Franchising Boom PDF

The Franchising Boom ⚫ More than 3,800 franchisors operate more than 750,000 outlets in the United States ⚫ Each year, franchises produce goods and services that are worth \$710 billion, 2.3% of the U.S. GDP ⚫ Franchises employ one in every 7.8 million workers in the U.S. in more than 300 majo...

The Franchising Boom ⚫ More than 3,800 franchisors operate more than 750,000 outlets in the United States ⚫ Each year, franchises produce goods and services that are worth \$710 billion, 2.3% of the U.S. GDP ⚫ Franchises employ one in every 7.8 million workers in the U.S. in more than 300 major industries ⚫ Economic impact of franchising on the U.S. economy: \$2.1 trillion ⚫ A new franchise opens somewhere in the world every 8 minutes **Franchising** A system in which semi-independent business owners ( franchisees) pay fees and royalties to a parent company ( franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. **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 training suggestions Hires, manages, and fires 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 and suppliers Must meet quality standards and purchase only from approved suppliers **Advertising** Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads **Quality Control** Sets quality standards and enforces them with inspections; trains franchisees Maintains quality standards; trains employees to implement quality systems **Support** Provides support through an established business system Operates business on a day-to-day basis with franchiser's support Franchising in Japan ⚫ There is no uniform definition of a franchise in Japan ⚫ However, there are three relevant definitions with regard to franchise businesses ⚫ First, the Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973 -- MSRCPA) defines a 'chain business' as a business that, pursuant to an agreement with uniform terms and conditions, continuously sells or acts as an agent for sales of products and provides guidance regarding management, and primarily targets medium and small retailers. ⚫ In addition, a 'specified chain business' is defined as 'any chain business the agreement for which includes clauses which permit its members to use certain trademarks, trade names or any other signs, and collects joining fees, deposits or any other money from the member when becoming a member'. ⚫ If a franchise business falls under this definition, the regulations of the MSRCPA apply. Franchising in Japan ⚫ Second, the Guidelines Concerning the Franchise System (Franchise Guidelines) under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 1947 -- Anti-Monopoly Act) provide that: ⚫ The franchise system is defined in many ways. However, the franchise system is generally considered to be a form of business in which the head office provides the member with the right to use a specific trademark and trade name, and provides coordinated control, guidance, and supports for the member's business and its management. ⚫ The head office may provide support in relation to the selling of commodities and the provision of services. In return, the member pays the head office. Franchising in Japan ⚫ Third, the Japan Franchise Association (JFA) defines a franchise as: ⚫ A continuing relationship between one business concern (called a Franchisor) and another business concern (called a Franchisee) where a Franchiser and a Franchisee enter into a contractual agreement, the Franchiser granting the Franchisee the right to use the signs representing the Franchisor's business, which signs include the Franchisor's logo, service mark, trade name and others as well as the Franchisor's management know-how, and to conduct the product sales and other businesses which bear the same image as the Franchisor's; ⚫ the Franchisee paying the consideration to the Franchisor in return, providing the fund required for the business, and operating the business under the Franchisor's guidance and assistance. Franchising in Japan (Japan Franchise Association data) Types of Franchising ⚫ Trade-name ⚫ A franchisee purchases the right to use the franchisor's trade name without distributing particular products exclusively under the franchisor's name ⚫ Product distribution ⚫ A franchisor licenses a franchisee to sell its products under the franchisor's brand name and trademark through a selective, limited distribution network, with no method of doing business ⚫ Pure ("business format") ⚫ A franchisor sells a franchisee a complete business format and system 00 13 Franchising Basics ⚫ Franchisee gets the right to use all of the elements of a fully integrated business operation ⚫ Essence of what franchisees purchase from the