalds sends its
Chinese franchisees to a Hong Kong branch of its
famous Hamburger University, where students learn all
of the aspects of running successful outlets. Hamburger
University resembles a business school; students sit in
high-tech classrooms and analyze case studies in break-
out groups. Unlike a business school, however, this uni-
versity includes a mock restaurant, where students get
hands-on training. Instructors focus on teaching
prospective franchisees to think creatively and analyti-
cally and to smile and be cheerful, skills they dont nor-
mally learn in Chinese universities and companies. U.S.
franchisers operating in China know that it will take
time for their investments to come to fruition, but they
believe the payoffs will be worth the wait. We are
planting the seeds for a bigger future, says Sam Su,
president of Yum Restaurants China.
1. Describe the opportunities and the challenges
franchisers face when entering emerging markets
such as China.
2. Use the Web as a resource to develop a list of at
least five suggestions that will help new franchisers
looking to establish outlets in China.
Sources: Adapted from Steven Gray and Geoffrey A. Fowler, Chinas
New Entrepreneurs, Wall Street Journal, January 25, 2003, pp. B1,
B4; Stat-USA, U.S. Foreign Commercial Service, Franchising
Industry in China, http://www.buyusainfo.net/docs/x_5566195.pdf;
Carlye Adler, How China Eats a Sandwich, Fortune, March 21,
2005, pp. 210[B]210[D]; Julia Boorstin, Yum Isnt Chicken of
Chinaor Atkins, Fortune, March 8, 2004, p. 50.
Smaller, Nontraditional Locations
As the high cost of building full-scale locations continues to climb, more franchisers are
searching out nontraditional locations in which to build smaller, less expensive outlets.
Based on the principle of intercept marketing, the idea is to put a franchises products or
services directly in the paths of potential customers, wherever that may be. Locations
within locations have become popular. Franchises are putting scaled-down outlets on col-
lege campuses, in high school cafeterias, in sports arenas, in hospitals, on airline flights,
and in zoos. St. Louis-based Pizzas of Eight already has outlets inside convenience stores,
supermarkets, and bowling alleys and plans to open others in video stores.
41
Many fran-
chisees have discovered that smaller outlets in these nontraditional locations generate
nearly the same sales volume as full-sized outlets at just a fraction of the cost!
Dunkin Donuts
Steve Siegel, owner of 35 Dunkin Donuts shops in the Boston area, recently began
branching out into small, nontraditional locations where pedestrian traffic counts are
high. One of his most profitable spots measures just 64 square feet, but because it is in a
business district filled with office workers, it generates a high volume of sales. Dunkin
Donuts also has an agreement with Wal-Mart to open outlets inside some of the giant
retailers stores.
42
intercept marketing
the principle of putting a
franchises products or services
directly in the paths of potential
customers, wherever they may be.
Locations that emphasize convenience by being close to their customers will be a key to
continued franchise growth in the domestic market.
Conversion Franchising
The recent trend toward conversion franchising, in which owners of independent busi-
nesses become franchisees to gain the advantage of name recognition, will continue. One
study reports that 72 percent of franchisers in North America use conversion franchising as
conversion franchising
a franchising trend in which
owners of independent businesses
become franchisees to gain the
advantage of name recognition.
a growth strategy.
43
In a franchise conversion, the franchiser gets immediate entry into new
markets and experienced operators; franchisees get increased visibility and often a big
sales boost. It is not unusual for entrepreneurs who convert their independent stores into
franchises to experience an increase of 20 percent or more in sales because of the instant
name recognition the franchise offers. The biggest force in conversion franchising has
been Century 21, the real estate sales company.
Master Franchising
A master franchise (or subfranchise) gives a franchisee the right to create a semi-inde-
pendent organization in a particular territory to recruit, sell, and support other franchisees.
Amaster franchisee buys the right to develop subfranchises within a broad geographic area
or, sometimes, an entire country. Subfranchising turbocharges a franchisers growth.
Many franchisers use it to open outlets in international markets more quickly and effi-
ciently because the master franchisees understand local laws and the nuances of selling in
local markets. For instance, a master franchisee with TCBY International, a yogurt fran-
chise, has opened 21 stores in China and Hong Kong. Based on his success in these mar-
kets, the company has sold him the master franchise in India.
44
Piggybacking (or Combination or Multibranded Franchising)
Some franchisers also are discovering new ways to reach customers by teaming up with
other franchisers selling complementary products or services. A growing number of com-
panies are piggybacking outletscombining two or more distinct franchises under one
roof. This buddy system approach works best when the two franchise ideas are compat-
ible and appeal to similar customers. For example, Yum! Brands, whose stable of fran-
chises includes Taco Bell, KFC, Pizza Hut, A&W, and Long John Silver, is building hun-
dreds of combination outlets, a concept that has proved to be highly successful. About 15
percent of the companys restaurants involve multibranding, with two or more concepts in
the same location. We find customers prefer a double-branded concept to a single brand
six to one, says Yum! Brands CEO David Novak.
