01:00 PM – 04:00 PM

ROOM 205
PROFESSOR: AGNES ENOY LARA, MBA

FRANCHISING
SATURDAYS
Is my Firm Ready to Franchise? A prospective franchisor develops a comprehensive business plan to outline in detail the
A franchisor guides and assists a network of independently owned and operated businesses franchise operations and the functions of the organization.
that produce the products or services authorized in the franchised agreement. The principal work of A properly developed franchisor plan will have three major components or packages:
the franchisor is the effective operation and growth of a franchise system. Three (3) other issues 1. A franchisor's business plan
crucial to the development and maintenance of the franchise system are trademarks, sufficiency of 2. A franchisee recruitment package
capital for the franchisor, and amount to charge for the franchise license. Each will be discussed 3. A franchisee operations manual and success package
as follows:
Franchisor business plan
Does my franchise business have protectable trademark?  include a detailed blueprint of operations. Such blueprint would have the following primary
 A trademark is a symbol of a product or service and the level of quality provided by the owner components:
of the mark (franchisor) and its licensee (franchisee). The trademark identifies the franchisor as a. management
responsible to control the quality of the licensees' products and services offered to the public. b. organization
Licensed trademarks constitute the identity of the franchise system. The three kinds of c. administrative policy
trademarks are coined, suggestive, and descriptive trademarks. d. managing the marketing process
e. sales and marketing research
1. Coined trademarks- can be be recognizable word or set of letters unrelated to the products or f. managing the operations
services it identifies, for example, Mobil, Midas, Visa, Kodak, Exxon, and Xerox. g. location and site selection
2. Suggestive trademarks- identify a characteristics or feature of the franchisor 's goods or h. accounting practices and fiscal responsibilities deemed appropriate, along with the realistic
services, for example, 7-ELeven(food store chain), Cyclone (wire fencing), Business financial projections.
i. financial strategy and anticipated market conditions; management information systems.
Week( magazine), Tie Rak (Ties and accesories), Snap-on (mechanic tools), Quick-N-EZ
j. legal documentation for determining the franchisor franchise relationship and anticipated
(convenience and gas store), and Mustang (car).
activities of each party.
3. Descriptive trademarks- considered to be the weakest type of legal trademark and can be
Franchisee Recruitment Package
difficult to protect. A descriptive mark describes the product or service that is sold. Also,
 A second component of a franchise business plan.
surnames or geographic locations are considered appropriate descriptive trademarking. The
 It is designed to show to a prospective franchisee what the franchisor has to offer and should
difference between a suggestive mark and descriptive mark is imprecise and may be no more
contain clear statements about expectations and responsibilities of each party-franchisor and
than a judgment call. Examples of descriptive trademarks are Holiday Inn (motel chain), Vision
franchisee.
Center eyeglass and optical clinic), Outback Steakhouse (restaurant chain), and Milwaukee's
 it includes the disclosure document, recruitment and advertising brochures, and franchising
Best (beer).
agreements.
A franchisor should be careful to select a trouble-free trademark that can be registered. A trademark
search should be made to determine the rights of any others that hold the same or similar trademark.
When the mark is cleared, it should be registered on the Trademark Register which constitutes notice 1. Disclosure document should be given to a prospective franchisee at the first personal meeting
of use and nationwide claim on the mark. between the prospect and the franchisor, or ten days prior to the execution of a contract or a
payment dealing with the franchising relationship between the franchisor and the franchisee,
Do I have enough capital to develop and implement the franchise program? whichever occurs first.
 A business entering into franchising will incur substantial expenses before the first franchisee is 2. Franchising agreement has to be presented to a franchisee five business days prior to any due
signed up. If trade identity (trademark) is needed, then consulting, legal, and accounting or consideration given by the franchisee to the franchisor.
reporting services are likely to be incurred. The franchisor will need to hire and train 3. Franchise brochure a printed booklet provided to a prospective franchisee that has responded to
management and field personnel, develop a marketing program for the franchise system and a the franchisor's advertisement or seeks information based on a word-of-mouth inquiry. The
sales promotion program for the franchisees' products and services, meet compliance regulation brochure and recruitment flow chart help explain the product and service format of the franchisor
with regard to franchise sales, and guide and assist the newly minted franchisees along their way is using and identify the steps or processes.
toward success as franchised business owners. This package should describe the business concisely through a logical flow of topics that identify the
 If a franchisor sets the initial franchise fee or royalty rate on franchisee product and service ff:
sales too low, then the franchise headquarters may be unable to acquire sufficient financial
resources to effectively monitor and support the franchise system. This situation raises the final 1. The objectives of the franchisor firm.
questions for the prospective franchisor of.... 2. The initial capital and expected investment required of a potential franchisee.
3. Personal and other qualifications a potential franchisee must have.
What amount should I charge for the franchise?
4. The training provided by the franchisor to the franchisee.
5. The anticipated benefits and responsibilities if becoming a franchisee.
 - For a business to be franchised successfully, it is must be profitable. Once the franchisor starts
collecting fees, royalties, advertising fees, and maybe other fees such as specific training needs Franchisee Operations and Success Package
and site development, the franchisor may earn enough income to offset the costs of developing  The third component of the franchise plan, which generally contains the 3 elements of the ff:
and maintaining a franchise system. However, the franchisor must also look at the bottom line
for the franchisee. With the added costs created by the franchise system on each franchisee, will Operations manual
the franchisee still profitable or has acceptable return on the investment made?  identified by the franchisee as the bible of the business.
 describes in detail of each function and subfunction with procedural guidelines and standards
THE FRANCHISOR BUSINESS PLAN for operating the business.
  It is not given until after signing franchise agreement and or loaned to the franchisee for the
duration of the contract.
 Its purpose is (1) to impart specific information about the franchisor's system or approach, (2)
to develop the values and knowledge of the prospective franchisee toward the franchise
approach and procedures, and (3) to develop skills in accordance with the system of operations
for the franchised unit.
Financial and bookkeeping(accounting system)
 an appropriate recordkeeping approach is generally developed by the franchisor and explained
to the franchisee. A franchisee needs to know about each reporting form required by the
franchisor, as well as any approaches to financial analysis, which will asssist the franchisee in
becoming an effective financial controller of the franchised units.
Advertising, promotion, and sales program
 typical address among other issues, the amount of advertising and promotional support
available prior to and at the time of a grand opening, cooperative advertising arrangements
between franchisor and franchisee.
 It is important that both franchisor and franchisee have a clear understanding of the amount and
type of advertising, sales promotion, and public relation themes, including which party is
responsible for development and to what degree each activity is meant to generate sales,
heighten visibility, and improve the franchise's image within the local community.
Both franchisor and the franchisee will deal with the market place; the franchisee, however, will do
so on more of a day-to day basis
THE FRANCHISE FEASIBILITY STUDY SHOULD SHOW THE FF:
1. a prospective franchisee will or will not be profitable given the format proposed in relation to
the market forces being confronted.
2. the proposed product or service has or does not have sufficient "utility" or customer demand or
preference in light of alternative purchase possibilities.
3. the business operation at the proposed location(s) will attract the consuming public.
4. the prospective franchisee will be more successful providing this particular product or service
through a franchised unit than through a independent business.
As with franchisor decision, if the answers to these questions are in the affirmative, the person
should consider further becoming a franchise within the proposed franchise system.
If the result of FS shows not beneficial to both parties the franchise system is likely no be successful.

