WEEK 11

Franchising and the Entrepreneur

ITE-6301 Technopreneurship
Week 8: Forms of Business Ownership
Module Learning Outcomes:

By the end of this module, a student is able to:

1. Describe the three types of franchising: trade name, product
distribution, and pure.
2. Explain the benefits and the drawbacks of buying a franchise.
3. Understand the laws covering franchise purchases.
4. Discuss the right way to buy a franchise.
5. Outline the major trends shaping franchising.
Topics Covered

• Franchising Franchising and the

• Types of Franchises
• The Benefits and Drawbacks of Entrepreneur
Buying a Franchise
• The Right Way to Buy a Franchise
Introduction
The number of franchises has grown tremendously. The
number of U.S. franchises has increased consistently since
the 1970s, and the continued growth since the mid–1980s
documents that franchises continues to play a significant
role in the U.S. and world business economy.

Franchising is a business structure comprised of semi–

independent business owners (referred to as the
franchisees) that pay fees and royalties to a parent company
(referred to as the franchiser) in return for the right to be
identified with its trademark, to sell its products or services,
and often to use its business format and system.
The Franchising Relationship between the franchiser
and the franchisee is a unique and often a highly
structured and defined business relationship regarding:
 Site selection
 Design
 Employees
 Products and services
 Prices
 Purchasing
 Advertising
 Quality control
 Support
Types of Franchises
There are three types of franchising systems:
1. Tradename franchising
2. Product distribution franchising
3. Pure (or comprehensive or business format)
franchising
One of the primary reasons for interest in a franchise
system is that the franchisee is able to tap into the
proven experience and guidance that the franchise offers.
The Benefits of Buying a Franchise
Benefits of franchising include:
 Management training and support
 Brand name appeal
 Standardized quality of goods and services
 National advertising programs
 Financial assistance – Refer to Figure 6.3: Franchisor
Financial Assistance
 Proven products and business formats
 Centralized buying power
 Site selection and territorial protection
 Greater chance for success
The Benefits of Buying a Franchise - cont.

These benefits have proven to have a positive impact on

the success rate of franchises, beginning in the first
year of operation, compared to nonfranchise ventures.
The Drawbacks of Buying a Franchise
There are some negative attributes of buying a
franchise and those include:
 Franchise fees and profit sharing
 Strict adherence to standardized operations
 Restrictions on purchasing
 Limited product line
 Unsatisfactory training programs
 Market saturation
 Less freedom
 Myths of Franchising
The 10 myths regarding franchising include:
1.Franchises will be safer and will not fail
2.Franchises will be economical
3.Franchises will be more successful based on its size
4.Franchises will be able to have improvement potential
5.Franchises will be “all the same”
6.Franchises will enable the owner to be removed from day–to–day
management
7.Franchises will be a business anyone can do
8.Franchises will be the cheapest business option
9.Franchises will be taking care of my business problems
10.Franchises will be a business “I” can run things the way “I” want to
 Franchising and the Law
In response to problems that occurred in the 1950s to the
franchising boom and the associated franchisers who
defrauded their franchisees, strict laws attempt to prevent such
behavior.

Franchise Disclosure Document (FDD): In 2008, the FTC

replaced the Uniform Franchise Offering Circular (UFOC) with
the Franchise Disclosure Document (FDD). The FDD establishes
full disclosure and guidelines for the franchising company. The
FDD requires all franchisers to disclose detailed information to
prospective franchisees before any offer or sale of a franchise.
This document contains 23 major topics in its disclosure
statement.
 Franchising and the Law - cont.

Trade Regulation Rule: Enacted by the Federal Trade Commission

(FTC) requiring all franchisers to disclose detailed information
on their operations at the first personal meeting or at least ten
days before a franchise contract is signed, or before any money is
paid. In this section, the twenty–three major topics required by
the Trade Regulation Rule are discussed as well.
 Franchising and the Law - cont.

Red flags to detect dishonest franchisers occur when franchises:

 Fail to provide sufficient documentation
 Have marginally successful or no prototypes
 Offer a poorly prepared operations manual
 Promise future earning with no documentation
 Demonstrate a franchise turnover or termination rates
 Experience an unusual amount of litigation by franchisees
 Franchising and the Law - cont.
 Discourage having your attorney review the contract
 Have no written documentation
 Exert a high degree of pressure
 Claim to be exempt from federal disclosure laws
 Promise high profits with minimal effort
 Are reluctant to provide a list of referral franchisees
 Respond with evasive, vague answers to your questions
Potential franchisees need to be aware and cautious when they see these
signs. These issues may indicate that there are real concerns and, in the
worst-case scenario, deception.
The Right Way to Buy a Franchise
The steps to consider buying a franchise
are:
1. Evaluate yourself
2. Research your market
3.Consider your franchise options
4.Get a copy of the franchiser’s FDD
5.Talk to existing franchisees
6.Ask the franchiser some tough questions
7.Make your choice
The Right Way to Buy a Franchise

Factors that make a franchise appealing include an

association with:
 A unique concept
 The potential profitability
 The benefits of a registered trademark
 A proven business system
 Training programs
 Its affordability
 The relationships with other franchisees:
Trends Shaping Franchising
Franchising has experienced three major growth waves since its
beginning with fast– food activity in the 1970s, service businesses
in the 1980s, and low–cost franchises that focus on specific market
niches. Today, franchisees are better educated, are more
sophisticated, have more business acumen, and are more
financially secure than those of the past. Other trends include:
 International opportunities: Franchising is becoming a major U.S.
export industry. About 52 percent of U.S. franchisers have
outlets in other countries.
 Smaller, nontraditional locations: Due to high costs of building
full–scale locations, franchises are putting scaled–down outlets
directly in the path of customers in places such as college
campuses, grocery stores, gas stations, theaters, and airports.
Trends Shaping Franchising
 Conversion franchising: Owners of independent businesses become franchisees to
gain the advantage of name recognition.
 Multiple–unit franchising: A franchisee opens more than one unit in a broad
territory within a specific time period. “Franchisers are finding it’s far more
efficient in the long run to have one well–trained franchisee operate a number of
units than to train many franchisees.”
 Area Development and Master franchising: A franchisee is given the right to create
a semi–independent organization in a particular territory to recruit, sell, and
support other franchisees. Under area development the franchisee earns the
exclusive right to open multiple units in a specific territory within a specified time.
A master franchise is a method that gives a franchisee the right to create a
semi-independent organization in a particular territory to recruit, sell, and
support other franchises.
 Cobranding: Franchisers team up with other franchisers selling complementary
products or services by combining two or more franchises under one roof.
Conclusion

Franchising is a significant force in the U.S. and

world economy. The franchise experience offers
entrepreneurs, regardless of their experience or
background, the ability to own and operate their
own business with guidance and support
increasing the chance for success.
END