This document discusses several topics related to franchising:
1. It explains what franchising is and how the business model works, including the two main types of franchise systems.
2. It describes the steps entrepreneurs can take to establish a franchise system, including selecting and developing effective franchisees.
3. It discusses the advantages and disadvantages of establishing a franchise system from the perspectives of both the franchisor and franchisee.
4. It outlines important considerations and steps involved for entrepreneurs interested in buying an existing franchise, including evaluating costs, finding the right franchise opportunity, and legal aspects of the franchise relationship.
2. 1. Explain franchising and how this form of business ownership works.
2. Describe steps entrepreneurs can take to establish a franchise system.
3. Become familiar with the advantages and disadvantages of establishing a
franchise system.
4. Describe actions and issues associated with a decision to buy a franchise.
5. Explain the steps an entrepreneur goes through to buy a franchise.
6. Identify and explain the various legal aspects associated with the franchise
relationship.
7. Discuss two additional issues—franchise ethics and international franchising—
entrepreneurs should think about when considering franchising.
Learning Objectives
3. What Is Franchising and How Does It Work?
Franchising
• The word franchise comes from an old dialect of French
and means “privilege” or “freedom.” Franchising has a long history.
In the Middle Ages
kings and lords granted
franchises to specific
individuals or groups to
hunt on their land or to
conduct certain forms
of commerce.
In the 1840s, breweries
in Germany granted
franchises to certain
taverns to be the
exclusive distributors of
their beer for the
region.
Many of the most
familiar franchises in
the United States,
including Kentucky Fried
Chicken (1952),
McDonald’s (1955), Burger
King (1955), Midas Muffler
(1956), and H&R Block
(1958), started in the post–
World War II era of the
1940s and 1950s.
Shortly after the U.S.
Civil War, the Singer
Sewing Machine
Company began
granting distribution
franchises for its
sewing machines and
pioneered the use of
written franchise
agreements.
Middle Ages 1840s Civil War 1950s
LO1: Explain franchising and how this form of business ownership works.
4. What Is Franchising?
Franchising
Franchising is a form of business organization in which a firm that already has a
successful product or service (franchisor) licenses its trademark and method of
doing business to another business or individual (franchisee) in exchange for a
franchise fee and an ongoing royalty payment.
5. Two Types of Franchise Systems
Product and Trademark Franchise Business Format Franchise
An arrangement under which the franchisor grants to the
franchisee the right to buy its products and use its trade
name.
An arrangement under which the franchisor provides a
formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
This approach typically connects a single manufacturer
with a network of dealers or distributors.
• For example, General Motors has established a
network of dealers that sell GM cars and use the GM
trademark in their advertising and promotions
• Other examples of product and trademark franchisors
include agricultural machinery dealers, soft drink
bottlers, and beer distributorships.
Fast-food restaurants, convenience stores, and motels are
well-known examples of business format franchises.
• Business format franchises are by far the most popular
form of franchising, particularly for entrepreneurial
firms
6. Business Format Franchises
Table 15.1 10 Industries in Which Business Format Franchises Are Used Prominently
1. Automotive
2. Business Services
3. Commercial and Residential Services
4. Food Retailing
5. Lodging
6. Personal Services
7. Quick Serve Restaurants
8. Real Estate
9. Retail Products & Services
10. Table/Full-Service Restaurants
7. Types of Franchise Agreements
Individual
Franchise Agreement
Area
Franchise Agreement
9. • When Is Franchising Most Appropriate?
• Franchising is most appropriate when a firm has a strong or potentially
strong trademark, a well-designed business method, and a desire to grow.
When to Franchise?
In some instances franchising is not appropriate.
It would be nearly impossible for
Walmart to find enough franchisees with
the financial capital and expertise to
open and successfully operate a
Walmart store.
Each individual Burger King store is
relatively small and policies and
procedures can be written for
almost any contingency.
In contrast, Walmart stores are
much larger, more expensive to
build, and more complex to run
compared to Burger King.