Franchisor support package

 rather nebulous term that typically refers to the measure franchisor adopt to maintain
wholesome relationships between themselves and their franchisee(s). Very often expectations
are set forth in writing which indicate the degree to which franchisees are responsible to
develop their specific market(s), the level of performance to be maintained in internal
operations, and what steps would normally be followed to eliminate or at least minimize legal
problems n trademark, brand or trade name, or antitrust areas.
 On all counts, the franchisee needs to understand what is expected prior to acquiring the
franchise. A clear understanding is beneficial to both parties (franchisor & franchisee
relationship) to avoid potential problems within them. The franchise, once acquired, is the
centerpiece of a continuing relationship.

Training manuals

 need to be prepared so that not only can prospective franchisees be trained but also future
employees within franchised unit.
 training is necessary to fill the gaps between a franchisee's (and employees') existing knowledge
and skills and the levels of performance expected by the franchisor.

FRANCHISE FEASIBILITY STUDY

The first step in establishing a comprehensive integrated franchise plan is to determine the
feasibility of developing an existing business into a franchise operation.
Feasibility study-should contain sufficient information to enable either a franchisor or a
franchisee to make a decision (whether to pursue or not pursue).
The franchisor's position must be properly analyzed to determine if the franchisor will or
will not be able to (ff):
1. Properly administer the franchising system.
2. Support franchisees through home office functions. appropriate to type of business being
analyzed and do so in a profitable fashion.
3. Benefit more through franchising than by operating a separate, independent business.
If these are answered affirmatively, the prospective franchisor should pursue the next step in making
the decision about being a franchisor.
Critical areas of FS that usually addresses some contents of business plan:
1. Executive summary
crucial part of by business plan, because it tells the story of the franchise venture and
sparks the interest of any outsiders, readers, and or investors. It highlights the type of
business, key personnel, and financial requirements necessary to open and operate the
business.
2. Marketing process concerns with the distribution of goods to the potential customers to satisfy
some want or need. It investigate the major marketing objectives of the franchisor, the basic
market plan and pricing strategy, the franchise recruitment plan and flowchart, the franchisee
prospectus, franchise sales and advertising, franchisee location and criteria selection, any grand
opening plan, and ongoing customer advertising.
1.1. Marketing objectives-contains major goals and objectives of the organization. It
explains what the franchisor ultimately plans to do this.
3 major goals important in operational objective
a) the definition or description of activity (sales)
b) a quantitative measurable number
c) a time period of one year.
1.2. Marketing plan and Pricing Strategy-describes and discuss the target market.
It answers the question of who? where? and how many? Allows develop pricing
strategy certainly on how to percent mark up the product and trends must be
understood.
1.3. Market target analysis-identify the target market and analyze the market's
primary characteristics. To determine the potential buyer power available
through the market. The basic demographics
1.4. Pricing Strategy-product or service is offered must cover relevant costs and
ensure an adequate profit for the franchisee and the franchisor. It should be
flexible to meet the competitive shift of consumer preference.
1.5. Mark-up Pricing-determine the actual cost of the product at the anticipated
production/sales volume, and to add the profit margin.
1.6. Franchisee Recruitment plan and flow chart- include basic description of the
franchisee profile describing who you are trying to recruit. It explains the steps to
follow working with the prospective franchisees.
1.7. Franchisee Prospectus- it discuss franchise opportunity and serve as a sales
brochure that explains franchisees what the business is about. Also includes the
basic start-up costs and history, training, and opportunities of the franchising
system.
1.8. Franchisee Sales and Advertising- this section explains how to promote the
franchise opportunity to prospective franchisees. It also contains franchisor's
different methods of sales promotion for the prospect franchisee.
1.9. Franchise Location Criteria Selection-this part allows the franchisor to
describe of where and why they are going to locate the franchise. It would also
include the demographics of the target customers in which it is important in order
to find best possible location close to the customer
1.10. Site Location- an important factor of business success is to have a properly
determined location. It is important to consider this factor carefully,
