Entrepreneurship Chapter 11: Franchising

Study Notes

Franchising is a form of business organization where a firm (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and ongoing royalty payment.

Product and Trademark Franchise:
- Grants the right to buy products and use the franchisor's trade name.
- Typically connects a single manufacturer with a network of dealers or distributors.
- Examples: General Motors and dealerships.
Business Format Franchise:
- Provides a formula for doing business, including training, advertising, and other forms of assistance.
- Most popular form of franchising, especially for entrepreneurial firms.
- Examples: Fast-food restaurants, convenience stores, and motels.

Individual Franchise Agreement:
- Franchisee signs an agreement with the franchisor to operate a single outlet.
- Examples: Dunkin' Donuts and UPS Store.
Area Franchise Agreement:
- Franchisee signs an agreement to open and operate multiple outlets within a specific area.
- Examples: Domino's Pizza and KFC.
Master Franchise Agreement:
- Grants the franchisee the right to open and operate multiple outlets within a specific area and also to sub-franchise to others.

Franchising is most appropriate when a firm has a strong trademark, a well-designed business method, and a desire to grow quickly.
It may not be suitable for all businesses, such as large and complex operations like Walmart.

Qualities to look for in prospective franchisees:
- Good work ethic
- Ability to follow instructions
- Ability to operate with minimal supervision
- Team-oriented
- Experience in the industry
- Adequate financial resources and good credit history
Ways to develop franchisees' potential:
- Provide mentoring and ongoing support
- Keep operating manuals and business systems up-to-date
- Encourage input and feedback
- Maintain the franchise system's integrity

Advantages:
- Rapid, low-cost market expansion
- Profit sharing and income from franchise fees and royalties
- Increased buying power and cost savings
Disadvantages:
- Loss of control and potential friction with franchisees
- Managing growth and supporting franchisees
- Potential legal expenses and differences in required business skills

Important considerations:
- Willingness to take orders and follow the franchisor's system
- Ability to put in the necessary work and financial resources
- Compatibility with the franchisor's values and culture
- Potential for business growth and profitability
Costs involved:
- Initial franchise fee
- Ongoing royalty payments
- Advertising fees and other expenses
- Total initial investment

Federal Trade Commission (FTC) regulates the offer and sale of franchises
Franchisors must provide written disclosures to potential franchisees, including the Franchisor Disclosure Document (FDD)
The FDD contains 23 categories of information about the franchisor and the franchise relationship

Franchise ethics:
- Importance of ethical behavior in franchising
- Potential for ethical abuse due to get-rich-quick mentality, false assumptions, and conflicts of interest
International franchising:
- Opportunities and challenges of franchising in foreign markets
- Importance of considering cultural and linguistic differences, local laws and regulations, and the value of the franchisor's name in the foreign country