Chapter 10 Franchising.pptx

Entrepreneurship: Successfully Launching New Ventures Sixth Edition Chapter 11 Franchising Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Righ...

Entrepreneurship: Successfully Launching New Ventures Sixth Edition Chapter 11 Franchising Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  Learning Objectives Explain franchising and how this form of business ownership works. Describe steps entrepreneurs can take to establish a franchise system. Become familiar with the advantages and disadvantages of establishing a franchise system. Describe actions and issues associated with a decision to buy a franchise. Explain the steps an entrepreneur goes through to buy a franchise. Identify and explain the various legal aspects associated with the franchise relationship. Discuss two additional issues—franchise ethics and international franchising—entrepreneurs should think about when considering franchising. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. What is Franchising? Franchising − A form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Two Types of Franchise Systems (1 of 2) Product and Trademark Franchise – An arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. – This approach typically connects a single manufacturer with a network of dealers or distributors.  For example, General Motors has established a network of dealers that sell GM cars and use the GM trademark in their advertising and promotions. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Two Types of Franchise Systems (2 of 2) Business Format Franchise – An arrangement under which the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance. – Fast-food restaurants, convenience stores, and motels are well-known examples of business format franchises.  Business format franchises are by far the most popular form of franchising, particularly for entrepreneurial firms. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  Business Format Franchises Table 15.1 10 Industries in Which Business Format Franchises Are Used Prominently 1. Automotive 2. Business Services 3. Commercial and Residential Services 4. Food Retailing 5. Lodging 6. Personal Services 7. Quick Serve Restaurants 8. Real Estate 9. Retail Products & Services 10. Table/Full-Service Restaurants Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. BUSINESS FORMAT and TRADEMARK FRANCHISE IN THE MALAYSIAN CONTEXT Business Format Franchise Product and Trademark Franchise Marrybrown Gaurdian health and beauty retail chain OldTown White Coffee 7-Eleven Secret Recipe Baskin-Robbins Smart Reader Kids Petronas Maxis: Celcom UniFi (Telekom Malaysia) UMobile HomePro MR.DIY KFC, McDonald's, Domino's, and Subway Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Types of Franchise Agreements (1 of 3) Individual Franchise Agreement For example: Dunkin' Donuts: A franchisee signs an individual agreement with Dunkin' Donuts to operate a single coffee and bakery outlet. UPS Store: An entrepreneur enters into an individual franchise agreement with UPS Store to operate a single shipping and printing center. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Types of Franchise Agreements (2 of 3) Area Franchise Agreement For example: Domino's Pizza: A franchisee signs an area development agreement with Domino's Pizza to open and operate multiple pizza delivery outlets within a specific city. KFC: A business entity enters into an area development agreement with KFC to develop and operate a certain number of fast-food restaurants within a designated region. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Types of Franchise Agreement (3 of 3) Master Franchise Agreement Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. When to Franchise? (1 of 2) – Franchising is most appropriate when a firm has a strong or potentially strong trademark, a well-designed business method, and a desire to grow. – In some instances franchising is not appropriate.  For example, franchising works for Burger King but would not work for Walmart.  Each individual Burger King store is relatively small and policies and procedures can be written for almost any contingency.  In contrast, Walmart stores are much larger, more expensive to build, and more complex to run compared to Burger King Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. When to Franchise? (2 of 2) Figure 15.2 Nine Steps in Setting Up a Franchise System Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Selecting and Developing Effective Franchisees (1 of 2) Table 15.2 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 in which the franchise competes Adequate financial resources and good credit history Ability to make suggestions without becoming confrontational or upset if the suggestions are not adopted Ability to represent the franchisor in a positive manner Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Selecting and Developing Effective Franchisees (2 of 2) Table 15.2 Ways Franchisors Can Develop Their Franchisees’ Potential Provide mentoring that supersedes routine training Keep operating manuals up-to-date Keep product, services, and business systems up-to-date Solicit input from franchisees to reinforce their importance in the larger system Encourage franchisees to develop a franchise association Maintain the franchise system’s integrity Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Advantages and Disadvantages of Establishing a Franchise System (1 of 2) There are two primary advantage of franchising. − Franchising helps a venture grow quickly because franchisees provide the majority of the capital. − Agency theory argues that managers, because they are paid a salary, may not be as committed to the success of their individual units as franchisees, who are in effect business owners. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Advantages and Disadvantages of Establishing a Franchise System (2 of 2) Table 15.3 Advantages and Disadvantages of Franchising as a Method of Business Expansion Advantages Disadvantages Rapid, low-cost market Profit sharing. expansion. Loss of control. Income from franchise fees and royalties. Friction with franchisees. Franchisee motivation. Managing growth. Access to ideas and Differences in required business suggestions. skills. Cost savings. Legal expenses. Increased buying power. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Buying a Franchise (1 of 4) From the Franchisee’s Point of View – Potential franchise owners should strive to be as well informed as possible before purchasing a franchise and should be aware that it is often legally and financially difficult to exit a franchise relationship. – Franchising may be a particularly good choice for someone who wants to start a business but has no prior business experience.  Many franchise systems provide their franchisees substantial training and support. