Chapter Five

Franchising

Learning Objectives
‡ Establish what a franchise is and how it operates ‡ Articulate the difference between product-distribution franchises and business-format franchises ‡ Compare the advantages and disadvantages of franchising

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Learning Objectives (continued)
‡ Explain how to evaluate a potential franchise ‡ Explore franchising in the international marketplace

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Familiar Franchises
‡ ‡ ‡ ‡ ‡ McDonald¶s H&R Block AAMCO Transmissions GNC (General Nutrition Centers) Dairy Queen

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Entrepreneur¶s Top Ten Franchises in 2004
‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ SUBWAY Curves for Women Quizno¶s Franchise Co. 7-Eleven, Inc. Jackson Hewitt Tax Service The UPS Store McDonald¶s Jani-King Dunkin¶ Donuts Baskin-Robbins USA Co. For updates: www.franchise500.com
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About Franchising
‡ Franchise ± contractual license to operate an individually owned business as part of a larger chain ‡ Franchisor ± parent company that develops a product or business process and sells the rights to franchisees ‡ Franchisee ± small business person who purchases the franchise in order to sell the product or service of the franchisor

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Franchising: Background
‡ Existence since the early 1800s (reapers & sewing machines) ‡ Experienced growth since the 1950s ‡ Evolved past exclusive use of agents ‡ Represented in almost every industry ‡ Interest in international franchising is growing quickly

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Franchising Systems
Product-Distribution Franchising ± A type of franchising in which the franchisee agrees to purchase the products of the franchisor or to use the franchisor¶s name.

Business-Format Franchising - A type of franchising in which the franchisee adopts the franchisor¶s entire method of operation.

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Types of Franchises

Source: PricewaterhouseCoopers, ³Economic Impact of Franchised Businesses´
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Franchising Systems Product-Distribution Franchising
‡ Allows the franchisee (dealer) to buy products from the franchisor (supplier) or to license the use of its trade name ‡ Typically connects a single manufacturer with many dealers ‡ Idea is to make products available to consumers in a specific geographic region through exclusive dealers ‡ Examples: Soft-drink bottlers, gasoline stations, car dealerships

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Franchising Systems Business-Format Franchising
‡ More of a turnkey approach
± Franchisee purchases not only the franchisor¶s product to sell, but also the entire way of doing business, including operation procedures, marketing packages, physical building and equipment, and full business services

‡ Commonly used in quick-service restaurants, lodging, retail food, and table/full-service restaurants
± Examples: Hotel and motel chains, McDonald¶s

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The Advantages and Disadvantages of Franchising

Debate Issue: Is franchising the best way to own a business?
YES The advantages of franchising far outweigh the disadvantages. The franchisee can start the business with limited capital but, at the same time, make use of the business experience of others. This experience usually means the franchise name is widely recognized. Therefore, franchised outlets are generally more successful than independently owned businesses. A franchisee usually receives important training regarding operations management. NO A true entrepreneur desires ultimate control over business operations. Franchising does not allow for such independence and, in many cases, franchisees are not allowed to make crucial decisions. Beside the lack of control, the franchisee is, in effect, working for the franchisor. The more successful the franchisee, the greater the royalties paid to the franchisor. Owning any business is hard work but, with franchising, the franchisee is never justly compensated for the franchise¶s success.
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Getting In

Selecting a Franchise Evaluate Your Needs
‡ How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses? ‡ Where are your going to get it? ‡ Are you prepared to give up some independence of action to secure the advantages offered by the franchise?

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Selecting a Franchise Evaluate Your Needs (continued)
‡ Do you really believe you have the innate ability, training, and experience to work smoothly and profitable with the franchisor, your employees, and your customers? ‡ Are you ready to make a long-term commitment to working with this franchisor, offering its product or service to your public?

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Do Your Research
‡ General Business Periodicals
± Inc., Fortune Small Business, Wall Street Journal, Success, Entrepreneur

‡ Specialized Journals & Magazines
± Franchise, Franchising Opportunities World, and Quarterly Franchising World

‡ Trade Associations
± International Franchise Association (IFA) ± Canadian Franchise Association (CFA)

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Other Information Sources
‡ American Franchise Association (AFA) ‡ American Association of Franchisees and Dealers (AAFD) ‡ Online information ± FranNet, Franchise Handbook Online, etc. ‡ Better Business Bureau ‡ Institute of Management and Administration

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Before Signing the Contract
‡ Ask questions ‡ Analyze the market ‡ Review disclosure statements

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The Franchise Agreement
‡ Franchise, Royalty, and Advertising Fees ‡ Termination of the Franchise Agreement ‡ Terms and Renewal of Agreement ‡ Exclusive Territory ‡ Get Professional Advice

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The Franchise Agreement Remember
‡ The franchisor wrote the contract and that most of the conditions contained in it are weighted in their favor ‡ NEVER sign a franchise agreement without getting a lawyer¶s opinion. ‡ MAKE SURE that an attorney and accountant have experience with franchising

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Get Professional Advice
‡ Do not assume that the disclosure statement tells you everything you need to know about the franchise. That is not the intent of the document.

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International Franchising
United Kingdom 2,843 Asia 2,897 Japan 8.975 Continental Europe 4,975 Near East 339

Caribbean Central 792 America Australia 179 South 2,858 America 521 New Zealand 420

Africa 641

Franchising companies...approx. 4,500 Number of franchising outlets...approx. 560,000

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Small Business Globalization by the Numbers

Source: Allbusiness.com/Focus Magazine/Going Global, U.S. Department of Commerce, and SBA Office of Advocacy.

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