Franchising Midterms PDF

DON HONORIO VENTURA STATE UNIVERSITY Franchising (MKTG P301) Midterms Period Lesson 1: Introduction to Franchising o Contract Details: Legal...

DON HONORIO VENTURA STATE UNIVERSITY Franchising (MKTG P301) Midterms Period Lesson 1: Introduction to Franchising o Contract Details: Legal document outlining the terms, obligations, and rights of both 1. Definition of Franchising the franchisor and franchisee. Overview: Understanding what franchising is o Key Elements: Initial and how it operates as a business model. franchise fee, royalty payments, duration of the Key Topics: agreement, territorial rights, Franchising Basics: and renewal conditions. o Definition: Franchising is a method of expanding a 2. History and Evolution of Franchising business where the franchisor licenses its business model, Overview: Exploring the development and brand, and operational growth of franchising as a business strategy methods to franchisees in over time. exchange for a fee. Key Topics: o Key Components: The Early Beginnings: relationship involves a franchisor, who owns the o Historical Context: Origins of brand and business system, franchising trace back to the and a franchisee, who Middle Ages with product operates a business under the distribution franchises, such franchisor’s brand. as brewers licensing taverns. Benefits of Franchising: o Modern Franchising: Emergence of franchising in o For Franchisors: Rapid the 20th century with expansion with reduced companies like Singer Sewing capital risk, leveraging Machines and Coca-Cola. franchisee investments. Evolution and Growth: o For Franchisees: Access to a proven business model, brand o Post-War Boom: Significant recognition, training, and growth in franchising after ongoing support. World War II, particularly in the fast-food and hospitality Franchise Agreement: sectors (e.g., McDonald’s, Holiday Inn). 1 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY o Diversification: Expansion ▪ Franchisee typically into various industries, has more flexibility in including retail, services, and managing the healthcare. business operations compared to other Current Trends: franchise models. o Global Expansion: Increasing ▪ Franchisor may international presence and provide limited training adaptation to local markets. and support related to o Technology Integration: Use operational of technology to enhance procedures. franchise operations, Business Format Franchise: marketing, and customer engagement. o Definition: Franchisees receive a complete business system, including the brand, 3. Types of Franchise Models operational procedures, marketing strategies, and Overview: Identifying and understanding the training. different franchise models and their characteristics is crucial for potential o Examples: Fast food chains, franchisees and franchisors to determine the retail stores, and service best fit for their business goals and providers (e.g., Subway, 7- operational preferences. Eleven, and Anytime Fitness). Key Topics: o Characteristics: Product Distribution Franchise: ▪ Emphasis on uniformity and o Definition: Franchisees are consistency across all granted the right to distribute franchise locations. a manufacturer’s products under the franchisor’s brand. ▪ Extensive franchisor support, including o Examples: Automobile detailed operational dealerships, gasoline stations, manuals, ongoing and soft drink bottlers. training, and o Characteristics: marketing support. ▪ Focus on product ▪ Franchisees are sales with a limited required to adhere role in the broader strictly to the business operations. franchisor’s system and standards to ensure brand integrity. 2 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Management Franchise: focus on financial management and o Definition: Franchisee profitability. manages the business on behalf of the franchisor, often ▪ Franchisee is often a in service industries. passive investor who relies heavily on hired o Examples: Vending machine management teams to routes, cleaning services, and handle daily recruitment agencies. operations. o Characteristics: ▪ Franchisor provides ▪ Franchisee focuses extensive support primarily on managing including site operations and staff selection, training, and rather than handling operational oversight day-to-day operational to ensure the tasks. franchise’s success. ▪ Often suitable for individuals with strong Additional Considerations: management skills and experience. Hybrid Models: ▪ Franchisor usually o Some franchises may provides training and combine elements from operational guidelines multiple models. For example, but does not involve a franchise could offer a themselves in the day- hybrid of product distribution to-day operations. and business format, where franchisees are involved in Investment Franchise: both selling products and o Definition: Franchisee invests following a detailed in the franchise and hires staff operational system. to operate the business, Master Franchise: typically involving larger capital investment. o Definition: A master franchisee acquires the rights o Examples: Hotel chains, large to sub-franchise within a restaurants, and senior care certain territory. They are facilities. responsible for developing o Characteristics: and managing other franchisees within that area. ▪ Emphasis on return on investment with a 3 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY