Entrepreneurship and Small

Business Management
2/e
by Mariotti and Glackin

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Chapter 2:
FRANCHISING

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 Learning Objectives
 Define and describe franchising.
 Identify the positive and negative aspects of
franchising.
 Understand the structure of the franchise
industry.
 Recognize the legal aspects of franchising.
 Learn how to research franchise opportunities.
 Explore international franchising.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2-3

 What Is Franchising?
 Franchise—a business that markets a
product/service developed by a franchisor.
 Franchising—the system of operating a
franchise governed by a legal agreement.
 Franchisor—person or company who
develops/sells a franchise and specifies the
terms and methods of the agreement.
 Franchisee—owner of a franchise unit or
territory rights.

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 Main Types of Franchises
 Product and trade-name franchising
—licensing or production of the product,
and use of the franchise trade mark, logo,
or identity.
 Auto dealership
 Business-format franchising—
purchase of an entire business model and
system, including access to management
expertise.
 Circle K, Pizza Hut
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 Other Franchise Variations
 Master franchise—allows individuals
and organizations to buy the right to
sub-franchise within a defined
geographic territory.
 Area franchise or multiple-unit
franchise—gives exclusive rights to
open franchisee-operated units within
specific areas.

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 Before You Invest….
 Pick a franchise you’re familiar with.
 Know the upfront costs.
 Know your restrictions.
 If you want to get rich, plan to
expand.
 Read the fine print.

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 Positive and Negative
Aspects of Franchising
Advantages Drawbacks
 Start-up assistance  Constraints on

 Instant recognition creativity and

 Purchasing power
freedom
 Costs
 Advertising and
 Standards and
promotional support
 Operating guidelines
termination
 Record of success

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Franchise Industry Structure
 A few large franchisors, with worldwide
franchisees, control most of the
industry.
 Many smaller franchisors have local and
regional franchisees.
 In 2012, U.S. franchises had revenues
of $769 billion provided over 8.1 million
jobs.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2-9

Additional Types of Franchises
 Internet franchise—”virtual” franchise that
is not dependent on a physical location.

 Conversion franchising—an existing

stand-alone business or local chain becomes
part of a franchise operation.

 Piggybacking or co-branding—two
franchises share locations and resources.

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Legal Aspects of Franchising
 State and federal regulations govern
franchises.
 Federal Trade Commission (FTC)—
primary agency involved in oversight.
 Franchise Disclosure Document (FDD)
—primary source of data for prospective
franchisees regarding franchisors.
 Franchise agreement—legal contract
between the parties in a franchise.

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 Information Included in a FDD
 Overview and background
 Fees and costs
 Contractual obligations
 Territory
 Financial performance
 Data on existing units
 Financial statements and contracts
 Termination, renewal, and other policies

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 Information Included in a
Franchise Agreement
 Term of agreement (length of time)
 Standards of quality and performance
 Royalties
 Non-compete, “hold harmless,” and
integration clauses; choice of venue
 Clauses regarding termination, renewal, and
transfer of the franchise
 Territories

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Steps for Franchise Selection
1. Take time to reflect and engage
core supporters.
2. Identify potential franchises.
3. Do research to narrow the list of
options.
4. Decide whether to use a franchise
broker.
5. Visit and observe franchise
operator(s).

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 Steps for Franchise Selection
(continued)

6. Request preliminary information from

franchise companies.
7. Perform due diligence on a specific
franchise.
8. Explore financing options.
9. Make a decision, engage professional
counsel, and negotiate an agreement.
10. Make it work!

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 International Franchising
 Opportunities exist worldwide.
 The decision to go global is more
complex than domestic franchising.
 Ethnic, cultural, and religious diversity
impact business format and operations.
 Policies must be altered for differences
in governing law and custom.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 2-17