Franchising and The Entrepreneur: Chapter 4 Franchising ©2012 Pearson Education, Inc. Publishing As Prentice Hall 4-1

Franchising and the
Entrepreneur
Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall
4-1
The Franchising
Boom!!!
 Shoppers can now buy virtually
every product or service
imaginable through franchises
 More than 854,000 franchise
outlets in the United States
 employ almost 9.6 million people
 generate $835 billion in annual
output – an amount that is 5.8% of
the country’s GDP
4-2
Global Franchising
 52% of U.S. franchisers have
international outlets
 Of the U.S. franchisers who operate
globally, 30% of their total outlets are
located in other countries
 Hot markets: Europe and Pacific Rim
4-3
Franchising
 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
4-4
Figure 4.1 The Franchising Relationship
Element The Franchiser The Franchisee
Site selection Oversees and approves; may choose site Chooses site with franchiser’s approval
Design Provides prototype design Pays for and implements design
Employees Makes general recommendations and Hires, manages, and fires

training suggestions employees
Products and services Determines product or service line Modifies only with franchiser’s approval
Prices Can only recommend prices Sets final prices
Purchasing Establishes quality standards; provides Must meet quality standards; must purchase
list of approved suppliers; may require only from approved suppliers; must purchase
franchisees to purchase from the franchisor from supplier if required
Advertising Develops and coordinates national ad Pays for national ad campaign; complies with
campaign; may require minimum level of local advertising requirements; gets franchisor
spending on local advertising approval on local ads
Quality control Sets quality standards and enforces them Maintains quality standards; trains employees
with inspections; trains franchisees to implement quality systems
Support Provides support through an established Operates business on a day-to-day basis with
business system franchiser’s support
Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice
of
Types of
Franchising
 Tradename
 Product distribution
 Pure (Business format)
4-6
Why Buy a Franchise?
 Franchisees are buying the franchiser’s
experience
 “Going into business for yourself but not by
yourself”
 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?”
4-7
Benefits of Franchising
 Business system
 Management training and support
 Brand name appeal
 “Cloning”
 Standardized quality of goods and

services
 National advertising program
4-8
Benefits of Franchising
 Financial assistance
 Franchise Registry
 Proven products and business
formats
 Centralized buying power
 Site selection and territorial
protection
 Greater chance for success
4-9
Greater Chance for Success
 Study: After 5 years, 90% of

franchises are still in business
compared to 40% of
independent businesses
 The difference?
 Services,assistance, and guidance
that experienced franchisers offer
their franchisees
4-10
Success Rate Comparison
10 0 %
90%
80%
70%
60%
50%
% F ra nc his e s S urv iv ing
40% % In de pe nde nt B us ine s s e s S urv iv ing
30%
20%
10 %
0%
Ne w 1 2 3 4 5 6 7 8 9 10
Ye a rs in B us ine s s
Source: National Federation of Independent Businesses and U.S. Department of Commerce.
Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 4-11
What Franchisers Want in
Franchisees
1. People skills 94%
2. Ability to be coached 87%
3. General business skills 86%
4. Access to capital 84%
5. Entrepreneurial mindset 76%
6. Specific industry skills 29%
4-12
Drawbacks of Franchising
 Franchise fees and revenue

sharing
 Start-up costs range from $2,000 to
$250,000
 Royalty: 1% to 11% of sales
 Strict adherence to standardized

operations
 Restrictions on purchasing
4-13
Drawbacks of Franchising
 Limited product line

 Unsatisfactory training programs
 Market saturation
 Less freedom
 “Happy prisoners”
4-14
Ten Myths of Franchising
1. Franchising is the safest way to go into

business because franchises never fail
2. I’ll be able to open my franchise for
less money than the franchiser
estimates
3. The bigger the franchise organization,
the more successful I’ll be
4-15
4. I’ll use 80 percent of the franchiser’s

business system, but I’ll improve
upon it by substituting my
experience and know-how
5. All franchises are the same
6. I don’t have to be a “hands-on”
manager. I can be an absentee
owner and be very successful
4-16
7. Anyone can be a satisfied, successful
franchise owner
8. Franchising is the cheapest way to get
into business for yourself
9. The franchiser will solve my business
problems for me; after all, that’s why I
pay an ongoing royalty
10. Once I open my franchise, I’ll be able to
run things the way I want to
4-17
How to Buy a Franchise
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 franchiser’s Uniform
Franchise Disclosure Document (UFDD) and
study it
4-18
What Should You Look
For?
 A unique concept or marketing
approach
 Profitability
 A registered trademark
4-19
What Should You Look
For? (Continued)
 A business system that

works
 A solid training program
 Affordability
 A positive relationship
with franchisees
4-20
How to Buy a Franchise
(Continued)
 Talk to existing franchisees

 Ask the franchiser some tough
questions
 Make your choice
4-21
Table 4.4 Advantages and Disadvantages of Buying a New vs.
an Established Franchise
Pros Cons
Can be new and exciting Business is not tested or

Business concept can be fresh and established in the market
New different in the market Unknown brand and trademark
Possibility of getting lower fees as Possibility that the concept is a fad
Franchise
a “pioneer” of the concept with no staying power
Potential for a high return on Franchiser may lack the
investment experience to deliver valuable
services to franchisees
Business concept likely is well- High franchise fees and costs that
known to consumers and market for often are non-negotiable
Established the products or services is already Concept may be on the wane in the
established market
Franchise
Franchiser has experience in Franchiser’s brand and trademark
delivering services to franchisees may remind customers of an
Franchiser has had time to work outdated concept
the “bugs” out of the business Franchiser’s “trade dress” may be
system in need of updating and redesigning
Source: Based on Andrew A. Caffey, “Age Issues,” Entrepreneur, January 2002. p. 118.
Chapter 4 Franchising Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall 4-27

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Franchising and the

Element The Franchiser The Franchisee

Design Provides prototype design Pays for and implements design

Employees Makes general recommendations and Hires, manages, and fires

Prices Can only recommend prices Sets final prices

 Standardized quality of goods and

 Study: After 5 years, 90% of

Source: National Federation of Independent Businesses and U.S. Department of Commerce.

 Franchise fees and revenue

 Strict adherence to standardized

 Limited product line

1. Franchising is the safest way to go into

4. I’ll use 80 percent of the franchiser’s

 A business system that

 Talk to existing franchisees

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

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