FRANCHISING

BASIC PRINCIPLES OF FRANCHISING

I. Learning Objectives
When you have completed this chapter you will be able to:
1. Explain the importance and benefits of franchising to entrepreneurs and to small &
medium enterprises.
2. Explain the assessment of franchising opportunity.
3. Explain the things that are involved and the steps involved in franchising.

II. Materials Needed

● Laptop or cellphone
● Google meet
● Powerpoint Presentation

III. Discussion
A. Importance and Benefits of Franchising to entrepreneurs and small and medium
enterprises
Franchising is an excellent way of expanding a business that is already successful. Franchising
offers a number of advantages not only to entrepreneurs but also to small and medium
enterprises—which helps explain why franchising has been so successful. Entrepreneurs benefit
from these agreements because they allow companies to expand much more quickly than they
could otherwise. A lack of funds and workers can cause a company to grow slowly. However,
through franchising a company invests very little capital or labor, because the franchisee supplies
both.
A company also can ensure it has competent and highly motivated owner/managers at each outlet
through franchising. Since the owners are largely responsible for the success of their outlets, they
will put a strong, constant effort to make sure their businesses run smoothly and prosper. In
addition, companies are able to provide franchising rights to only qualified people. Moreover,
franchisors can raise money without selling shares of their companies through franchising.

1. Capital
The most common barrier to expansion faced by today’s small businesses is lack of access to
capital. Even before the credit-tightening of 2008-2009 and the “new normal” that ensued,
entrepreneurs often found that their growth goals outstripped their ability to fund them.
Franchising, as an alternative form of capital acquisition, offers some advantages. The primary
reason most entrepreneurs turn to franchising is that it allows them to expand without the risk of
debt or the cost of equity. First, since the franchisee provides all the capital required to open and
operate a unit, it allows companies to grow using the resources of others. By using other people’s
money, the franchisor can grow largely unfettered by debt. Moreover, since the franchisee -- not
the franchisor -- signs the lease and commits to various contracts, franchising allows for
expansion with virtually no contingent liability, thus greatly reducing the risk to the franchisor.

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This means that as a franchisor, not only do you need far less capital with which to expand, but
your risk is largely limited to the capital you invest in developing your franchise company -- an
amount that is often less than the cost of opening one additional company-owned location.

2. Motivated Management
Another stumbling block facing many entrepreneurs wanting to expand is finding and retaining
good unit managers. All too often, a business owner spends months looking for and training a
new manager, only to see them leave or, worse yet, get hired away by a competitor. And hired
managers are only employees who may or may not have a genuine commitment to their jobs,
which makes supervising their work from a distance a challenge. But franchising allows the
business owner to overcome these problems by substituting an owner for the manager. No one is
more motivated than someone who is materially invested in the success of the operation. Your
franchisee will be an owner -- often with his life’s savings invested in the business. And his
compensation will come largely in the form of profits.

The combination of these factors will have several positive effects on unit level performance.

● Long-term commitment. Since the franchisee is invested, she will find it difficult to walk
away from her business.

● Better-quality management. As a long-term “manager,” your franchisee will continue to

learn about the business and is more likely to gain institu­tional knowledge of your
business that will make him a better oper­ator as he spends years, maybe decades, of his
life in the business.

● Improved operational quality. While there are no specific studies that measure this
variable, franchise operators typically take the pride of ownership very seriously.
They will keep their locations cleaner and train their employees better because they
own, not just manage, the business.
● Innovation. Because they have a stake in the success of their business, franchisees are
always looking for opportunities to improve their business -- a trait most managers
don't share.
Franchisees typically out-manage managers. Franchisees will also keep a sharper eye on the
expense side of the equation -- on labor costs, theft (by both employees and customers) and any
other line item expenses that can be reduced. Franchisees typically outperform managers. Over
the years, both studies and anecdotal information have confirmed that franchisees will
outperform managers when it comes to revenue generation. Based on our experience, this
performance improvement can be significant -- often in the range of 10 to 30 percent.