franchisors ⚫ Experience ⚫ Key Question ⚫ What can a franchise do for me that I cannot do for myself? Benefits of Franchising ⚫ Management training and support ⚫ Start-up ⚫ Ongoing ⚫ Brand name appeal ⚫ "Cloning" ⚫ Standardized quality of goods and services ⚫ National advertising program ⚫ Franchisees contribute 1% to 5% of sales Benefits of Franchising ⚫ Financial assistance ⚫ Only 20% of franchisors offer financial assistance to franchisees ⚫ SBA -- Franchise Registry ⚫ Proven products and business formats ⚫ Centralized buying power ⚫ Site selection and territorial protection ⚫ Important issue: Territorial encroachment ⚫ Greater chance for success Drawbacks of Franchising ⚫ Franchise fees and ongoing royalties ⚫ Average upfront franchise fee = \$25,147 ⚫ Royalties range from 1% to 11% of franchisees' sales ⚫ Average royalty = 6.7% of sales ⚫ Strict adherence to standardized operations ⚫ Restrictions on purchasing and price ⚫ Approved suppliers only Drawbacks of Franchising ⚫ Limited product line ⚫ Contract terms and renewal ⚫ Average term = 10.3 years ⚫ Unsatisfactory training programs ⚫ Market saturation ⚫ Less freedom -- ⚫ "No independence" ⚫ "Happy prisoners" 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\. I'll use 80 percent of the franchiser's business system, but I'll improve upon by substituting my experience and know-how 5\. All franchises are the same Ten Myths of Franchising 6\. I don't have to be a hands-on manager I can be an absentee owner and still be very successful 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 fee 10\. Once I open my franchise, I'll be able to run things the way I want to Pre-contractual disclosure ⚫ Under the MSRCPA, when a franchisor intends to negotiate a franchise agreement with a prospective franchisee, the franchisor must provide written documents describing the prescribed items and explain the contents of the written documents to prospective franchisees. ⚫ There are no regulations regarding the frequency of updating disclosures. Detecting Dishonest Franchisers ⚫ Claims that the contract is "standard; no need to read it" ⚫ Failure to provide a copy of the required disclosure documents ⚫ Marginally successful prototype or no prototype ⚫ Poorly prepared operations manual ⚫ Promises of future earnings with no documentation ⚫ High franchisee turnover or termination rate ⚫ Unusual amount of litigation by franchisees Detecting Dishonest Franchisers ⚫ Attempts to discourage your attorney from evaluating the contract before signing it ⚫ No written documentation ⚫ A high pressure sale ⚫ Claims to be exempt from federal disclosure laws ⚫ "Get rich quick" schemes, promising huge profits with minimal effort ⚫ Reluctance to provide a list of existing franchisees ⚫ Evasive, vague answers to your questions The Right Way to Buy a Franchise ⚫ Evaluate yourself - What do you like and dislike? ⚫ Research your market ⚫ Consider your franchise options ⚫ Get a copy of the Franchise Disclosure Document (MSRCPA) for the franchise and read it! ⚫ Talk to existing franchisees ⚫ Ask the franchiser some tough questions ⚫ Make your choice Factors That Make a Franchise Appealing ⚫ Unique concept or marketing approach ⚫ Profitability ⚫ Registered trademark ⚫ Business system that works ⚫ Solid training program ⚫ Affordability ⚫ Positive relationship with franchisees Trends Shaping Franchising ⚫ Changing face of franchisees ⚫ Better educated with more business acumen ⚫ Multiple-unit franchising ⚫ 52% of franchisees operate multiple outlets (and growing) ⚫ International opportunities ⚫ McDonald's earns 70% of its sales internationally Trends Shaping Franchising ⚫ Smaller, nontraditional locations ⚫ Intercept marketing: putting a franchise's products or services directly in the paths of potential consumers, wherever they may be ⚫ Conversion franchising ⚫ Owners of independent businesses become franchisees to gain the advantage of name recognition Trends Shaping Franchising ⚫ Co-branding (piggyback or combination franchising) ⚫ Two or more franchises team up to sell complementary products or services under one roof ⚫ Refranchising ⚫ Franchisors sell their company-owned outlets to franchisees ⚫ "While 81 percent of McDonald\'s locations worldwide are currently owned and operated by franchisees, the company wants to increase that percentage to about 90 percent by the end of 2018." Trends Shaping Franchising ⚫ Multi-unit franchising ⚫ IFA: 20% of franchise owners are multiple-unit owners ⚫ Typical multiple-unit franchises own five outlets ⚫ Area development and master franchising ⚫ Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time ⚫ Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees