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Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1
The Franchising
Boom!!!
Sales of $1.4 trillion annually from
virtually every product or service
imaginable
Franchise sales account for 50% of
total retail sales
Top 500 U.S. franchisers operate
more than 358,000 outlets with
sales of $400 billion worldwide
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 2
Global Franchising
52% of U.S. franchisers have
international outlets
Of the U.S. franchisers who operate
globally, 30% of their total outlets are
located in other countries
Hot markets: Europe and Pacific Rim
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 3
Franchising
Franchising – semi-independent business
owners pay fees and royalties to a parent
company in exchange for the right to sell its
products and services under the franchiser’s
trade name and often to use its business
format and system
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 4
Figure 6.2 The Franchising Relationship
Site selection Oversees and approves; may choose site Chooses site with franchiser’s approval
Products and services Determines product or service line Modifies only with franchiser’s approval
Purchasing Establishes quality standards; provides Must meet quality standards; must purchase
list of approved suppliers; may require only from approved suppliers; must purchase
franchisees to purchase from the franchisor from supplier if required
Advertising Develops and coordinates national ad Pays for national ad campaign; complies with
campaign; may require minimum level of local advertising requirements; gets franchisor
spending on local advertising approval on local ads
Quality control Sets quality standards and enforces them Maintains quality standards; trains employees
with inspections; trains franchisees to implement quality systems
Support Provides support through an established Operates business on a day-to-day basis with
business system franchiser’s support
Source: 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.
Types of
Franchising
Tradename
Product distribution
Pure (Business format)
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 6
Why Buy a Franchise?
Franchisees are buying the franchiser’s
experience
“Going into business for yourself but not by
yourself”
Franchisees get a proven business system and
avoid having to learn by trial-and-error
Before buying, ask: “What can a franchise do
for me that I cannot do for myself?”
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 7
Benefits of Franchising
Business system
Management training and support
Brand name appeal
“Cloning”
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 8
Benefits of Franchising
Financial assistance
Franchise Registry
Proven products and business
formats
Centralized buying power
Site selection and territorial
protection
Greater chance for success
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 9
Greater Chance for Success
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 10
Success Rate Comparison
10 0 %
90%
80%
70%
60%
50%
% F ra nc his e s S urv iv ing
40% % In de pe nde nt B us ine s s e s S urv iv ing
30%
20%
10 %
0%
Ne w 1 2 3 4 5 6 7 8 9 10
Ye a rs in B us ine s s
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 12
Drawbacks of Franchising
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 13
Drawbacks of Franchising
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 14
Ten Myths of Franchising
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 15
Ten Myths of Franchising
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 16
Ten Myths of Franchising
7. Anyone can be a satisfied, successful
franchise owner
8. Franchising is the cheapest way to get
into business for yourself
9. The franchiser will solve my business
problems for me; after all, that’s why I
pay an on-going royalty
10. Once I open my franchise, I’ll be able to
run things the way I want to
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 17
Franchising and the Law
Key tool for protection is the Uniform
Franchise Disclosure Document (UFDD)
Franchisers must deliver a copy of
UFDD before any offer or sale of a
franchise
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 18
Franchising and the Law
The UFDD contains information on 23
topics, including:
Franchiser’s business experience
Franchise fees and costs
Lawsuits involving the franchiser
Financial assistance available
Territorial protection granted
Restrictions on purchasing
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 19
Detecting Dishonest
Franchisers
Claims that the contract is “standard;
no need to read it”
Failure to provide a copy of the
required disclosure documents
Marginally successful prototype or no
prototype
Poorly prepared operations manual
Unsolicited testimonial from “a highly
successful franchisee”
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 20
Detecting Dishonest
Franchisers (Continued)
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 21
Detecting Dishonest
Franchisers (Continued)
No written documentation
High pressure sale
Claims to be exempt from federal
disclosure laws
"Get rich quick" schemes, promising
huge profits with minimal effort
Reluctance to provide a list of existing
franchisees
Evasive, vague answers to your
questions
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 22
How to Buy a Franchise
Preparation, common sense, and patience
are vital ingredients in choosing the right
franchise
Evaluate yourself - What do you like and
dislike?
Research the market
Consider your franchise options
Get a copy of the franchiser’s Uniform
Franchise Disclosure Document (UFDD) and
study it
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 23
What Should You Look
For?
A unique concept or marketing
approach
Profitability
A registered trademark
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 24
What Should You Look
For? (Continued)
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 25
How to Buy a Franchise
(Continued)
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 26
Table 4.4 Advantages and Disadvantages of Buying a New vs.
an Established Franchise
Pros Cons
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 28
Trends Shaping
Franchising
International opportunities
Global markets offer fast-growth
opportunities
Major markets: Canada, Mexico, Japan,
Europe
Key to success: Adaptation
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 29
Trends Shaping
Franchising
Internet franchises
Conversion franchising
72% of North American franchisers use
as a growth strategy
Multiple-unit franchising
34% of franchisees operate multiple
outlets (and growing)
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 30
Trends Shaping
Franchising
Master franchising
Piggybacking (or combination or multi-
branded franchising)
“Buddy system”
Serving aging baby boomers
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 31
Franchising as a Growth
Strategy
Issues to consider:
Is your business model replicable?
Have you developed an expansion plan?
Have you performed the necessary due
diligence?
Do you have proper legal guidance?
Initial cost to launch a franchise
business is $100,000 to $750,000
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 32
Franchising Web Sites
Entrepreneur’s Franchises and Opportunities
http://www.entrepreneur.com/franchiseoppor
tunities/index.html
Chapter 4 Franchising Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 34