Week 4: Elements of a Successful System PDF

INSTITUTE OF MANAGEMENT AND BUSINESS ALLIED PROFESSIONS BACHELOR OF SCIENCE IN ENTREPRENEURSHIP FRANCHISING PREPARED BY: JESSAMINE S. GEZUN, MBA, LPT, CHRA FACULTY, IMBAP PRAYER  ICEBREAKER LEFT, RIGHT, CLA...

INSTITUTE OF MANAGEMENT AND BUSINESS ALLIED PROFESSIONS BACHELOR OF SCIENCE IN ENTREPRENEURSHIP FRANCHISING PREPARED BY: JESSAMINE S. GEZUN, MBA, LPT, CHRA FACULTY, IMBAP PRAYER  ICEBREAKER LEFT, RIGHT, CLAP, JUMP LEFT IS TO RIGHT JUMP IS TO CLAP RIGHT IS TO LEFT CLAP IS TO JUMP WEEK 4: Elements of a Successful System INTENDED LEARNING OUTCOME ❑ Discuss the fundamentals of a successful system and the advantages and disadvantages of the Franchise system. TOPIC OUTLINE Advantages and Disadvantages of the Franchise System Elements of a Successful System Franchising Basics: Key Elements of a Franchise System and Business The key elements of a franchise system and business include: Franchise Application ▪ Similar to an employment application, the franchise application also focuses significantly on the franchisee candidate’s qualifications and experience in business including the applicable industry and, importantly, solid financial assets to begin and support the franchised business. Franchise Disclosure Document (FDD) ▪ The FDD is a detailed, comprehensive document (typically over 200 pages) covering 23 specific items governed by federal regulation that is intended to provide the franchisee candidate with all the relevant information needed to make a well-informed decision about whether to invest in the franchise and sign a franchise agreement.  Requirements for a Franchise Disclosure Document (FDD) The FDD is divided up into 23 sections and the potential franchisee must review each of them before signing. According to the FTC (FEDERAL TRADE COMMISSION), franchisors have an obligation to provide the franchisee with the FDD at least 14 days before it needs to be signed or before any initial money is exchanged. The franchisee has a right to a copy of the FDD after the franchisor has received the application and agreed to consider it.  Every FDD must include the following 23 disclosure items: FDD Item 1: The Franchisor and any Parents, Predecessors, and Affiliates Within FDD Item 1 franchisors must disclose corporate information, including information about affiliated and parent companies of the franchisor. Item 1 FDD disclosures are designed to provide franchise buyers with information about the corporate structure of the franchisor, any affiliated companies, and any predecessors such as a former owner of the franchise system. FDD Item 2: Business Experience Within FDD Item 2 franchisors must disclose information about the franchisor's management team. Item 2 FDD disclosures are designed to provide franchise buyers with information about franchisor management, franchise sales, and franchisee support team members, including each team members 5 year employment history. FDD Item 3: Litigation Within FDD Item 3 franchisors must disclose certain types of litigation that currently involves or previously involved the franchisor, the franchisor's affiliates, predecessors, and/or individual management team members identified in Item 2. Item 3 FDD disclosures are designed to provide franchise buyers with information about litigation history, the type of litigation the franchisor and team members have been involved in, and the outcome of the litigation. FDD Item 4: Bankruptcy Within FDD Item 4 franchisors must disclose whether or not the franchisor, the franchisor's affiliates, predecessors, and/or individual management team members identified in Item 2 previously filed for bankruptcy. FDD Item 5: Initial Fees Within FDD Item 5 franchisors must disclose all upfront fees that a franchisee must pay to the franchisor before the franchisee opens the franchised business. The most common initial fees disclosed in Item 5 include the initial franchise fee and other upfront pre-opening fees that may be paid to the franchisor such as fees for opening-inventory and equipment that must be purchased from the franchisor. FDD Item 6: Other Fees Within FDD Item 6 franchisors must disclose all other fees that a franchisee must pay to the franchisor throughout the terms of the franchise agreement. These fees typically include on-going royalties, brand development fund, marketing, technology, training, and other fees specific to the franchisor. FDD Item 7: Estimated Initial Investment Within FDD Item 7, franchisors must include a low to high estimate of the estimated cost for a franchisee to establish and open the franchised business. This estimate must include everything from build-out costs to reserve capital for the first three months of operation. The biggest expenses in Item 7 relate to expenses related to building-out and equipping the franchised business. FDD Item 8: Restrictions on Sources of Products and Services Within FDD Item 8 franchisors must disclose what products and supplies the franchisee must purchase from the franchisor or the franchisor's designated suppliers. Within Item 8 the franchisor must also disclose revenue and rebates that the franchisor earned from selling source-restricted supplies and products to franchisees. FDD Item 9: Franchisee's Obligations Within FDD Item 9 franchisors must disclose, in table format, the franchisee's obligations under the franchise agreement. This table includes a summary of all legal obligations ranging from site selection and opening to default provisions and the franchisee's obligations upon termination of the franchise agreement. FDD Item 10: Financing Within FDD Item 10 franchisors must disclose whether or not the franchisor offers franchisees financing as to initial fees to