Franchising Chapter 1-5 Quiz

Introduction to Franchising

• Franchising is a method of expansion that provides an alternative means of capital formation.
• It is especially attractive for businesses expanding into geographically or culturally remote foreign markets.
• Franchising involves granting the right to operate a business under an established brand to a franchisee, using the franchisor's systems and methods in exchange for fees or royalties.
• Enables franchisees to start with an established brand and allows franchisors to expand without directly managing all locations.
• Franchising allows beneficiaries to sell the products or services of manufacturers or parent businesses, potentially including access to intellectual property rights.

History of Franchising

• Middle Ages: Governments granted licenses to officials for maintaining order and assessing taxes, with fees paid for protection and business rights.
• Colonial Period: European monarchs granted franchises for establishing colonies and exploiting resources in new territories, with royalties or taxes paid in return.
• 1840s: Spaten Brewery in Munich partnered with taverns, granting exclusive rights to sell Spaten beer in exchange for fees or a portion of profits.
• 1880s: Isaac Merritt Singer of the Singer Sewing Machine Company established a system of independent agents who were granted rights to sell and service Singer sewing machines in specific territories.
• Turn of the Century: The creation and mass production of automobiles led to dealership networks.
• 1896: William Metzger built the first independent automobile dealership in Detroit, Michigan.
• Second businessman H.O. Kohller opened the first automobile dealership in Pennsylvania.
• Oil companies began opening gasoline service stations, some as franchises.
• 1960s: Ray Kroc partnered with the McDonald brothers to expand their hamburger stand into a franchise, with approximately 80% of McDonald's restaurants now franchised.
• 1985: McDonald’s opened franchising opportunities in the Philippines.
• 1988: Max’s Group began franchising its brands nationwide, including Jamba Juice, Krispy Kreme, and Yellow Cab.
• 2003: Potato Corner was inducted into the Franchise Hall of Fame by the Philippine Franchising Association and the Department of Trade and Industry.

Types of Franchising

• Job Franchise: Owner-operated with few employees, often home-based, requiring low investment.
• Conversion Franchise: Independent businesses join an existing franchise network, beneficial for quick network expansion and brand recognition.
• Investment Franchise: Large-scale businesses requiring significant capital, franchisee is not involved in daily operations but employs professional management staff.
• Product Distribution: Franchisee distributes or sells the franchisor's product under their own identity.
• Business Format: Franchisor provides everything needed to set up and operate the business.

Importance of Franchising

• Franchising provides opportunities to start a business with the support of an established brand and a proven business model.
• Franchises offer training and support, enabling confident business startups.
• Successful franchises generate jobs, remain profitable, and attract customers due to stable business systems and consistent products/services.
• Franchisees benefit from a corporate system of success and a strong support system, reducing risk compared to independent ventures.
• Franchisees also benefit from lower expenses via volume buying and access to new technology provided by the franchisor.

Types of Franchising (Detailed)

• Job Franchise: Low-cost, easy-to-start, often home-based, with the franchisee handling daily tasks.
  • Examples: Travel agencies, coffee vans, cellphone repair shops
• Product Franchise: Focuses on selling the franchisor’s products using the franchisor's brand name, with limited support in operating the business.
  • Key Features: Use of brand name, product-focused, limited support
• Business Format Franchise: Franchisor provides a complete system for operating the business, including brand, marketing, training, and operational procedures.
  • This ensures consistency by including: Brand Name, Products or Services, Operating System
• Investment Franchise: Large-scale businesses needing significant capital, with franchise owners either managing themselves or hiring teams.
  • Examples: Hotels, Large Restaurants, Fitness Centers, Retail Stores.
• Conversion Franchise: Independent businesses join an established franchise network, gaining benefits from trademarks, marketing programs, and operating procedures.
  • Suited industries include: Real estate, dental and medical clinics, hairdressing, hardware stores, professional services, home services, hotels, auto mechanics.