o Examples: International must adapt to the franchisor’s system expansion of brands like and standards. The transition often Starbucks or McDonald's. includes rebranding and operational changes. o Characteristics: ▪ Master franchisees often have more responsibilities, including recruitment, training, and support for sub-franchisees. ▪ They may have greater control over the local adaptation of the franchise model. Single-Unit vs. Multi-Unit Franchising: o Single-Unit: Franchisee operates one location. Common in business format franchises. o Multi-Unit: Franchisee operates multiple locations, often within the same region. This model can be seen in both business format and investment franchises. Conversion Franchise: Definition: Existing businesses convert to a franchise model by affiliating with an established franchisor. Examples: Independent restaurants or service businesses that join a larger franchise system for brand recognition and support. Characteristics: Conversion franchises benefit from existing operations and customer bases but 4 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Lesson 2: The Franchise Industry Market o Access to Capital: Trends in trends franchise financing, including SBA loans, private equity, and crowdfunding. 1. Industry Trends and Market Analysis Consumer Behavior: Overview: Understanding the latest trends, o Shifts in Consumer market conditions, and economic factors Preferences: Trends in impacting the franchise industry. consumer preferences Key Topics: affecting the franchise industry, such as demand for Current Market Trends: convenience, personalized o Technological Integration: experiences, and ethical Increasing use of technology consumption. in operations, marketing, and o Digital Transformation: customer service. Examples Influence of digital include mobile ordering apps, transformation on consumer automated systems, and data behavior, including online analytics. shopping, social media o Health and Wellness Focus: engagement, and digital Growth in health-conscious marketing. franchises such as fitness Regulatory Environment: centers, healthy food restaurants, and wellness o Regulations and services. Compliance: Overview of key regulations affecting the o Sustainability and Eco- franchise industry, such as Friendly Practices: Rising franchise disclosure laws and consumer demand for labor laws. environmentally sustainable practices and products. o Impact of Legislation: How Franchises adopting green changes in legislation, such as practices in operations and minimum wage increases and supply chains. health care regulations, impact franchise operations Economic Factors: and profitability. o Impact of Economic Cycles: How economic downturns and booms affect franchise 2. Major Franchise Sectors growth, consumer spending, Overview: Identifying and exploring the key and investment. sectors within the franchise industry, their characteristics, and market potential. 5 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Key Topics: o Home Services: Growth in home service franchises such Food and Beverage: as cleaning services, o Quick Service Restaurants landscaping, and home (QSRs): Fast food chains and improvement. Examples their market dominance. include Molly Maid and Examples include Handyman Connection. McDonald's, Subway, and o Automotive Services: Trends KFC. in automotive service o Casual Dining and Full- franchises, including repair Service Restaurants: Trends shops, car washes, and oil in casual dining and full- change services. Examples service restaurant franchises. include Meineke and Jiffy Examples include TGI Fridays Lube. and Olive Garden. Education and Childcare: o Specialty Food and o Tutoring and Test Prep: Beverage: Growth of niche Growth in educational markets such as coffee shops franchises offering tutoring (e.g., Starbucks), smoothie and test preparation services. bars, and specialty bakeries. Examples include Kumon and Retail: Sylvan Learning. o Convenience Stores: Trends o Childcare Centers: Trends in in convenience store childcare and early education franchises and their appeal to franchises. Examples include consumers. Examples include The Learning Experience and 7-Eleven and Circle K. Primrose Schools. o Specialty Retail: Growth in specialty retail franchises 3. Franchise Growth and Development such as clothing boutiques, pet stores, and home Overview: Examining the factors contributing improvement stores. to franchise growth and development, including market entry strategies and Services: expansion plans. o Health and Fitness: Key Topics: Expansion of fitness center franchises, yoga studios, and Market Entry Strategies: wellness services. Examples o Domestic vs. International include Anytime Fitness and Expansion: Strategies for Orangetheory Fitness. entering new markets, including the challenges and 6 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY opportunities of international o Key Performance Indicators expansion. (KPIs): Identifying and tracking KPIs to measure o Franchise Model Selection: franchise performance and Choosing the appropriate identify areas for franchise model for growth, improvement. such as master franchising, multi-unit franchising, and o Benchmarking and Best area development. Practices: Using benchmarking and best Franchisee Recruitment and practices to enhance Training: franchise operations and drive o