be paid by the franchisor or in connection with the franchised business. FDD Item 11: Assistance, Advertising, Computer Systems, and Training Within FDD Item 11 franchisors must disclose the type of assistance and training that the franchisor will provide to the franchisee, advertising requirements imposed on the franchisee, and the required computer and software systems that the franchisee will be required to purchase and utilize. FDD Item 12: Territory Within FDD Item 12 franchisors must disclose if the franchisee will be awarded a protected territory, whether or not the territory is protected, how the territory will be determined, and instances where the franchisor reserves the right to operate within the franchisees territory. FDD Item 13: Trademarks Within FDD Item 13 franchisors must disclose information about the trademarks of the franchise system, including, whether or not they are registered, the registration status, and whether or not the franchisor has notice of a trademark conflict or dispute. FDD Item 14: Patents, Copyrights, and Proprietary Information Within FDD Item 14 franchisors must disclose information about any patents, copyrights and other proprietary information that is related to the franchise system. FDD Item 15: Obligation to Participate in the Actual Operation of the Franchise Business Within Item 15 franchisors must disclose what obligations, if any, the individual franchisees / franchisee owners must have in the day-to-day operations of the franchised business including whether or not they must work in the franchised business on a full time basis. FDD Item 16: Restrictions on What the Franchisee May Sell Within FDD Item 16 franchisors must disclose its control over what a franchisee may or may not sell as a part of the franchised business. FDD Item 17: Renewal, Termination, Transfer, and Dispute Resolution Within FDD Item 17 franchisors must disclose and summarize the legal rights and obligations related to the renewal, termination, and transfer of the franchised business. This item must also include a summary as to how legal disputes must be resolved between the franchisor and franchisee. FDD Item 18: Public Figures Within Item 18 franchisors must disclose if there are any celebrities or other public figures that have been hired to promote the franchise system. FDD Item 19: Financial Performance Representations Within FDD Item 19 franchisors must disclose whether or not it is making any Financial Performance Representations and if it does, the franchisor must provide specific detail within Item 19. FDD Item 20: Outlets and Franchisee Information Within FDD Item 20 franchisors must disclose, in five separate tables, a summary of the franchised and corporate outlets over the prior three years and a projection as to future opening in the next year. FDD Item 21: Financial Statements Within FDD Item 21 franchisors must disclose and include copies of the Franchisor's Financial Statements. FDD Item 22: Contracts Within FDD Item 22 franchisors must list and attach as an exhibit all contracts that a franchisee must sign with the franchisor. These contracts include a sample of the franchisor's standard franchise agreement and related agreements such as a development agreement, site selection agreement, release agreement, and others. FDD Item 23: Receipts Within FDD Item 23 Franchisors must include two copies of the receipt page. The receipt page is the page that a franchisee must sign to confirm and prove the proper disclosure and delivery of the FDD. Disclosure Document (Franchise Disclosure Document – FDD) Purpose: Provides comprehensive information about the franchisor and the franchise system to potential franchisees. Key Elements: Franchisor Information: Background, ownership, and business history. Business Experience: Experience of the franchisor’s key executives. Litigation History: Information on any litigation involving the franchisor. Franchise Fees: Detailed breakdown of all fees and costs associated with the franchise. Financial Statements: The franchisor’s audited financial statements. Franchisee Obligations: Overview of the franchisee’s responsibilities and obligations.  FRANCHISE AGREEMENT FRANCHISE AGREEMENT is the legal agreement that creates a franchise relationship between a franchisor and a franchisee. Purpose: The main contract between the franchisor and franchisee outlining the terms and conditions of the franchise relationship.  KEY ELEMENTS OF FRANCHISE AGREEMENT 1. Grant of Franchise: Details the rights and obligations of both parties. 2. Territory: Specifies the geographic area where the franchisee can operate. 3. Term and Renewal: Defines the duration of the agreement and renewal conditions. 4. Fees and Payments: Outlines initial franchise fees, royalties, and other financial obligations. 5. Training and Support: Describes the training programs and ongoing support provided by the franchisor. KEY ELEMENTS OF FRANCHISE AGREEMENT 6. Operational Standards: Sets the standards and procedures for operating the franchise. 7. Advertising and Marketing: Details the franchisor’s and franchisee’s responsibilities for advertising and marketing. 8. Termination: Specifies the conditions under which the franchise agreement can be terminated. 