Franchising Advantages

• Business assistance: Franchisees receive support from the franchisor, including knowledge, equipment, supplies, and advertising plans.
• Brand recognition: Franchisees benefit from established customer bases and well-known branding.
• Lower failure rate: Franchises have proven business concepts and receive ongoing support and advice.
• Buying power: Large networks enable franchises to purchase goods in bulk at discounted rates, lowering costs.
• Profits: Franchises often see higher profits due to brand recognition.
• Lower risk: Franchise networks provide tested business models and support, reducing risk and facilitating loan access.
• Built-in customer base: Franchises come with instant brand recognition and a loyal customer base.
• Be your own boss: Franchisees gain autonomy with the support of the franchise's knowledge base.
• Franchisees benefit from a support system that is proven to work.
• Franchises provide a certain level of independence where they can operate their business.
• Franchises provide an established product or service which already enjoys widespread brand name recognition.
• Franchises increase chances of business success because franchise owners are associating with proven products and methods.
• Franchises may offer consumers the attraction of a certain level of quality and consistency which is mandated by the franchise agreement.
• Franchises offer important pre-opening support such as site selection, design and construction, financing (in some cases), training & a grand-opening program.
• Franchises offer ongoing support such as training, national and regional advertising, operating procedures and assistance, ongoing supervision and management support & increased/bulk spending power (in some cases).

Franchising Disadvantages

• Restricting regulations: Franchisees must adhere to the restrictions of the franchise agreement, limiting control over business decisions.
• Initial cost: Franchise fees can be costly, especially for well-known franchises, straining small business finances.
• Ongoing investment: Additional costs include royalty fees, advertising costs, and training fees.
• Potential for conflict: Close business relationships and power imbalances can lead to disagreements between franchisee and franchisor.
• Lack of financial privacy: Franchisors may oversee the franchisee's financial ecosystem.
• Lack of independence: Franchisees have less influence over offerings, storefront design, and marketing.
• High costs: Initial fees can be substantial, especially if the brand is recognizeable.
• Reason for conflict: Franchisee has little influence though agreement outlines roles of both franchisee & franchisor.
• Damaged reputation: If from a new franchise's actions. The franchisee has little power to change any issues
• Less Control: As soon as he accepts the offer of starting a new franchise, part control is lost, and must be operated under all the regulations of the operational procedures
• Over-dependence on the system: Franchisees have to balance system restrictions with their personal ability to manage their own businesses.
• Other franchisees that are "bad apples": The principal reason of franchsing is that it relies on peopels consistency of quality
• Income expectations: Franchising is only an invenstment if expectations are realistic in time, effort/work and investment ($).
• Franchising inelasticity: Agreements contain restrictiosn that potentially impact the franchisor's ability to make strategic decisions.

Definition of Franchising Opportunities

• Franchising opportunities involve operating under an established brand and business model.
• The franchisor grants rights to use trademarks, sell products/services, and follow operational systems in exchange for fees and royalties.
• It’s a mutually beneficial relationship: franchisees gain a proven business model and brand recognition, while franchisors expand with reduced operational risk.

Examples of Franchising Opportunities

• Food and Beverage Industry:
  • Starbucks (Licensed Stores): Running Starbucks outlets in specific regions.
  • McDonald’s: Operating restaurants using McDonald’s brand, recipes, and systems.
• Retail and Fashion:
  • The Body Shop: Franchises for eco-conscious beauty and skincare stores.
  • 7-Eleven: Owning convenience stores under its brand.
• Health and Wellness:
  • Anytime Fitness: A global gym franchise.
  • Massage Envy: A franchise for massage and skincare services.
• Education and Training:
  • Kumon: Franchising after-school math and reading centers.
  • Tutor Doctor: Provides personalized tutoring services.
• Beauty and Personal Care:
  • Nail-A-Holics: Offers nail care services.
  • Browhaus: Specializes in eyebrow grooming.
• Home-Based Franchises:
  • Coffee News: A low-cost franchise for distributing weekly newsletters.
  • Cruise Planners: Offers a home-based travel agency franchise.