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3. Speed of Growth
Every entrepreneur I've ever met who's developed something truly innovative has the same
recurring nightmare: that someone else will beat them to the market with their own concept. And
often these fears are based on reality. The problem is that opening a single unit takes time. For
some entrepreneurs, franchising may be the only way to ensure that they capture a market
leadership position before competitors encroach on their space, because the franchisee performs
most of these tasks. Franchising not only allows the franchisor financial leverage, but also allows
it to leverage human resources as well. Franchising allows companies to compete with much
larger businesses so they can saturate markets before these companies can respond.

4. Staffing Leverage
Franchising allows franchisors to function effectively with a much leaner organization. Since
franchisees will assume many of the responsibilities otherwise shouldered by the corporate home
office, franchisors can leverage these efforts to reduce overall staffing.

5. Ease of Supervision
From a managerial point of view, franchising provides other advantages as well. For one, the
franchisor is not responsible for the day-to-day management of the individual franchise units. At
a micro level, this means that if a shift leader or crew member calls in sick in the middle of the
night, they're calling your franchisee -- not you -- to let them know. And it's the franchisee’s
responsibility to find a replacement or cover their shift. And if they choose to pay salaries that
aren't in line with the marketplace, employ their friends and relatives, or spend money on
unnecessary or frivolous purchases, it won't impact you or your financial returns. By eliminating
these responsibilities, franchising allows you to direct your efforts toward improving the big
picture.

6. Increased Profitability
The staffing leverage and ease of supervision mentioned above allows franchise organizations to
run in a highly profitable manner. Since franchisors can depend on their franchisees to undertake
site selection, lease negotiation, local marketing, hiring, training, accounting, payroll, and other
human resources functions (just to name a few), the franchisor’s organization is typically much
leaner (and often leverages off the organization that's already in place to support company
operations). So the net result is that a franchise organization can be more profitable.

7. Improved Valuations
The combination of faster growth, increased profitability, and increased organizational leverage
helps account for the fact that franchisors are often valued at a higher multiple than other

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businesses. So when it comes time to sell your business, the fact that you're a successful
franchisor that has established a scalable growth model could certainly be an advantage.

8. Penetration of Secondary and Tertiary Markets

The ability of franchisees to improve unit-level financial performance has some weighty
implications. A typical franchisee will not only be able to generate higher revenues than a
manager in a similar location but will also keep a closer eye on expenses. Moreover, since the
franchisee will likely have a different cost structure than you do as a franchisor (she may pay
lower salaries, may not provide the same benefits packages, etc.), she can often operate a unit
more profitably even after accounting for the royalties she must pay you. As a franchisor, this
can give you the flexibility to consider markets in which corporate returns might be marginal. Of
course, you never want to consider a market you don't feel provides the franchisee with a strong
likelihood of success. But if your strategy involves developing corporate units in addition to
franchising, you'll likely find your limited capital development budget won't allow you to open
as many locations as you'd like. Franchisees, on the other hand, could open and operate
successfully in markets that are not high on your priority list for development.

9. Reduced Risk
By its very nature, franchising also reduces risk for the franchisor. Unless you choose to structure
it differently (and few do), the franchisee has all the responsibility for the investment in the
franchise operation, paying for any build-out, purchasing any inventory, hiring any employees,
and taking responsibility for any working capital needed to establish the business.

B. Assessment of Franchising Opportunity

What to consider when evaluating a franchise opportunity:
1. The market
Has a defined market been determined? Is that market in growth mode or is it in decline?
Understanding with complete certainty who you will serve helps to determine the viability and
ultimately the profitability of the franchise.

2. Company history
Researching the officers and management of the franchise along with those who will be
supporting your business should provide you with some insight on the franchise’s culture. Look
for stability and experience, as franchising is competitive and you want the best team as your
partner.

All franchises will file a Franchise Disclosure Document (FDD) with their complete business
details so you can begin your research. Be aware that the FDD is not forwarded until you have

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moved along in the discovery process and the franchisor has determined you are a qualified and
serious candidate. Articles 1-4 of the FDD will give you the company’s history, a list of the
management team, litigations, and bankruptcy information.

3. Financial statements
Article 21 of the FDD contains the franchise’s financial statements. Review them, question them,
and consider having a CPA look them over.