Attracting Franchisees: growth. Effective strategies for recruiting qualified franchisees, including marketing tactics and incentives. o Training and Support: Importance of providing comprehensive training and ongoing support to franchisees to ensure consistency and success. Franchisee Relations: o Building Strong Relationships: Strategies for fostering positive relationships between franchisors and franchisees, including communication and conflict resolution. o Franchise Advisory Councils: Role of franchise advisory councils in representing franchisee interests and improving the franchise system. Performance Metrics: 7 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Lesson 3 Legal Aspects of Franchising o Training and Support: Franchisor’s obligations to provide initial training, ongoing 1. Franchise Agreements and Contracts support, and access to proprietary systems and Overview: Understanding the legal technologies. foundation of the franchisor-franchisee relationship through franchise agreements o Marketing and Advertising: and contracts. Franchisor and franchisee responsibilities for local and Key Topics: national marketing efforts. Franchise Agreement Basics: o Term and Renewal: Duration o Definition: A franchise of the franchise agreement, agreement is a legal conditions for renewal, and document that outlines the termination clauses. terms and conditions between o Dispute Resolution: a franchisor and franchisee. Mechanisms for resolving o Key Elements: Rights and disputes, including mediation, obligations of both parties, arbitration, and litigation. fees, terms of the franchise, Legal Compliance: territory rights, and renewal conditions. o Franchise Registration Laws: Understanding the need for Critical Clauses in Franchise franchise registration in Agreements: certain jurisdictions and o Franchise Fees and compliance with federal and Payments: Initial franchise state laws. fee, ongoing royalties, o Regulatory Bodies: Role of advertising contributions, and regulatory bodies such as the other payments. Federal Trade Commission o Territorial Rights: Exclusive (FTC) in the United States and territories, territorial equivalent bodies in other protection, and expansion countries. rights. o Operational Standards: 2. Franchise Disclosure Documents (FDD) Adherence to franchisor’s operational procedures, Overview: Exploring the importance and quality control measures, and content of Franchise Disclosure Documents brand guidelines. (FDD) in ensuring transparency and compliance. Key Topics: 8 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Purpose of the FDD: o Restrictions on Sources of Products and Services: o Transparency: Providing Requirements for purchasing potential franchisees with products, equipment, and essential information about supplies from specified the franchisor, the franchise suppliers. system, and the terms of the franchise agreement. o Franchisee Obligations: Detailed description of o Legal Requirement: franchisee obligations, Compliance with regulatory including operational requirements to protect requirements and restrictions. potential franchisees and promote informed decision- o Territorial Rights: Information making. on territorial rights and any territorial protections offered. Content of the FDD: o Financial Performance o Franchisor Information: Representations: Optional History, ownership, and section where franchisors can business background of the provide information on the franchisor. financial performance of o Business Experience: existing franchises. Experience of key executives o Franchisee Training and and management team. Assistance: Description of o Litigation History: Disclosure initial training programs and of any past or current litigation ongoing support provided by involving the franchisor. the franchisor. o Bankruptcy History: o Termination and Renewal: Information on any Conditions under which the bankruptcies involving the franchise agreement can be franchisor or its executives. terminated or renewed. o Initial and Ongoing Fees: o Earnings Claims: Any Detailed breakdown of all earnings claims made by the fees, including initial franchise franchisor, along with fee, royalty fees, and other supporting documentation. payments. Review and Due Diligence: o Initial Investment: Estimated o Legal Review: Importance of initial investment required to having the FDD reviewed by a establish and operate the franchise attorney to franchise. understand legal implications and obligations. 9 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY o Franchisee Due Diligence: and addressing infringement Steps for potential franchisees issues. to conduct due diligence, Copyright and Patent including speaking with Considerations: existing franchisees and evaluating the franchisor’s o Copyrights: Protection of track record. original works such as training materials, marketing collateral, and software. 