45
Properly planned, piggybacked franchises can magnify many times over the sales and
profits of individual, self-standing outlets. One Baskin Robbins franchisee saw his sales
climb 25 percent when he added a Blimpie Subs and Salads franchise to his existing ice
cream shop. Another enterprising franchisee who combined Shell Oil (gas station),
Charleys Steakery (sandwich shop), and TCBY (frozen yogurt) franchises under one roof
in Columbus, Ohio, says that sales are running 10 percent more than the three outlets
would generate in separate locations.
46
Serving Dual-Career Couples and Aging Baby Boomers
Now that dual-career couples have become the norm, especially among baby boomers, the
market for franchises offering convenience and time-saving devices is booming.
Customers are willing to pay for products and services that will save them time or trouble,
and franchises are ready to provide them. Franchisees of Around Your Neck go into the
homes and offices of busy male executives to sell mens apparel and accessories ranging
from shirts and ties to custommade suits. Other areas in which franchising is experiencing
rapid growth include home delivery of meals, house cleaning services, continuing educa-
tion and training (especially computer and business training), leisure activities (such as
hobbies, health spas, and travel-related activities), products and services aimed at home-
based businesses, and health care.
Conclusion
Franchising has proved its viability in the U.S. economy and has become a key part of the
small business sector because it offers many would-be entrepreneurs the opportunity to
own and operate a business with a greater chance for success. Despite its impressive
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 215
master franchise
a franchise that gives a franchisee
the right to create a semi-
independent organization in a
particular territory to recruit, sell,
and support other franchisees.
piggybacking
a method of franchising in which
two or more franchises team up to
sell complementary products or
services under one roof.
216 SECTION II BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Chapter Summary by Learning Objectives
1. Describe the three types of franchising: trade
name, product distribution, and pure.
Trade name franchising involves a franchisee purchasing
the right to become affiliated with a franchisers trade name
without distributing its products exclusively. Product distri-
bution franchising involves licensing a franchisee to sell
products or services under the franchisers brand name
through a selective, limited distribution network.
Pure franchising involves a selling a franchisee a com-
plete business format.
2. Explain (A) the benefits and (B) the drawbacks of
buying a franchise.
Franchises offer many benefits: management training and sup-
port; brand name appeal; standardized quality of goods and
services; national advertising programs; financial assistance;
proven products and business formats; centralized buying
power; territorial protection; and a greater chance of success.
Franchising also suffers from certain drawbacks: fran-
chise fees and profit sharing; strict adherence to standard-
ized operations; restrictions on purchasing; limited product
lines; unsatisfactory training programs; market saturation;
and less freedom.
3. Explain the laws covering franchise purchases.
The Federal Trade Commission (FTC) enacted the Trade
Regulation Rule in 1979, which requires all franchisers to
disclose detailed information on their operations at the
first personal meeting or at least 10 days before a fran-
chise contract is signed, or before any money is paid. The
FTC rule covers all franchisers. The Trade Regulation
Rule requires franchisers to provide information on 23
topics in their disclosure statements. Seventeen states
have passed their own franchise laws requiring franchisers
to provide prospective franchisees a Uniform Franchise
Offering Circular (UFOC).
4. Discuss the right way to buy a franchise.
The following steps will help you make the right franchise
choice: Evaluate yourself; research your market; consider
your franchise options; get a copy of the franchisers
UFOC; talk to existing franchisees; ask the franchiser some
tough questions; make your choice.
5. Outline the major trends shaping franchising.
Key trends shaping franchising today include the changing
face of franchisees, international franchise opportunities,
smaller, nontraditional locations, conversion franchising,
multiple-unit franchising, master franchising, and piggy-
backing (or combination franchising).
Discussion Questions
1. What is franchising?
2. Describe the three types of franchising and give an
example of each.
3. Discuss the advantages and the limitations of fran-
chising for the franchisee.
4. Why might an independent entrepreneur be dissat-
isfied with a franchising arrangement?
5. What kinds of clues should tip off a prospective
franchisee that he or she is dealing with a disrep-
utable franchiser?
6. What steps should a potential franchisee take
before investing in a franchise?
7. What is the function of the FTCs Trade Regulation
Rule? Outline the protection the Trade Regulation
Rule gives all prospective franchisees.
8. Describe the current trends in franchising.
9. One franchisee says, Franchising is helpful
because it gives you somebody [the franchiser] to
get you going, nurture you, and shove you along a
little. But, the franchiser wont make you success-
ful. That depends on what you bring to the busi-
ness, how hard you are prepared to work, and how
committed you are to finding the right franchise for
you. Do you agree? Explain.