You have to begin with a personal inventory of how much you can comfortably invest. All
franchise companies will look at your liquid capital (sometimes known as the capital required) ,
your assets-to-liabilities, and your net worth. You don’t want to come in undercapitalized. Be
honest with yourself about what you can invest.

4. Level of investment
You have to begin with a personal inventory of how much you can comfortable invest. All
franchise companies will look at your liquid capital (sometimes known as the capital required)
your assets-to-liabilities, and your net worth. You don’t want to come in undercapitalized. Be
honest with yourself about what you can invest.

5. Training and support

Look for a support and training system that is comprehensive and does not have any outdated
procedures. Speak with current franchise owners in the system and learn from their experience.
These owners are a valuable resource and can tell you whether the franchisor actually provides
all that they promise.

6. Territory
This is covered in Article 12 of the FDD. Depending on your industry and business, look for
what’s trending in your territory. Is that territory experiencing growth or decline? Make a visit to
City Hall and speak with someone in planning or zoning. The franchisor will want you to be
successful in your location; otherwise, everyone loses.

7. Royalties
Go over Article 6 of the FDD very carefully. The franchisor should be making money on its
royalties, not by providing owners with “other” services. Many of these other services are to
third-party vendors and constitute a pass-along expense. A number of franchisors will reward
their owners with a sliding royalty scale based on revenue: the more you earn, the less royalty
you will pay. Also, look at minimum royalty payments and see if they’re enforced.

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8. Restrictions
Information regarding any restrictions can be found in Article 8. Franchisors have restrictions in
order to protect brand identity and consistency across the franchise system. Make sure you
understand of what you can and cannot do as a franchisee.

9. Suitability
A franchise agreement lasts generally anywhere from five to 15 years. It can be very expensive
to back out once you have signed your agreement. Suitability encompasses a personal inventory
of your core strengths and skills, and whether or not you will fit with the franchise culture you
will be partnering with. Do you see yourself doing this job for a long time?

10. Exit strategy

Think two steps ahead. What if you get ill or have a personal crisis? Plan on how you would exit,
whether that would be selling or transferring the business. Keep in mind there are costs to both
so ask about those costs upfront.

C. Things and Steps Involved in Franchising

Franchising is all about business development, growth and expansion. Franchising and the
process of successfully franchising your business, requires a strategic plan and a proven step-
by-step process. The goal is not just franchising your business or meeting the legal requirements
to sell franchises, but to build a franchise system that, from the very start, takes advantage of the
very best practices in the franchise industry, is strategically focused on enhancing the strengths
of your business, minimizing its weaknesses and establishing a flexible but rock solid foundation
that is designed to create, scale-up and grow your franchise system.

The franchising process needs to be about you, your business and your goals and it also needs to
be realistic and grounded in the very best practices and strategies that are proven to work. After
that, franchise success all comes down to execution and a process of learning and succeeding.
Our process – the franchise launch process – is all about creating franchise systems that to their
very core are designed to create strategic franchise success.
A. Things to Consider in Franchising:
1. Demand
As is the case before starting any new business, find out if there is a demand for the product or
service you intend to offer. If you are buying an overseas franchising licence, be wary that what
sells well in other countries may not be equally well-received here.
So don’t jump on the opportunity without doing your research. The potential for expansion
should also be considered if you intend to branch out to multiple outlets in the future.

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2. Track Record
Just because a company offers franchising opportunities doesn’t mean it’s worth taking up. You
should only look at companies that have proven themselves successful at franchising their
business.
If possible, speak to current franchisees about their experience so you get a clear idea of whether
the franchise is worth investing in.

3. Investment
One of the biggest barriers to buying a franchise is that unlike starting your own business, where
all the capital is invested in your operations, a sizeable portion of your initial capital goes to the
franchisor as fees for training, equipment and licensing rights. This figure can range from a few
thousand dollars to a few million.
Look at what the franchise company will be providing in exchange for the franchise fees, and
evaluate the time it will take to earn your upfront costs back to determine if a franchise is a
sound investment.

4. Competition
If the franchise is a well-known brand, there may already be lots of franchisees operating in the
vicinity, and not to mention other rival companies. Consider first if the franchise and industry
you’re choosing is a strategic business to enter as it’ll be hard to establish yourself if there are
many competitors in that market.
If the product being sold is unique then competition will not be an issue. But for most businesses,
this will not be the case.

