FRANCHISE BUSINESS

OPPORTUNITY:
BENEFITS,
CHALLENGES &
RISKS

FRANCHISE FIRM ENTRY INFLUENCE.

ESSENTIALS OF ENTREPRENEURSHIP
AND SMALL BUSINESS
MANAGEMENT
Author: Norman M. Scarborough
 Table Of Contents
The Benefits of Buying a Franchise
A Business System
Management Taining and Support
Brand Name Appeal
Standardized Quality of Goods and Services
National Advertising Programs
Financial Assistance
Proven Products and Business Formats
Centralized Buying Power
Site selection and Territorial Protection
 Table Of Contents
Greater Chance for Success
The Drawbacks of Buying a Franchise
Franchise Fees and Ongoing Royalties
Strict Adhere to Standardized Operations
Restrictions on Purchasing
Limited Product Line
Contract Terms and Renewal
 Benefits of buying
a Franchise
A franchisee owns a small business quickly and often
reaches break-even faster than an independent
business due to the established product and brand
name. However, most new franchise outlets don't
break even for six to eighteen months. Franchisors
benefit from experience, as they have worked out
kinks in the system through trial-and-error, sharing
the secrets of success with franchisees. A great
franchisor has developed all necessary tools for
starting a business.
 A Business System
Getting access to a successful company system is one
of the main advantages of purchasing a franchise. A
franchisor's business framework frequently enables
franchisees to start their operations more quickly than
if they had attempted to do it themselves. Franchisees
can succeed even if they have little to no prior
expertise in the sector by using the franchisor's
business system as a guide.
Management Training and Support

Franchisors offer management training programs to franchisees before

opening a new outlet, providing them with the necessary knowledge
for day-to-day operations and running their businesses successfully.
These programs often involve both classroom and on-site instruction,
ensuring franchisees have the necessary skills for their new venture.
For example, McDonald's franchisees spend 14 days at Hamburger
University in Illinois, MAACO franchisees study at the company's
headquarters, and Ben & Jerry's Homemade franchisees study at Scoop
Brand Name Appeal
A licensed franchisee gains the right to use a
nationally recognized brand name for a product
or service, providing a strong brand identity
and drawing power. This advantage is
particularly beneficial for franchisees of
established systems, as customers recognize the
trademark, standard symbols, store design, and
products. This advantage saves entrepreneurs
time and money in advertising.
 Standardized Quality of Goods and
Services

Getting access to a successful company system is one of the main advantages of

purchasing a franchise. A franchisor's business framework frequently enables
franchisees to start their operations more quickly than if they had attempted to do it
themselves. Franchisees can succeed even if they have little to no prior expertise in
the sector by using the franchisor's business system as a guide.
 National Advertising
Programs

Effective advertising is crucial for franchise operations,

benefiting all franchisees. Most franchisors have a national
or regional advertising program, with franchisees
contributing to the campaigns. A recent study found that
79% of franchisors require franchisees to contribute to a
national advertising fund, with the average amount being 2%
of sales. Additionally, 41% of franchisors require franchisees
to invest in local advertising, with companies like Wendy's
and Burger King requiring at least 3% of gross sales.
Financial Assistance
Franchising can be a costly endeavor, with franchisees typically
investing a significant amount of their own money in their businesses.
Some franchisors may provide additional financing to help franchisees
grow their businesses. A study by FRANdata shows that 20% of
franchises offer direct financing to franchisees. Franchisors may also
assist franchisees in establishing relationships with banks and other
sources of funds, enhancing their credit standing. The Small Business
Administration (SBA) has created the Franchise Registry program to
provide financing for franchisees through loan guarantee programs. The
program streamlines the loan application process for franchisees who
pass screening tests at participating franchises. Approximately 6.3% of
all SBA loan guarantees go to franchisees, typically ranging from
$250,000 to $500,000.
Proven Products and Business
Formats
Franchisees buy a franchisor's business
system, allowing them to build a business
from scratch without relying on personal
ability. This standardized procedures
enhance success and avoid inefficient
learning-trial and error. Franchisees also
don't have to struggle for local recognition.
Centralized Buying Power
Franchisees benefit from franchisor's
centralized and large-volume buying power,
which can pass on cost savings from
quantity discounts. This makes independent
small business owners unlikely to compete
with franchise operations, as economies of
scale often prevent them from doing so.
 SITE SELECTION AND TERRITORIAL
PROTECTION
Franchise success relies on location, locution, and location. Franchising experts consider these three
factors as the most important. Franchising involves extensive location analysis, including traffic patterns,
zoning ordinances, accessibility, and population density. Franchising experts can control the site
selection process, but franchisees typically make the decision. Some franchisors offer territorial
protection, allowing exclusive distribution of brand name goods or services within a specific geographic
area. This protection prevents invasion of existing franchisees' territories and sales dilution. A study of
successful franchises found that the failure rate for franchisees is lower in systems with exclusive
territories. As markets become saturated with franchise outlets, the placement of new outlets has become
a source of friction between franchisors and franchisees. Prospective franchisees must know the type of
territorial protection the franchisor guarantees before signing a franchise contract.
Brand Name Appeal
A licensed franchisee gains the right to use a
nationally recognized brand name for a product
or service, providing a strong brand identity
and drawing power. This advantage is
particularly beneficial for franchisees of
established systems, as customers recognize the
trademark, standard symbols, store design, and
products. This advantage saves entrepreneurs
time and money in advertising.
 Greater Chance for
Success
Franchising in a franchise is not risk-free, as between
200 and 300 new franchise companies enter the market
each year. However, not all survive, as seen with 138
franchisee-owned restaurants facing bankruptcy.
Research shows that the failure rate for young franchise
systems is higher than older ones. Franchising is less
risky than building a business from scratch, but statistics
should be interpreted carefully, as franchisors may
repurchase or relocate outlets in danger of failure.
 As a result, some franchisors boast of never experiencing a failure. A recent
study of franchises reports that the success rate of franchisees is higher when a
franchise system:
• Requires franchisees to have prior industry experience.
• Requires franchisees to actively manage their stores (no "absentee" owners).
• Has built a strong brand name.
• Offers training programs designed to improve franchisees' knowledge and skills,