Purpose of Exploring Franchise Opportunities

• Exploring franchise opportunities allows individuals to use an established brand and proven business model for growth.
• Minimized Risk: Franchises operate on a business model that has been tested and refined.
  • Example: Investing in a well-known coffee chain ensures market acceptance and expertise.
• Brand Recognition: Makes attracting and retaining clients easier.
  • Example: Opening a Subway franchise immediately benefits from the brand’s reputation.
• Support and Training: Franchisors provide programs, guidelines, and support, ensuring franchisees are set up for success.
  • Example: McDonald’s offers comprehensive training on operations, customer service, and supply chain management.
• Faster Market Entry: Allowing entrepreneurs to enter the market quickly, while avoiding the time and effort required to build a brand from scratch.
  • Example: A 7-Eleven franchise provides stores with established supply chains.
• Established Supply Chain: Guaranteeing constant quality and cost-effective operations.
  • Example: KFC franchisees access the company’s exclusive recipes and suppliers.
• Scalability and Growth Potential:
  • Example: A franchisee of Anytime Fitness might invest in wellness franchises.
• Community and Networking: Joining a franchise means becoming part of a business owner community, which provides support and shared experiences.
  • Example: Franchisees of The Body Shop often collaborate on sustainability initiatives.

Types of Franchising Opportunities

• Product Distribution Franchise: Franchisee sells the franchisor’s products under the brand name; franchisor supplies product.
  • Examples: Coca-Cola bottling companies, automobile dealerships.
• Business Format Franchise: Franchisor provides a complete business model, marketing, and operational guidelines.
  • Examples: Fast food, fitness centers.
• Manufacturing Franchise: Franchisee manufactures and sells products under the franchisor’s brand name.
  • Examples: Coca-Cola bottling plants, apparel manufacturing under licensed brands.
• Job or Home-Based Franchise: Operated from home, requiring minimal investment, and ideal for flexible schedules.
  • Examples: Tutor Doctor, Cruise Planners.
• Investment Franchise: Requires significant capital, with staff hired to manage daily operations.
  • Examples: Hotel chains, multi-unit franchise ownerships.
• Conversion Franchise: An independent business converts into a franchise; adopting the franchisor’s branding and business model.
• Examples: Real estate agencies cleaning and plumbing services
• Retail Franchise: Selling goods or services directly to customers through physical stores or Kiosks.
• Examples: The Body Shop, 7-Eleven
• Service Franchise: Provides Specific Services with trained staff.
• Examples: Jan-King & Massage Envy

Steps to Becoming a Franchisee

• Self-Assessment: Evaluate skills, interests, and financial readiness.
  • Considerations: Resources, willingness to follow systems, time commitment.
• Research Franchise Opportunities: Identify franchises aligning with interests, budget, and market demand.
  • Considerations: Industry preference, initial costs, franchisor reputation.
  • Resources: Franchise directories, expos, franchisor websites.
• Conduct Due Diligence: Investigate franchises thoroughly with existing franchisees.
  • Review Franchise Disclosure Document (FDD) for business information.
  • Analyze fees, royalties, market saturation, and competition.
• Assess Financial Feasibility: Determine funding for franchise fees, equipment, expenses, and working capital.
• Meet the Franchisor: Attend meetings to learn about processes, expectations, and support.
• Create a Business Plan: Guide your franchise journey and secure funding.
  • Include market analysis, projections, and strategies.
• Secure Financing: Explore financing options, such as banking and the franchisors own programs and loans.
• Sign the Franchise Agreement: Ensuring all conditions are understandable.
  • This includes duration, termination clauses & territorial rights.
• Attend Training Programs: Attend training sessions to learn operational procedures, product standards, and marketing strategies.
• Set Up and Launch Your Franchise: Secure a location and set up your business per the guidelines set, also hire, attract, train and onboard staff.
• Operate and Grow: Follow the franchisor's system to maintain brand consistency to grow your customer base.

Importance of Feasibility in Franchising

• Franchise feasibility evaluates the potential success of replicating a business model through franchising.
• It considers market demand, competition, efficiency, and quality across locations, as well as business potential.

Key Factors in Franchise Feasibility

• Market Demand: Conduct thorough market research to understand potential demand in different locations.
• Operational Efficiency: A business model that is easily replicated by franchisees with minimal training.
• This included standardize processes and systems that franchisees can easily implement
• Financial Viability: Assess the profitability of the business model and the potential return on investment for franchisees.
• The business must assess the initial investment, ongoing costs, and potential revenue.

Conducting a Franchise Feasibility Study

• A comprehensive analysis helps identify challenges and opportunities and guide franchising strategies.

Steps in a Franchise Feasibility Study

• Market research, operational analysis, financial analysis, legal considerations & review franchise system.