LO2: Describe steps entrepreneurs can take to establish a franchise system
11. Selecting and Developing Effective Franchisees
Qualities to Look for in Prospective Franchisees
• Good work ethic
• Ability to follow instructions
• Ability to operate with minimal supervision
• Team oriented
• Experience in the industry in which the
franchise competes
• Adequate financial resources and good credit
history
• Ability to make suggestions without becoming
confrontational or upset if the suggestions are
not adopted
• Ability to represent the franchisor in a positive
manner
12. Selecting and Developing Effective Franchisees
Ways Franchisors Can Develop Their Franchisees’ Potential
• Provide mentoring that supersedes routine
training
• Keep operating manuals up-to-date
• Keep product, services, and business systems
up-to-date
• Solicit input from franchisees to reinforce their
importance in the larger system
• Encourage franchisees to develop a franchise
association
• Maintain the franchise system’s integrity
14. Advantages and Disadvantage of Establishing
a Franchise System
There are two primary advantage of franchising.
• First, early in the life of an organization, capital is typically
scarce. Franchising helps a venture grow quickly because
franchisees provide the majority of the capital.
• Second, a concept called agency theory argues that for
organizations with multiple units, it is more effective for the
units to be run by franchisees than by managers who run
company-owned stores.
• The theory is that managers, because they are paid a
salary, may not be as committed to the success of their
individual units as franchisees, who are in effect business
owners.
LO3: Become familiar with the advantages and disadvantages of establishing a franchise system.
15. Advantages and Disadvantage of Establishing
a Franchise System
Advantages Disadvantages
• Rapid, low-cost market
expansion.
• Income from franchise fees and
royalties.
• Franchisee motivation.
• Access to ideas and suggestions.
• Cost savings.
• Increased buying power.
• Profit sharing.
• Loss of control.
• Friction with franchisees.
• Managing growth.
• Differences in required business
skills.
• Legal expenses.
Table 15.3 Advantages and Disadvantages of Franchising as a Method of Business Expansion
17. Buying a Franchise
• From the Franchisee’s Point of View
• Purchasing a franchise is an important business
decision involving a substantial financial
commitment.
• Potential franchise owners should strive to be as
well informed as possible before purchasing
a franchise and should be aware that it is often
legally and financially difficult to exit a franchise
relationship.
• Franchising may be a particularly good choice for
someone who wants to start a business but has no
prior business experience.
• Many franchise systems provide their
franchisees substantial training and support
• Some franchise organizations are designed to
provide their franchisees a part-time rather than a
full-time income e.g. e2 young engineers
LO4: Describe actions and issues associated with a decision to buy a franchise.
18. Is Franchising Right for You?
Answering the following questions will help determine if franchising is right for you:
• Are you willing to take orders? Franchisors are typically very particular about
how outlets operate.
• Are you willing to be part of a franchise “system” rather than be an
independent businessperson?
• How will you react if you make a suggestion to your franchisor and your
suggestion is rejected?
• What are you looking for in a business?
How hard do you want to work?
Entrepreneurs should weigh the possibility of purchasing a franchise
against the alternatives of buying an existing business or
launching their own venture from scratch
19. The Cost of a Franchise
Initial Franchise Fee
• The initial fee varies depending on the franchisor.
Capital Requirements
• The costs vary but may include the cost of buying real estate,
the cost of putting up a building, the purchase of inventory, and
the cost of obtaining a business license.
Continuing Royalty Payment
• Is usually around 5% of monthly gross income.
Advertising Fees
• Franchisees are often required to pay into a national or regional
advertising fund.
Other Fees
• Other fees may be charged for various activities, including:
- Training additional staff.
- Providing management expertise when needed.
- Providing computer assistance.
- Providing a host of other items or support services.