5. Training
A major advantage of franchising is the training and support offered to franchisees. If you don’t
have any entrepreneurial experience, then it is advisable to choose a franchise that offers
substantial training. Some even provide on-going support even after your franchise is up and
running.
With proper guidance and training, the chances of your franchise being successful right from the
start will increase greatly.

6. Restrictions
It is very common for franchisors to impose certain restrictions on how their franchises are to be
run. They usually require franchisees to follow guidelines and standards which may encompass
things such as product offerings, prices, operational hours, and store design among others.

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So you may be the boss, but the franchisor generally has the control. If you’re not comfortable
with this kind of arrangement, then running a franchise may not be what you’re looking for.
B. Steps Involved in Franchising
1. The Franchise Assessment: Is Your Business Franchisable?
Since franchising starts with you, your business and your goals, the first step is to determine if
franchising is even right for you and whether or not your business is franchisable. Before we get
started on a new project and working with a new client we start with an initial franchise
assessment to determine if we believe franchising is the right fit. To learn more about the
franchisability of your business and the factors that we will evaluate, review our 5
Franchisability Factors.

2. Assessing Your Business and Brand

One of the biggest secrets to franchising is that, as a business and legal model, franchising is
extremely flexible and when done correctly must be unique to your business and goals and must
differentiate your new franchise system from competitors. To do this, we evaluate you business
and brand – their strengths, weaknesses, competitive advantages, unique selling points, legal
protections and future development goals – and throughout the franchise launch process we
focus on developing a franchise system that best meets your development goals and that will
maximize the scalability of your franchise system.

3. Competitive Franchise Study

As a franchisor you competitors will be other franchisors and franchise systems. Some of these
competitors will be in the same industry as you and others may be in a different industry but
nevertheless compete with your for prospective franchisees. To establish a baseline, we prepare a
competitive franchise study to evaluate and compare the metrics associated with three
comparable franchise systems. We don’t do this to copy these competing systems but, rather, to
understand them and to create a baseline when considering who we can structure your system to
stand out and offer better unit economics for franchisees. Our competitive study serves as a great
baseline and point of reference throughout the franchise development process.

4. The Franchise Blueprint

Establishing and creating a franchise system is very much a process that evolves over time. Once
we understand you, your goals, your business and your brand and after completing our
competitive franchise study, we create a blueprint mapping out the structure for your franchise
system. Franchise blueprint documents core development goals and development metrics,
including:

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● Franchise fees and establishing a franchise fee structure that is competitive and
encourages potential multi-unit development;
● Royalty fees and establishing a royalty fee structure that rewards franchisees for success
and one that achieves your growth and development goals;
● Multi-Unit opportunities and whether or not your franchise system will be focused on
single unit franchise opportunities or multi-unit franchise opportunities with development
agreements;
● Territory sizes, whether or not franchisees will be granted operating territories, how to
manage franchisee operating territories and forms of protection that may or may not be
granted to franchisees;
● Proprietary products and sources of supply, including the identification of core products
and services that must be purchased from your or your designees and whether or not you
may generate additional revenue from your suppliers; and
● Many other factors, including factors unique to you and your business and our strategic
plan for differentiating your franchise system, attracting franchisees and attracting
potential franchise broker interest in promoting your franchise offering.

5. Brand Protection
As a franchisor your brand and the legal protection of your trademarks are critical. We evaluate
your core intellectual property including the protectability of your trademarks and we will file
registration applications with the Patent and Trademark Office for the federal and nationwide
registration of your trademarks. If your trademarks cannot be registered or protected we will
have a candid conversation and work with you in assessing and evaluating alternative trademarks
and branding.

6. Developing Your FDD

Your Franchise Disclosure Document (FDD) is and will always be the core legal document from
which your franchise system will be created and your franchise sales activities will revolve
around. Although a legal document, your FDD must be grounded in a strategic franchise
development plan (our franchise blueprint) that creates and promotes the unique characteristic of
your business and that advantages that franchisees will be afforded by your franchise system
when compared to competitors.