Franchising involves two-pronged risk: success depends on franchisee's managerial skills

and motivation, and franchisor's business experience, system, and support. Many
franchisees believe franchising is key to their success, offering independent business
ownership with support.
 The Drawbacks of Buying
a Franchise
Franchising offers significant benefits for
entrepreneurs, but it requires sacrificing
freedom to the franchisor and other
disadvantages, making it crucial for
prospective franchisees to understand.
Franchise Fees and Ongoing Royalties
Franchising involves a franchisee imposing fees and a share of sales revenue
in return for using the franchisor's name, products, services, and business
system. The initial capital requirements for a franchise can range from $1,000
for home-based service franchises to $6.5 million or more for hotel and motel
franchises. Start-up costs for franchises often include an upfront fee for the
right to use the company name, with the average fee being $25,147. Some
franchise fees do not include costs, such as location analysis, site purchase,
construction, signs, fixtures, equipment, management assistance, and
training. Franchisors also impose continuing royalty fees as revenue-sharing
devices, usually involving a percentage of gross sales. These fees increase a
franchisee's overhead expenses significantly. Franchising royalties and fees
are calculated as a percentage of a franchisee's sales, and the franchisor gets
paid even if the franchisee fails to earn a profit
 Strict Adhere to Standardized Operations
Franchisees own their businesses but lack autonomy. Franchising
requires franchisees to maintain certain operating standards to
protect the franchisor's image. The franchisor controls store
layout, color schemes, products, personnel, and policies.
McDonald's franchisees must follow the franchise manual,
which outlines every detail. If a franchise fails to meet minimum
standards, the franchisor may terminate its license. Compliance
is determined through periodic inspections and mystery
shoppers, who observe and record key standards. McDonald's
uses mystery shoppers to compare franchisees' scores with
regional averages
 RESTRICTIONS ON PURCHASING

Franchising is a business model where franchisors require franchisees to purchase products or

equipment from the franchisor or approved suppliers to maintain quality standards. This can be
challenging in court due to antitrust laws, but franchisors generally have a legal right to ensure
franchisees maintain acceptable quality standards. Franchising can also influence the prices
franchisees charge, but cannot control the retail prices they charge. Franchising can suggest
retail prices but cannot force franchisees to abide by them, as this would violate the Robinson-
Patman Act. Franchising can also involve offering discount coupons that franchisees honor,
such as "two-for-one" coupons, which can cut into profit margins. In some cases, franchisors
may stop distributing these coupons to ensure franchisees maintain acceptable quality
standards.
 Limited Product Line

The franchise agreement typically restricts franchisees from selling unapproved products unless they
risk losing their licenses. Franchisees may be required to carry unpopular products or be prevented
from introducing desirable ones. However, some franchisors actively solicit innovations and product
suggestions from franchisees. McDonald's' most successful products, like the Big Mac, were
invented by franchisees like Jim Delligatti, who sold 550 million Big Macs annually.
Contract Terms and Renewal

Franchise contracts are written by franchisor's attorneys and are typically

written in favor of the franchisor. The contract governs the franchisor-
franchisee relationship for up to 20 years, with an average length of 10.3
years. However, 40% of new franchisees sign their contracts without
reading them. Franchisees should also understand the terms and conditions
for renewal, which typically involve paying a renewal fee, repairing
deficiencies, or upgrading outlets. A recent study by the International
Franchise Association and FRANdata reported a 94% renewal rate for
franchise agreements.
THANK YOU!
MR. ALDON FRANCIA