20. The Cost of a Franchise
Table 15.4 Initial Costs to the Franchisee of a Sample of Franchise Organizations
Franchise
Organization
Year Started
Franchising
Company-
Owned Units
Franchised
Units
Franchise
Fee
Ongoing
Royalty Fee
Total Initial
Investment
Anytime Fitness 2002 38 3,386 $19,000--
$37,500
$449-$549/month $80,020--$490,100
Budget Blinds 1994 0 1,087 $19,950 Varies $99,240–$202,070
Edible
Arrangements
2001 8 1,245 $30,000 5% $196,610--$327,810
Hampton Inn
Hotels
1984 1 2,148 $75,000 6% $4.2--$14.9 million
Liberty Tax
Service
1973 351 3,753 $40,000 14% $58,700--$71,900
Franchise
Organization
Year Started
Franchising
Company-
Owned Units
Franchised
Units
Franchise
Fee
Ongoing
Royalty Fee
Total Initial
Investment
Pinkberry 2006 33 242 $35,000 6% $310,842—$615,145
Play It Again Sports 1988 0 285 $25,000 5% $240,300--$397,200
Qdoba Mexican
Grill
1997 359 330 $30,000 5% $851,600--$1.13 million
The UPS Store 1980 0 4,910 $29,950 5% $159,224--$434,521
Wetzel’s Pretzels 1996 9 294 $35,000 7% $164,950--$405,850
Source: Based on Entrepreneur.com, www.entrepreneur.com (accessed March 21, 2017).
21. Finding a Franchise
• The most critical step in the early stages of
investigating franchise opportunities is for the
entrepreneur to determine the type of franchise
that is the best fit.
• Before buying a franchise, a potential franchisee
should imagine operating the prospective franchise
or, better yet, should spend a period of time working
in one of the franchisor’s outlets.
• Prospective franchisees should also consider
attending franchise opportunity shows that are held
periodically . There are also several excellent
franchise-focused individuals
and organizations that post on Twitter (online)
23. What to ask before
deciding to buy
a franchise ?
24. Questions to Ask before Buying a Franchise
Questions to Ask a Franchisor
• What is the background of the company and its performance
record?
• What is the company’s current financial status?
• What are the names, addresses, and phone numbers of
existing franchisees in my trade area?
• How do you train and mentor your franchisees?
• If at some point I decide to exit the franchise relationship, how
does the exit process work?
• In what ways do you work with a franchisee who is struggling?
Questions to Ask Current Franchisees
• How much does your franchise gross per year? How much does
it net? Are the procedures followed to make royalty payments to
the franchisee burdensome?
• Are the financial projections of revenues, expenses, and profits
that the franchisor provided me accurate in your judgment?
• Does the franchisor give you enough assistance in operating
your business?
• How many hours, on average, do you work per week?
• How often are you able to take a vacation?
• Have you been caught off-guard by any unexpected costs or
expectations?
• Does your franchisor provide you with ongoing training and
support?
• If you had to do it all over again, would you purchase a franchise
in this system? Why or why not?
Because of the risks involved in franchising, the selection of a franchisor should be a careful, deliberate process. One of the smartest
moves a potential franchise owner can make is to talk to current franchisees and inquire if they are making money and if they are
satisfied with their franchisor. Reflecting on how this approach helped ease her inhibitions about buying a franchise
25. Advantages and Disadvantages of Buying a Franchise
Advantages Disadvantages
• A proven product or service within an established
market.
• An established trademark or business system.
• Franchisor’s training, technical expertise, and
managerial expertise.
• An established marketing network.
• Franchisor’s ongoing support.
• Availability of financing.
• Potential for business growth.
• Cost of the franchise.
• Restrictions on creativity.
• Duration and nature of the commitment.
• Risk of fraud, misunderstandings, or lack of franchisor
commitment.
• Problems of termination or transfer.
• Poor performance on the part of other franchisees.
• Potential for failure.
Table 15.6 Advantages and Disadvantages of Buying a Franchise
26. Steps in Purchasing a Franchise
• The first rule of buying a franchise is
to avoid making a hasty decision.
• Owning a franchise is typically costly
and labor-intensive. As a result, the
purchase of a franchise should be a
careful, deliberate decision.
• Purchasing a franchise system is a
seven-step process.
Seven Steps in Purchasing a Franchise
LO5: Explain the steps an entrepreneur goes through to buy a franchise.
27. Watch Out! Common Misconceptions about Franchising
• Franchising is a safe investment.
• A strong industry ensures franchise success.
• A franchise is a “proven” business system.
• There is no need to hire a franchise attorney or an accountant.