10. What comments would you make to a highly cre-
ative and innovative person who was considering
purchasing a franchise?
growth rate, the franchising industry still has a great deal of room to grow. Franchising is
really small business at its best, says Don DeBolt, president of the International Franchise
Association.
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 217
Business Plan Pro
Most franchise systems will
require you to submit a business
plan with the application process.
In many cases, the franchiser will specify what the business
plan should include and may even require you follow an
established business plan outline. If you are planning to pur-
chase a franchise, investigate all of the application require-
ments. Determine the expectations regarding the content and
structure of the business plan that you are to submit. Find
out whether the franchiser has outlines or example plans or
whether a plan from another franchisee is available in any
form for your review.
Each year, Entrepreneur magazine ranks the top 500
franchise systems. Entrepreneur determines this ranking
based on financial strength and stability, growth rate and
size of the system, the number of years in business and
length of time franchising, start-up costs, litigation, per-
centage of terminations, and whether the company provides
financing.
47
The most recent ranking of the top 20 fran-
chises is as follows.
Rank Franchise Name Business Description Potential Start-up Cost
1 Subway Sandwiches and salads $70,000$220,000
2 Quiznos Sub Sandwiches and salads $71,700$251,100
3 Curves Womens fitness and weight loss center $38,400$53,500
4 The UPS Store Postal, business, communication $138,700$53,500
5 Jackson Hewitt Tax Service Tax preparation services $49,800$94,000
6 Dunkin Donuts Donuts and baked goods $179,000$1,600,000
7 Jani-King Commercial cleaning $11,300$34,100
8 RE/MAX International, Inc. Real estate $20,000$200,000
9 7-Eleven Inc. Convenience store Varies
10 Liberty Tax Service Income tax preparation services $42,300$52,400
11 Dominos Pizza LLC Pizza, breadsticks, buffalo wings $141,400$415,100
12 Pizza Hut Inc. Pizza $1,100,000$1,700,000
13 Sonic Drive In Restaurants Drive-in restaurant $710,000$2,300,000
14 Century 21 Real Estate LLC Real estate $11,700$522,500
15 Jan-Pro Franchising Intl Inc. Commercial cleaning $3,300$49,900
16 McDonalds Hamburgers, chicken, salads $506,000$1,600,000
17 ServiceMaster Clean Cleaning and disaster restoration $26,000$102,300
18 Kumon Math & Reading Supplemental education $10,000$30,000
19 Coldwell Banker Real Estate Real estate $23,500$490,500
20 Jiffy Lube International Inc. Fast oil change $214,000$273,000
Note the business category that dominates this list. Why do
you think this phenomenon occurs? Note the start-up costs
associated with each franchise. How do the start-up costs of
service companies compare to those of the other franchises?
Why does this only represent a portion of the revenue that
the franchise system will require from the franchisee?
Business Plan Exercises
On the Web
Go to http://www.prenhall.com/scarborough and click on
the Chapter 6 tab. Review the online franchise resources
that are available. One of those links is to The World
Franchise Directory. Click on that link and enter the first
letter of a familiar franchise, the letter S, for example.
The number of franchise systems, many of them with an
international presence, is staggering. Now, click on the
Sample Plan tab and review the sample franchise plan
included in this section. What unique characteristic do you
notice about this business plan compared to others you have
seen?
If you plan to purchase a franchise, visit the franchise
systems Web site and request information. In most cases,
you will respond to some initial questions to receive
detailed franchise information. As you proceed through the
process, note the specific questions regarding your sources
of capital. Your access to capital will be a major qualifica-
tion in determining whether you are franchise worthy in
addition to other criteria.
In the Software
If you plan to own a franchise and that franchise system has
specific business plan guidelines, modify the outline in
Business Plan Pro outline to match the franchises recom-
mendation. To view the outline in the left-hand navigation,
click on the Plan Outline icon or go to the View menu and
click on Outline. Then, right-click on each of those topics
that you need to change, move, or delete to meet the fran-
chises requirement. You may move topics up or down the
outline with the corresponding arrows. To change topics
from headings to subheadings, you Demote the topic.
When you Promote a topic, you move a subheading to the
left to a more dominant position.
Building Your Business Plan
Continue building your franchise business plan based on
that outline. Use the information and verbiage that is
familiar to the franchise system whenever possible. Your
plan may be one of dozens received that week, and you
want to demonstrate your knowledge, competence, and
credibility. Your franchise business plan can be a sales
tool to position you as an informed and attractive fran-
chise owner.
218 SECTION II BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Beyond the Classroom . . .
1. Visit a local franchise operation. Is it a trade name,
product distribution, or pure franchise? To what
extent did the franchisee investigate before invest-
ing? What assistance does the franchiser provide?
How does the franchisee feel about the franchise
contract he or she signed? What would he or she do
differently now?