9. Dispute Resolution: Outlines the mechanisms for resolving disputes. The key elements of a franchise system and business include: Operations Manual ▪ This manual provides the “do’s and don’ts” – sometimes referred to as the “secret sauce” – and all the relevant details of running the business both long term and day-to-day. This document is essentially the franchisor’s knowledge, experience, guidelines, and suggestions provided in writing to the franchisee to help them be successful in their franchised business and to avoid issues and problems with the franchisor and perhaps the law. The key elements of a franchise system and business include: Training Program ▪ This provides face-to-face and voice-to-voice details, essentially an extension of the operations manual, to help in running the business day-to-day. The franchisor provides training to the franchisee and its managers and key staff before, during, and after the launch of the franchised business, including giving them regular feedback in developing, growing, and operating the franchised business. The key elements of a franchise system and business include: Marketing and Promotion Program ▪ The franchisor must have a program that helps to market and promote the franchised business and support the franchisees as a group, generate greater awareness for the franchise brand and business, and generate new franchises in other territories for the good of the overall “franchised system.” Advantages and Disadvantages of Franchising  Advantages of franchising for the franchisee 1. Business assistance - One of the benefits of franchising for the franchisee is the business assistance they receive from the franchisor. 2. Brand recognition - A big benefit that franchisees receive when opening a franchise is brand recognition. If you start a business from scratch, you would have to build your brand and customer base from the ground up, which would take time. 3. Lower failure rate - In general, franchises have a lower failure rate than solo businesses. When a franchisee buys into a franchise, they’re joining a successful brand, as well as a network that will offer them support and advice, making it less likely they’ll go out of business. 4. Buying power - Another benefit of franchising is the sheer size of the network. If you’re operating a standalone business and need to order products or supplies to make your products, you’re paying more money per item because your order is relatively small. 5. Profits In general, franchises see higher profits than independently established businesses. Most franchises have recognizable brands that bring customers in droves. This popularity results in higher profits. Even franchises that require a high initial investment for the franchise fee see high return on investment. 6. Lower risk Starting a business is risky. This is true whether a business owner is opening an independent business or purchasing a franchise. 7. Built-in customer base One of the biggest struggles of any new business is finding customers. Franchises, on the other hand, come with instant brand recognition and a loyal customer base. Even if you’re opening the first branch of a franchise in a small town, the likelihood is that potential customers are already familiar with the brand from exposure to TV commercials or travel to other cities. 8. Be your own boss One of the biggest benefits of owning a business is being your own boss. When starting a franchise business, you get to be your own boss with the added benefit of receiving support from the franchise’s knowledge base.  Disadvantages of franchising for the franchisee 1. Restricting regulations While a franchise allows the franchisee to be their own boss, they’re not entirely in control of their business, nor can they make decisions without taking into account the opinion of the franchisor. Depending on the franchise agreement, the franchisor can control any of these aspects of the business: Business location Layout Hours of operation Decor Holidays Products Pricing Advertising and marketing Signage Resale conditions  Disadvantages of franchising for the franchisee 2. Initial cost - While the initial investment of the franchise fee buys a lot of benefits for the franchisee, it can also be costly—especially if you’re joining a very well-known and profitable franchise. While this often translates to larger profits, coming up with this initial money can put a strain on any small business owner.  Disadvantages of franchising for the franchisee 3. Ongoing investment - In addition to the initial investment you’ll have to provide to start your franchise, there are additional, ongoing costs that are unique to franchises. Within the franchise agreement, the ongoing costs of the franchise should be enumerated. These costs might include royalty fees, advertising costs, and a charge for training services.  Disadvantages of franchising for the franchisee 4. Potential for conflict - While one of the benefits of owning a franchise is the network of support you receive, it also has the potential for conflict. Any close business relationship, especially when there’s an imbalance of power, comes with a risk that the parties won’t get along.  Disadvantages of franchising for the franchisee 5. Lack of financial privacy Another disadvantage of franchising is a lack of privacy. The franchise agreement will likely stipulate that the franchisor can oversee the entire financial ecosystem of the franchise. This lack of financial privacy can be seen by franchisee as a disadvantage of owning a franchise; however, it may be less of an issue if you welcome financial guidance.  Advantages of franchising for the franchisor 1. Access to capital - One of the biggest barriers to expansion for small business is the money it costs to expand. And while there are several business loan options, they don’t always pan out. Franchising your business will take some time and money on your end, but it also has the potential to make you a lot of money in the form of franchise fees. 2. Efficient growth - Opening the first unit of a business is costly and time consuming. Opening a second unit can be almost as difficult. When that burden is shared with another business owner, it makes the process more efficient and takes the bonus of the initial business owner.  