remembering that location is critical.to but not the sole determinant of proper site
selection. All factors should be reviewed before a final location is chosen or
change location is made.
1.11. Grand Opening Plan-include the information about how many representatives
from the franchisor will be on site during the grand opening and all ads and
promotions will be used at that time.
1.12. Customer Advertising-this section should include all the promotions, direct
selling, public relations, and advertisements which will used by the franchisee to
encourage the customer to purchase the goods or services.
3. Management
simply defined as "getting things done through people", however, it is one of the most
critical factors in determining success or failure of any business. This section of franchise
FS is designed to identify and explain the organizational structure and system operation
established by the franchisor to help the franchise system to be successful.
The 5 Elements of Franchise FS Management section
1. Headquarters' organization
2. Franchisee organization
3. Operations manual
4. Training manual
5. PERT chart
1. Headquarter's Organization-A chart, diagram or table that illustrate and clearly identify
the position required, authority and responsibility vested in each position, and the
placement of each position in regard to the functions of overall thrust of the
organization.
2. Franchisee organization- similar to headquarters org. It contains the organization
structure of the franchisee sets by the franchisor in which also included the policies and
personnel management.
3. Operations manual-describes the functions of the franchisee's business in detail. It
provides step by step illustration and description for each set required activities within
the store's operation
4. Traning manual-may be separate from or part of the operations manual. It provides
information necessary to train unit employees to perform the required functions and
operations within the specific business environment of the franchise.
5. Project Evaluation Review Technique (PERT) Chart- delineated set of related events
presented in sequence. It can be useful tool for franchisor in establishing franchised
units. This charts illustrate the required steps from initiation of the franchise idea to the
grand opening of the unit by a franchisee.
4. Finance and Accounting
In a franchise system, it is important that proper financial records be kept by both
franchisor and franchisee. In assessing the feasibility of a franchise, it is essential that
financial projections be made for or by the franchisor to estimate income, expenses,
cash flow, assets required at various levels of business activity, debt capacity, and
equity requirements anticipated for each potential level of business activity
Major Accounting Records (kept by both franchisor and franchisee)
1. Start-up or turnkey costs (itemized)
2. Financial position for starting franchisor's system
3. Pro forma balance sheet
4. Pro forma income statement
5. Pro forma cash flow statement
6. Breakeven analysis
7. Ratio analysis
8. Provision for taxation
Start-up or Turnkey Costs
Before the franchisor begins the operation, it is important to develop a start-up or turnkey costs.
This would generally include items such as land, building, furniture, fixtures, equipment, and
personnel costs which required to begin the franchise business. The franchisor needs to itemize
all these costs to be able to determine the necessary start-up costs for the franchise system.
Financial Position
The franchisor needs to look at his or her own financial position to determine the availabilities of
money to start a franchising program.
The franchisor needs to know how much money will be required to start a franchising system,
and if the money is available.
Balance Sheet
It is the snapshot of the financial condition of the franchise business. This financial statement,
once called a statement of financial position, shows how a business utilizes its resources and
assets in comparison with debt and ownership (equity) of the business (eq. Assets=Liabilities
+ Ownership Equity).
4. Employee-related taxes
If taxes are not filed and payments are not made as required the business can incur civil as well
as criminal liabilty.
Prospective franchisees need to understand what the total start -up or turnkey costs of a new
franchise will be, as well as the prospective gross sales, typical direct and indirect costs, prospective
profits at various levels of sales/output, the recordkeeping system required by the franchisor, and the
filing requirements, as well as any financial requirements such as franchising fees, royalty
payments, advertising cooperative payments, or consultant or service fees expected by the
franchisor from an existing franchisee. The more info. a prospective franchisee develops before the
final decision is made whether to open a franchised unit, the wiser the wiser the decision. In the long
run, fewer problems, misunderstanding, and potential litigations are likely to take place.