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  Buying a Franchise (2 of 4) Answering the following questions will help determine if franchising is right for you: Are you willing to take orders? Franchisors are typically very particular about how outlets operate. Are you willing to be part of a franchise “system” rather than be an independent businessperson? How will you react if you make a suggestion to your franchisor and your suggestion is rejected? What are you looking for in a business? How hard do you want to work? Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Buying a Franchise (3 of 4) How willing are you to put your money at risk? How will you feel if your business is operating at a net loss but you still have to pay royalties on your gross income? Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Buying a Franchise (4 of 4) Table 15.6 Advantages and Disadvantages of Buying a Franchise Advantages Disadvantages A proven product or service within Cost of the franchise. an established market. Restrictions on creativity. An established trademark or Duration and nature of the business system. commitment. Franchisor’s training, technical Risk of fraud, misunderstandings, expertise, and managerial expertise. or lack of franchisor commitment. Problems of termination or transfer. An established marketing network. Poor performance on the part of other franchisees. Franchisor’s ongoing support. Potential for failure. Availability of financing. Potential for business growth. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  The Cost of a Franchise (1 of 4) Initial Franchise Fee – The initial fee varies depending on the franchisor – upfront cost to join as a “member” of the franchise system. Capital Requirements – The costs vary but may include the cost of buying real estate, the cost of putting up a building, the purchase of inventory, and the cost of obtaining a business license. Continuing Royalty Payment – Is usually around 5% of monthly gross income. – ongoing “membership fees Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  The Cost of a Franchise (2 of 4) Advertising Fees – Franchisees are often required to pay into a national or regional advertising fund. Other Fees – Other fees may be charged for various activities, including:  Training additional staff.  Providing management expertise when needed.  Providing computer assistance.  Providing a host of other items or support services. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  The Cost of a Franchise (3 of 4) Table 15.4 Initial Costs to the Franchisee of a Sample of Franchise Organizations Franchise Year Started Company- Franchised Franchise Ongoing Total Initial Organization Franchising Owned Units Units Fee Royalty Fee Investment Anytime Fitness 2002 38 3,386 $19,000-- $449-$549/month $80,020--$490,100 $37,500 Budget Blinds 1994 0 1,087 $19,950 Varies $99,240–$202,070 Edible 2001 8 1,245 $30,000 5% $196,610--$327,810 Arrangements Hampton Inn 1984 1 2,148 $75,000 6% $4.2--$14.9 million Hotels Liberty Tax 1973 351 3,753 $40,000 14% $58,700--$71,900 Service Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.  The Cost of a Franchise (4 of 4) Table 15.4 (continued) Franchise Year Started Company- Franchised Franchise Ongoing Total Initial Organization Franchising Owned Units Units Fee Royalty Fee Investment Pinkberry 2006 33 242 $35,000 6% $310,842—$615,145 Play It Again Sports 1988 0 285 $25,000 5% $240,300--$397,200 Qdoba Mexican 1997 359 330 $30,000 5% $851,600--$1.13 million Grill The UPS Store 1980 0 4,910 $29,950 5% $159,224--$434,521 Wetzel’s Pretzels 1996 9 294 $35,000 7% $164,950--$405,850 Source: Based on Entrepreneur.com, www.entrepreneur.com (accessed March 21, 2017). Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Steps in Purchasing a Franchise (1 of 2) The first rule of buying a franchise is to avoid making a hasty decision. Owning a franchise is typically costly and labor-intensive. As a result, the purchase of a franchise should be a careful, deliberate decision. Purchasing a franchise system is a seven-step process, as illustrated in the following slide. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Steps in Purchasing a Franchise (2 of 2) Figure 15.3 Seven Steps in Purchasing a Franchise Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Watch Out! Common Misconceptions about Franchising Franchising is a safe investment. A strong industry ensures franchise success. A franchise is a “proven” business system. There is no need to hire a franchise attorney or an accountant. The best systems grow rapidly, and it is best to be part of a rapid-growth system. I can operate my franchise outlet for less than the franchisor predicts. The franchisor is a nice person—he’ll help me out if I need it. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Legal Aspects of the Franchise Relationship Federal Rules and Regulations – The offer and sale of a franchise are regulated at the federal level.  According to Federal Trade Commission (FTC) rule 436, franchisors must furnish potential franchisees with written disclosures that provide information about the franchisor, the franchised business, and the franchise relationship.  In most cases, the disclosures are made through a lengthy document referred to as the Franchisor Disclosure Document (FDD).  The FDD contains 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. More About Franchising (1 of 3) Franchise Ethics – The majority of franchisors and franchisees are highly ethical. – There are certain features of franchising, however, that make it subject to ethical abuse. These features are as follows:  The get-rich-quick mentality.  The false assumption that buying a franchise is a guarantee of business success.  Conflicts of interest between franchisors and franchisees. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. More About Franchising (2 of 3) International Franchising – International opportunities for franchising are becoming more prevalent for the following two reasons:  The markets for certain franchised products in the U.S. have become saturated (i.e., fast food).  The trend toward globalization continues. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. More About Franchising (3 of 3) International Franchising (continued) – Steps to take before buying a franchise overseas:  Consider the value of the franchisor’s name in the foreign country.  Work with a knowledgeable lawyer.  Determine whether the product or service is saleable in a foreign country.  Uncover whether the franchisor has experience in international markets.  Find out how much training and support you will receive from the franchisor. Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Videos https://www.youtube.com/watch?v=6fidL51oakg https://www.youtube.com/watch?v=kr_iqkRcLHU https://www.youtube.com/watch?v=L_uvCuqr01k Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved. Copyright Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.