Advantages of franchising for the franchisor 3. Minimal employee supervision - One of the big stresses as a business owner is hiring and managing employees. As a franchisor, the only support that you have to provide to the franchisee is training and business knowledge. In general, the franchisor has no hand in the management, hiring, and firing of employees. 4. Increased brand awareness - One of the many benefits of franchising is increased brand awareness. The more locations the brand has, the more people who are aware of the brand. And the more these customers come to know and love the brand, the more profitable and successful the brand can be. This increased brand awareness of a multi-location franchise can be highly beneficial to the franchisor and their franchisees—a win-win.  Advantages of franchising for the franchisor 5. Reduced risk - One of the biggest benefits to the franchisor in a franchise agreement is the ability to expand without an increase in risk. Because the franchisee takes on the debt and liability of opening a unit under the name of the franchise, the franchisor gets all the benefit of an additional location without taking on the risk themselves.  Disadvantages of franchising for the franchisor 1. Loss of complete brand control When a business owner opens an independent business, they maintain complete control over their brand and every decision that happens within the business. When a franchisor allows a franchisee to open a business under their brand, they’re giving away (actually, selling) some of the control over their small business branding. While the franchise agreement should contain strong stipulations and rules to guide the decisions made by the franchisee, your franchisees won’t be clones of you. They will think and act differently, and your brand could wind up suffering because of it.  Disadvantages of franchising for the franchisor 2. Increased potential for legal disputes - Any time you enter into a close business agreement with other people, you open yourself to the risk of legal disputes. While a well-crafted and lawyer-approved franchise agreement should limit a lot of the possibilities for legal disputes between the franchisor and franchisees, these disputes are still possible.  5 ELEMENTS OF A SUCCESSFUL FRANCHISE For a franchise to be perfect, there are several things that it would need to have. 1. Powerful business systems A franchise without a business system isn't a franchise. It's a business at death's door. 2. Serious brand power If a franchise is "branded" that usually means it's popular. It also could mean that it's been around for a long time, and that's why finding a location could be challenging.  5 ELEMENTS OF A SUCCESSFUL FRANCHISE 3. Innovation For a perfect franchise business opportunity to survive in our fast- paced times, its corporate office must always be looking for ways to innovate. 4. Powerful franchisee training If you're going to open a franchise, you need to feel confident about running the business.  5 ELEMENTS OF A SUCCESSFUL FRANCHISE 5. Wealthy franchisees - A perfect franchise will have wealthy franchisees The great franchisors are the ones that focus on franchisee profitability. A franchisor with lots of very profitable franchisees can't help but grow.  12 Characteristics of a Successful Franchisee 1. Provide benefit to your 6. Adaptability and flexibility community that might otherwise 7. Leader / Communicator not be available. 8. Team player 2. Not afraid to put in the hours 9. Ask for help 3. Work under pressure 10. Focused on results 4. Desire to learn 11. Financial fitness 5. Willingness to delegate 12.Financial capacity  Common Franchising Terms and Definitions Business format franchise: This type of franchise includes not only a product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals. Disclosure statement: Also known as the FDD, or Franchise Disclosure Document, the disclosure document provides information about the franchisor and franchise system. FDD: The Franchise Disclosure Document, FDD, is the format for the disclosure document which provides information about the franchisor and franchise system to the franchisee.  Common Franchising Terms and Definitions Franchise:A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control. Franchise agreement: The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do. Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name. Franchising: A method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control.  Common Franchising Terms and Definitions? Franchisor: The person or company that grants the franchisee the right to do business under their trademark or trade name. Product distribution franchisee: A franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business. Royalty: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales. Trademark: The marks, brand name and logo that identify a franchisor which is licensed to the franchisee.  REFERENCES https://www.varnumlaw.com/insights/franchising-what-is-it-and-is-it-for-you/ https://www.franchiselawsolutions.com/learn/franchise-your-business/fdd https://www.franchiselawsolutions.com/learn/franchise-your-business/franchise- agreements https://www.nerdwallet.com/article/small-business/advantages-of-franchising https://www.entrepreneur.com/franchises/the-5-elements-of-a-successful- franchise/240258 https://www.cmc-canada.ca/blog/Our%20Blog/twelve-characteristics-of-a- successful-franchisee https://www.franchise.org/faqs/what-are-common-franchising-terms-and- definitions https://cbos.com.ph/legal-aspects-of-franchising-in-the-philippines/ THANK YOU FOR LISTENING  ASSIGNMENT FRANCHISE APPLICATION