Income Statement (Profit and Loss)

A business will reap a profit in a given period if revenues exceed expenses.
Usually, the income statement is prepared on a monthly, quarterly, or at least yearly basis in
order to indicate the profit-loss relationship resulting from the use of assets available in that
accounting period and the expenses incurred.

Cash flow Statement

shows the resources from which the firm obtained its income during accounting period and how
it was spent.
It is probably the most important of all financial documents used by a franchisor and a franchisee
because it illustrates the flow of cash through the business across time.

Breakeven Analysis
refers to determination of that point in the franchised business activity where revenues (income)
exactly equal expenses (cost of doing business).

Ratio Analysis
is a method of determining the various financial relationships which would suggests the degree
of financial health of a firm. The common marks to determine financial health include liquidity,
profitability, and debt)equity position.
The ratios are designed to compare the current business activity (1) with that of prior time
periods or (2) with that similar firms in the same industry. The franchisor develops a series of
financial ratios on each of the franchisees for the purpose of comparison.

Provision for Taxation

 important to consider
 Both franchisor and franchisee must recognize and understand the various tax filings
required by federal, state, and local governments.
4 main areas of taxations in which requirements of reporting about business activity and the
resulting tax liability must be met are as ff:

1. Sales taxes
2. Business taxes
3. Property taxes