• The best systems grow rapidly, and it is best to be part of a rapid-growth system.
• I can operate my franchise outlet for less than the franchisor predicts.
• The franchisor is a nice person—he’ll help me out if I need it.
28. Buying Pharmacy franchise in Thailand
Why Fasino (Pharma Franchise) Marketing Failure?
• Product – House brand, fixed supplier
• Service – POS, Owner training, Pharmacist , GPP
• Store- Area, Building, Decoration, Display
• Price- standard price ?, margin, income
• Promotion – Branding, Advertising
• WOM
29. Legal Aspects of the Franchise Relationship
Federal Rules and Regulations
• The offer and sale of a franchise are regulated at the
federal level.
• According to Federal Trade Commission (FTC) rule 436,
franchisors must furnish potential franchisees with written
disclosures that provide information about the franchisor,
the franchised business, and the franchise relationship.
• In most cases, the disclosures are made through a lengthy
document referred to as the Franchisor Disclosure
Document (FDD).
• The FDD contains 23 categories of information that give a
prospective franchisee a broad base of information about
the background and financial health of the franchisor.
State Rules and Regulations
• In addition to the FTC disclosure requirements, 15 states
have franchise investment laws that provide additional
protection to potential franchisees
LO6: Identify and explain the various legal aspects associated with the franchise relationship.
30. Legal Measures Concerning Promotion Of Franchise Business In Thailand
• There is no directly existing law
concerning franchise business in Thailand.
กฎหมายเกี่ยวกับการประกอบธุรกิจแฟรนไชส์
ในประเทศไทย
1. ประมวลกฎหมายแพ่งและพาณิชย์
2. พระราชบัญญัติว่าด้วยข้อสัญญาที่ไม่เป็นธรรม พ.ศ. 2540
3. กฎหมายเกี่ยวกับทรัพย์สินทางปัญญา
4. พระราชบัญญัติความลับทางการค้า พ.ศ. 2545
5. พระราชบัญญัติคุ้มครองผู้บริโภค พ.ศ. 2522
6. พระราชบัญญัติการแข่งขันทางการค้า พ.ศ.2542
7. กฎหมายเฉพาะที่เกี่ยวกับธุรกิจนั้น
31. More About Franchising
Franchise Ethics
• The majority of franchisors and franchisees are highly ethical.
• There are certain features of franchising, however, that make it subject to ethical abuse. These
features are as follows:
• The get-rich-quick mentality
• franchisors have a tendency to either oversell the potential of their franchise or overpromise
the support they will offer to their franchisees.
• The false assumption that buying a franchise is a guarantee of business success.
• Any statement to the contrary is typically misleading or unethical.
A franchisor must steer clear of claims that it has the “key” to business success, and a franchisee
needs to be wary of all such claims.
• Conflicts of interest between franchisors and franchisees.
• The structure of the franchise relationship can create conflicts of interest between franchisors
and their franchisees
• Franchisor might insist that a franchisee sell a product that has high revenue but low margins
(or net income)
LO7: Discuss two additional issues—franchise ethics and international franchising—entrepreneurs should think about when considering franchising.
32. More About Franchising
Consider the value of the franchisor’s
name in the foreign country.
Work with a knowledgeable lawyer.
Determine whether the product or service
is saleable in a foreign country.
Uncover whether the franchisor has
experience in international markets.
Find out how much training and support
you will receive from the franchisor.
Steps to take before buying a franchise overseas:
International Franchising
• International opportunities for franchising are becoming more prevalent for the following two reasons:
1. The markets for certain franchised products in the U.S. have become saturated (i.e., fast food).
2. The trend toward globalization continues.
33. 1. Explain franchising and how this form of business ownership works.
2. Describe steps entrepreneurs can take to establish a franchise system.
3. Become familiar with the advantages and disadvantages of establishing a franchise
system.
4. Describe actions and issues associated with a decision to buy a franchise.
5. Explain the steps an entrepreneur goes through to buy a franchise.
6. Identify and explain the various legal aspects associated with the franchise
relationship.
7. Discuss two additional issues—franchise ethics and international franchising—
entrepreneurs should think about when considering franchising.
