Questions and Answers
What is franchising?
A form of business organization where a franchisor licenses its trademark and method of doing business to a franchisee in exchange for a franchise fee and ongoing royalty payment.
What are the two main types of franchise systems?
The ____ provides a formula for doing business to the franchisee.
franchisor
Which of the following is NOT a quality to look for in prospective franchisees?
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Franchising is only suitable for large corporations.
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What are two primary advantages of franchising?
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What should potential franchise owners be aware of before purchasing a franchise?
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What percentage is a typical ongoing royalty payment collected from franchisees?
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Franchising guarantees business success.
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Which document provides potential franchisees with information about the franchisor and franchise relationship?
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What are two common misconceptions about franchising?
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Study Notes
Franchising
- 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.
Types of Franchise Systems
- 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.
Types of Franchise Agreements
- 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.
When to Franchise?
- 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.
Selecting and Developing Effective Franchisees
- 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 and Disadvantages of Establishing a Franchise System
- 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
Buying a Franchise
- 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
Steps in Purchasing a Franchise
- Seven-step process:
- Research and evaluate franchise opportunities
- Review the franchisor's disclosure document (FDD)
- Evaluate the franchise agreement
- Analyze the franchisor's financial statements
- Consult with a franchise attorney and accountant
- Visit existing franchisees and ask questions
- Make a decision and sign the franchise agreement
Watch Out! Common Misconceptions about Franchising
- Franchising is not a safe investment
- A strong industry does not guarantee franchise success
- A franchise is not a proven business system
- It is essential to hire a franchise attorney and accountant
- Rapid growth may not be the best indicator of a good franchise system
- The franchisor's predictions may not be accurate
- The franchisor may not always be helpful or supportive
Legal Aspects of the Franchise Relationship
- 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
More About Franchising
- 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
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Description
This quiz covers the basics of franchising and how entrepreneurs can establish a franchise system. Learn about the advantages and steps involved in franchising.