2. Use the Web to locate several franchises that inter-
est you. Contact the franchisers and ask for their
franchise packages. Write a report comparing their
treatment of the topics covered by the Trade
Regulation Rule. Analyze the terms of their fran-
chise contracts. What are the major differences?
Are some terms more favorable than others? If you
were about to invest in the franchise, which terms
would you want to change?
3. Ask a local franchisee to approach his or her
regional franchise representative about leading a
class discussion on franchising.
4. Contact the International Franchise Association
(1350 New York Avenue, N.W., Suite 900,
Washington, D.C., 20005-4709; phone number 202
628-8000) for a copy of Investigate Before
Investing. Prepare a report outlining what a
prospective franchisee should do before buying a
franchise.
Appendix A. A Franchise Evaluation Checklist
You
1. Are you qualified to operate a franchise success-
fully? Do you have adequate drive, skills, experi-
ence, education, patience, and financial capacity?
Are you prepared to work hard?
2. Are you willing to sacrifice some autonomy in
operating a business to own a franchise?
3. Can you tolerate the financial risk? Would business
failure wipe you out financially?
4. Can you juggle multiple tasks simultaneously and
prioritize various projects so that you can accom-
plish those that are most important?
5. Are you genuinely interested in the product or ser-
vice you will be selling? Do you enjoy this kind of
business? Do you like to sell?
6. Do you enjoy working with and managing people?
Are you a team player?
7. Will the business generate enough profit to suit you?
8. Has the franchiser investigated your background
thoroughly enough to decide whether you are qual-
ified to operate the franchise?
9. What can this franchiser do for you that you cannot
do for yourself?
The Franchiser and the Franchise
1. Is the potential market for the product or service
adequate to support your franchise? Will the prices
you charge be in line with the market?
2. Is the markets population growing, remaining
static, or shrinking? Is the demand for your
product or service growing, remaining static,
or shrinking?
3. Is the product or service safe and reputable?
4. Is the product or service a passing fad, or is it a
durable business idea?
5. What will the competition, direct or indirect, be in
your sales territory? Do any other franchisees oper-
ate in this general area?
6. Is the franchise international, national, regional, or
local in scope? Does it involve full- or part-time
involvement?
7. How many years has the franchiser been in opera-
tion? Does it have a sound reputation for honest
dealings with franchisees?
8. How many franchise outlets now exist? How many
will there be a year from now? How many outlets
are company-owned?
9. How many franchises have failed? Why?
10. How many franchisees have left the system within
the last year? What were their reasons for leaving?
11. What service and assistance will the franchiser pro-
vide? What kind of training program does the fran-
chiser offer? How long does it last? What topics
does it cover? Does the franchiser offer ongoing
assistance and training?
12. Will the franchise perform a location analysis to
help you find a suitable site? If so, is there an extra
charge for doing so?
13. Will the franchiser offer you exclusive distribution
rights for the length of the agreement, or may it sell
to other franchises in this area?
14. What facilities and equipment are required for the
franchise? Who pays for construction? Is there a
lease agreement?
15. What is the total cost of the franchise? What are
the initial capital requirements? Will the franchiser
provide financial assistance? Of what nature? What
is the interest rate? Is the franchiser financially
sound enough to fulfill all its promises?
16. How much is the franchise fee? Exactly what does
it cover? Are there any ongoing fees? What addi-
tional fees are there?
17. Does the franchiser provide an estimate of expenses
and income? Are they reasonable for your particular
area? Are they sufficiently documented?
18. How risky is the franchise opportunity? Is the
return on the investment consistent with the risks?
19. Does the franchiser offer a written contract that
covers all the details of the agreement? Have your
attorney and your accountant studied its terms and
approved it? Do you understand the implications of
the contract?
20. What is the length of the franchise agreement?
Under what circumstances can it be terminated? If
you terminate the contract, what are the costs to
you? What are the terms and costs of renewal?
21. Are you allowed to sell your franchise to a third
party? Does the franchiser reserve the right to
approve the buyer?
22. Is there a national advertising program? How is it
financed? What media are used? What help is pro-
vided for local advertising?
23. Once you open for business, exactly what support
will the franchiser offer you?
24. How does the franchise handle complaints from
and disputes with franchisees? How well has the
system worked?
The Franchisees
1. Are you pleased with your investment in this
franchise?
2. Has the franchiser lived up to its promises?
3. What was your greatest disappointment after get-
ting into this business?
4. How effective was the training you received in
helping you to run the franchise?
5. What are your biggest challenges and problems?
6. What is your franchises cash flow like?
7. How much money are you making on your
investment?
8. What do you like most about being a franchisee?
Least?
9. Is there a franchisee advisory council that repre-
sents franchisees?
10. Knowing what you know now, would you buy this
franchise again?
CHAPTER 6 FRANCHISING AND THE ENTREPRENEUR 219