7. Developing Your Franchise Agreement

Your franchise agreement will be a part of your FDD. They must provide you with the very best
protections and must be structured and focused on strategic growth. Depending on our strategic
planning goals, your franchise agreement may not be just one agreement. Your franchise system
may be structured with multiple development opportunities where a franchise may sign a

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franchise agreement giving them the right to establish one unit or they may be offered a franchise
agreement where they are granted the opportunity to establish multiple units. Your franchise
agreements need to reflect your franchise system and must be designed to facilitate franchise
sales.
● What are the Steps to Take to Franchise a Business?
When you franchise your business it means that you have taken the necessary legal and business
steps to sell franchises, support franchisees, and grow your brand. First and foremost, your
franchise lawyer will have to prepare and issue a Franchise Disclosure Document that complies
with federal and state law. When dealing with states that require FDD registration and filings,
you’ll also have to register or file your FDD with the state in order to be able to sell franchises.
The following are the steps to franchise your business:

1. Determine if Franchising is Right for Your Business

Your business, business systems, and personal goals need to align with franchising. When you
franchise you’ll be responsible for recruiting, training, and supporting franchisees as your brand
grows.
2. Franchise Disclosure Document
Your FDD should be prepared to comply with federal and state specific franchise laws and
should be specific to your business and the franchise that you are offering.
3. Operations Manual
You will be providing a confidential operations manual to your franchisees. Your operations
manual must document and inform you franchisees about all system requirements and
information needed to develop, open, and operate the franchised business.
4. Register Your Trademarks
You must register your trademarks with the United States Patent and Trademark Office. More
about trademarks here and what could happen if your trademarks are not registered.
5. Establish Your Franchise Company
You will need to establish a new franchise entity, typically a corporation or limited liability
company. Your new franchise company will be in the business of selling franchises, supporting
franchisees, and building systems to grow.
6. Register and File Your FDD
Before you can sell franchises in franchise registration states (CA, IL, MD, NY, VA, etc…) or
franchise filing states (FL, NC, SC, TX, etc…) you must file the appropriate applications and
notices. Check out our interactive franchise registration registration map to learn more about
state specific laws, registration, and filing requirements.
7. Create Your Franchise Sales Strategy and Set a Budget
Even after your legal documents are complete, determining your initial franchise sales strategy
and setting a budget is critical. Evaluate your target franchisees, target markets, interest in your
franchise and a realistic budget for attracting, training, and supporting franchisees.
The franchise development process typically takes between 90- to 120-days to go from where
you are today to being a franchisor legally able to offer and sell franchises. However, once you
“franchise your business” you’re just getting started.
IV. CHAPTER SUMMARY

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In the business world, there are many ways of getting into business. These entry areas
vary depending on the type of the business. The interest of the businessperson is also a major
factor. As such, many people wishing to get into business seek one of the many avenues that are
open to them. One of the most effective ways of getting into business is through franchising.
Effective strategies in this line of business can prove to be a benefit for new entrants in the
business world and to established businesspersons wishing to venture into new areas or diversify
in their current work. We can then conclusively say that ,in the corporate world today,
franchising is an effective and innovative form of business yet devised to distribute products and
services and as such a major growth area for business.
In conclusion, therefore, though demerits of franchising are there, it remains to be an
effective way of getting into business. The various merits make this form of starting business be
popular, unlike other forms like start up. It therefore turns out that franchising is a major growth
area for business.

V. REFERENCES
https://www.entrepreneur.com/article/252591
https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-franchising-you
r-business
https://www.nerdwallet.com/article/small-business/advantages-of-franchising
https://www.allbusiness.com/10-key-things-to-consider-when-evaluating-a-franchise-opp
ortunity-1527-1.html
https://www.newgroundconsulting.com/what-to-consider-before-buying-a-franchise/how-
can-a-prospective-franchisee-evaluate-a-franchise-opportunity/
https://www.whichfranchise.com/evaluating-a-franchise/#assessing
https://www.franchiselawsolutions.com/learn/how-to-franchise/

Submitted by:

DE CASTRO, JENG JENG H.

MAGDAMIT, ANGELICA M.
BULANHAGUI, JORGE G.
DE OCAMPO, VHIA BIANCA M.
CASABAL, ALYSSA JOYCE

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