ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT Chapter 7: Franchising and the Entrepreneur

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Copyright 2016 Pearson Education Inc 1 7-1 Section 2: The Entrepreneurial Journey Begins 7 Franchising and the Entrepreneur 7-2 Describe the three types of franchising: trade name, product

1 Copyright 2016 Pearson Education Inc Section 2: The Entrepreneurial Journey Begins 7 Franchising and the Entrepreneur 7-2 Describe the three types of franchising: trade name, product distribution, and pure. Explain the benefits of buying a franchise. Explain the drawbacks of buying a franchise. Understand the laws covering franchise purchases. Discuss the right way to buy a franchise. Outline the major trends shaping franchising

2 About 3,000 franchisors operate more than 770,000 outlets in the United States. Franchises generate more than $800 billion in annual sales and account for 4.1% of the U.S. GDP. Franchises employ 8.1 million workers in the United States in more than 300 major industries

Franchising: 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,

3 Franchising: 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. 7-7 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?

Trade-name: A franchisee purchases the right to use the franchisor s trade name without distributing particular products exclusively under the franchisor s name.

4 Trade-name: A franchisee purchases the right to use the franchisor s trade name without distributing particular products exclusively under the franchisor s name. Product distribution: A franchisor licenses a franchisee to sell its products under the franchisor s brand name and trademark through a selective, limited distribution network. Pure: A franchisor sells a franchisee a complete business format and system A business system Management training and support Start-up Ongoing Brand name appeal Cloning Standardized quality of goods and services

National advertising programs Franchisees contribute 1% to 5% of sales. Financial assistance About 20% of franchisors offer direct financial assistance to franchisees.

5 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 (continued from 7-13) Proven products and business formats Centralized buying power Site selection and territorial protection Important issue: Territorial encroachment Greater chance for success

6 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 (continued from 7-16) Strict adherence to standardized operations Restrictions on purchasing Approved suppliers only Limited product line Contract terms and renewal Average term = 10.3 years

7 Unsatisfactory training programs Market saturation Less freedom No independence Happy prisoners Franchising is the safest way to go into business because franchises never fail. 2. I ll be able to open my franchise for less money than the franchiser estimates. 3. The bigger the franchise organization, the more successful I ll be. 4. I ll use 80 percent of the franchiser s business system, but I ll improve upon by substituting my experience and know-how. 5. All franchises are the same I don t have to be a hands-on manager. I can be an absentee owner and still be very successful. 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 ongoing royalty fee. 10. Once I open my franchise, I ll be able to run things the way I want to

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

8 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 Evaluate yourself: What do you like and dislike? Research your market. Consider your franchise options. Get a copy of the Franchisor s FDD and read it! 7-23 Number of Franchisees from which Prospective Franchisees Solicit Information Before Selecting a Franchise

9 Unique concept or marketing approach Profitability Registered trademark Business system that works Solid training program Affordability Positive relationship with franchisees 7-25 (continued from 7-23) Evaluate yourself: What do you like and dislike? Research your market. Consider your franchise options. Get a copy of the Franchisor s FDD and read it! Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice Changing face of franchisees Minorities own 20.5% of all franchises compared to 14.2% of independent businesses. International opportunities Many franchises are focusing on international markets as a source of growth. Yum! earns 75% of its revenues from international franchises. McDonald s earns 70% of its sales internationally

10 Smaller, nontraditional locations Intercept marketing: putting a franchise s products or services directly in the paths of potential consumers, wherever they may be. Conversion franchising Owners of independent businesses become franchisees to gain the advantage of name recognition. 72% of North American franchisors use it as a growth strategy Refranchising Franchisors sell their company-owned outlets to franchisees. Multi-unit franchising IFA: 20% of franchise owners are multiple-unit owners. Typical multiple-unit franchises own five outlets Area development and master franchising Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time. Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees

Co-branding Aka piggyback or combination franchising: Two or more franchises team up to sell complementary products or services under one roof.

11 Co-branding Aka piggyback or combination franchising: Two or more franchises team up to sell complementary products or services under one roof Franchising: Is a key part of the small business sector Increases the chance of business success for the entrepreneur Growth continues

Forms of Ownership and Franchising. Chapter 4: Forms of Ownership & Franchising Copyright 2002 Prentice Hall Publishing Company

Forms of Ownership and Franchising 1 Factors Affecting the Choice Tax considerations Liability exposure Start-up capital requirements Control Business goals Management succession plans Cost of formation