Copyright © 2015 Pearson Education, Ltd.

6-1
Chapter 6

Copyright © 2015 Pearson Education, Ltd. 6-2

 Shoppers can now buy virtually every product
or service imaginable through franchises
 More than 757,000 franchise outlets in the
United States
Employ almost 8.2 million people
Generate $802 billion in annual economic
output – adding $460 billion to the country’s
GDP

Copyright © 2015 Pearson Education, Ltd. 6-3

Franchised Businesses by Product or Service Line

Copyright © 2015 Pearson Education, Ltd. 6-4

 Franchising in Global Markets
International Franchise Association survey:
61% percent of members operate in international
markets
74% plan to accelerate global growth
32% of the units of the 200 largest U.S.
franchisors are located outside the U.S.
Hot markets: Brazil, Russia, India, China, and
nations in the Middle East and North Africa

Copyright © 2015 Pearson Education, Ltd. 6-5

Franchising: semi-independent business owners
pay fees and royalties to a parent company in
exchange for the right to sell its products and
services under the franchiser’s trade name and often
to use its business format and system
Going into business for yourself, but not by yourself

Copyright © 2015 Pearson Education, Ltd. 6-6

 Three basic types:
1. Trade-name franchising
2. Product distribution franchising
3. Pure franchising (or comprehensive
franchising or business format
franchising

Copyright © 2015 Pearson Education, Ltd. 6-7

 Primary reason to buy a franchise is the mutual
benefits to the franchisor and franchisee
Franchisees are buying the franchiser’s
experience
 Franchisees get a proven business system and
avoid having to learn by trial-and-error
 Before buying, ask: “What can a franchise do for
me that I cannot do for myself?”

Copyright © 2015 Pearson Education, Ltd. 6-8

The Franchise Relationship

Copyright © 2015 Pearson Education, Ltd. 6-9

 What do you get when you buy a franchise?
A business system
Management training and support
Brand name appeal
Standardized quality of goods and services
National advertising program
Financial assistance
Proven products and business formats
Centralized buying power
Site selection and territorial protection
Increased chance for success

Copyright © 2015 Pearson Education, Ltd. 6-10

Franchise Lending Activity

Copyright © 2015 Pearson Education, Ltd. 6-11

 What are the drawbacks of a franchise?
Franchise fees and ongoing royalties
Strict adherence to standardized operations
Restrictions on purchasing
Limited product line
Market saturation
Limited freedom
No guarantee of success

Copyright © 2015 Pearson Education, Ltd. 6-12

A Franchise Evaluation Quiz

Copyright © 2015 Pearson Education, Ltd. 6-13

 Franchisors are required to file a Franchise
Disclosure Document (FDD)
Key tool for protection
Franchisers must deliver a copy of a FDD
before any offer or sale of a franchise
 The FTC requires that FDDs use ‘plain English’

Copyright © 2015 Pearson Education, Ltd. 6-14

 The FDD contains information on 23 topics,
including:
Franchiser’s business experience
Franchise fees and costs
Lawsuits involving the franchiser
Financial assistance available
Territorial protection granted
Restrictions on purchasing

Copyright © 2015 Pearson Education, Ltd. 6-15

 Preparation, common sense, and patience are vital
ingredients in choosing the right franchise
Evaluate yourself
What do you like and dislike?
Research the market
Consider your franchise options
Get a copy of the FDD and study it

Copyright © 2015 Pearson Education, Ltd. 6-16

 What should you look for?
A unique concept or marketing approach
A profitable business model
A solid brand name and a registered trademark
A business system that works
A solid training program
Affordability
A positive relationship with franchisees

Copyright © 2015 Pearson Education, Ltd. 6-17

 Preparation, common sense, and patience are vital
ingredients in choosing the right franchise
Evaluate yourself
What do you like and dislike?
Research the market
Consider your franchise options
Get a copy of the FDD and study it
Franchise turnover rate
Talk to existing franchisees
Ask the franchisor some tough questions
Make your choice

Copyright © 2015 Pearson Education, Ltd. 6-18

 A franchise contract summarizes the details that will
govern the franchisor-franchisee relationship
Outlines the rights and obligations of each party
Often favors the franchisor
FTC requires that franchisees receive a complete
and revised contract at least 5 days before signing it

Copyright © 2015 Pearson Education, Ltd. 6-19

 Pros Cons

 Can be new and exciting  Business is not tested or

 Business concept can be fresh established in the market
New and different in the market  Unknown brand and trademark
 Possibility of getting lower fees  Possibility that the concept is a fad
Franchise
as a “pioneer” of the concept with no staying power
 Potential for a high return on  Franchiser may lack the experience
investment to deliver valuable services to
franchisees
 Business concept likely is well-  High franchise fees and costs that
known to consumers and market often are non-negotiable
Established for the products or services is  Concept may be on the wane in the
already established market
Franchise
 Franchiser has experience in  Franchiser’s brand and trademark
delivering services to may remind customers of an
franchisees outdated concept
 Franchiser has had time to work  Franchiser’s “trade dress” may be
the “bugs” out of the business in need of updating and
Copyright © 2015 Pearson Education, Ltd.
system redesigning 6-20
 Three terms responsible for most disputes:
1. Termination
Franchisees are usually prohibited from terminating
the agreement, but franchisors can terminate ‘with
or without cause’
2. Renewal
Franchisors usually have the right to renew or refuse
contract renewal
3. Transfer and buybacks
Franchisees are usually not free to sell their
business without approval

Copyright © 2015 Pearson Education, Ltd. 6-21

 Three major growth waves since the beginning of
franchising
1. Early 1970s – fast food boom
2. Mid-1980s – shift to the service sector
3. Early 1990s – focus on specific market niches

Copyright © 2015 Pearson Education, Ltd. 6-22

 Changing face of franchisees
Today’s franchisees are:
More diverse
Better educated
More experienced
More financially secure
 Multiple unit franchising
Multiple-unit franchising is more efficient
 International opportunities
Key to success: Adaptation

Copyright © 2015 Pearson Education, Ltd. 6-23

 Smaller, nontraditional locations
Intercept marketing
 Conversion franchising
Conversion franchising offers instant name
recognition
 Refranchising
Refranchising is reducing the number of company-
owned stores

Copyright © 2015 Pearson Education, Ltd. 6-24

 Area development and master franchising
Area development offers exclusive rights to an
area
Master franchises or subfranchises can be a
good option in international markets
 Cobranding
Cobranding or combination franchising involves
teaming up with complementary products or
services
 Serving dual-career couples and aging baby boomers

Copyright © 2015 Pearson Education, Ltd. 6-25

 Entrepreneurs can use franchising as a growth
strategy
 To create a successful franchise operation you need:
A unique concept
A replicable concept
An expansion plan
To do due diligence
Legal guidance
Initial cost to launch a franchise business is
$100,000 to $750,000
To provide support for franchisees

Copyright © 2015 Pearson Education, Ltd. 6-26