3. Intellectual Property Issues o Patents: Protection of Overview: Understanding the importance of inventions and proprietary intellectual property (IP) in franchising and technologies used in the the legal considerations involved. franchise system. Key Topics: Trade Secrets and Confidential Information: Intellectual Property in Franchising: o Definition: Trade secrets o Definition: Intellectual include confidential business property includes trademarks, information, processes, copyrights, patents, trade recipes, and strategies that secrets, and proprietary know- provide a competitive edge. how. o Protection Strategies: o Role in Franchising: IP is a Implementing non-disclosure crucial asset in franchising, agreements (NDAs), representing the brand confidentiality clauses in identity, reputation, and franchise agreements, and competitive advantage of the employee training to franchise system. safeguard trade secrets. Trademark Protection: Licensing and IP Management: o Importance of Trademarks: o IP Licensing: Granting Trademarks protect the brand franchisees the right to use name, logo, and other the franchisor’s IP under identifiers associated with the specified conditions. franchise. o IP Monitoring and o Registration Process: Steps Enforcement: Regular for registering trademarks with monitoring of IP use to ensure relevant authorities to secure compliance and taking legal legal protection. action against unauthorized o Enforcement: Strategies for use. enforcing trademark rights 10 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY strategies and campaigns, as well as guidance for local advertising efforts. o Quality Control: Standardized procedures to maintain consistent quality across all Lesson 4 Franchise Business Models franchise locations. Examples: 1. Business Format Franchise Fast food chains (e.g., McDonald’s, Overview: Understanding the most common KFC) and comprehensive type of franchise model. Service-based franchises (e.g., 7- Key Topics: Eleven, Anytime Fitness) Definition: Advantages: o A business format franchise Established Brand: Instant involves a franchisor providing recognition and customer trust. a complete system for Comprehensive Support: Extensive operating the business, training and support from the including the brand, support, franchisor. and operational procedures. Proven System: Lower risk with a Components of a Business Format tried-and-tested business model. Franchise: Challenges: o Brand and Trademark: Use of the franchisor's brand name Strict Guidelines: Limited flexibility and trademarks. due to strict adherence to franchisor’s system. o Operational Manual: Detailed guidelines on how to Ongoing Fees: Regular royalty fees run the business, covering all and advertising contributions. aspects from day-to-day operations to customer service standards. 2. Product Distribution Franchise o Training and Support: Overview: Exploring a franchise model Comprehensive training focused on distributing and selling the programs for franchisees and franchisor’s products. their staff, ongoing support, Key Topics: and assistance. Definition: o Marketing and Advertising: Centralized marketing 11 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY o A product distribution Challenges: franchise involves the Dependence on Franchisor: Success franchisor supplying the heavily reliant on the franchisor’s franchisee with products to product quality and supply chain. sell, often with exclusive distribution rights. Limited Control: Franchisees have limited control over product offerings Components of a Product and pricing. Distribution Franchise: o Product Supply: Franchisees receive products directly from 3. Management Franchise the franchisor or approved suppliers. Overview: Understanding a franchise model where the franchisee manages the business o Brand Association: Use of the operations on behalf of the franchisor. franchisor’s brand name and logos to promote the Key Topics: products. Definition: o Sales Training: Training o A management franchise programs focused on product involves the franchisee knowledge and sales managing the operations of a techniques. franchisor-owned business or o Territorial Rights: Exclusive service, rather than owning rights to sell the products the business outright. within a designated territory. Components of a Management Examples: Franchise: Automobile dealerships (e.g., Ford, o Operational Responsibility: Toyota) Franchisee handles the day- to-day management and Soft drink bottlers (e.g., Coca-Cola, operational aspects of the Pepsi) business. Advantages: o Franchisor Ownership: The franchisor retains ownership Brand Leverage: Benefit from the of the business and assets. established reputation of the franchisor’s products. o Performance-Based Compensation: Franchisees Sales Focus: Primarily focused on often receive compensation sales and distribution without based on business managing a complete business performance, including system. 12 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY management fees and profit- providing the financial sharing arrangements. resources to fund the franchise while relying on the o Training and Oversight: franchisor or a third-party Ongoing training and oversight operator to run the business. from the franchisor to ensure operational standards are Components of an Investment met. Franchise: Examples: o Capital Investment: Franchisee’s role is primarily Hotel management (e.g., Marriott, financial, investing funds to Hilton) establish or support the Facility management services business. Advantages: o Operational Management: The franchise is often Lower Investment: Reduced managed by professionals financial risk compared to owning a hired by the franchisor or a business. separate management Professional Management: company. Opportunity to leverage management o Return on Investment: skills and experience. Franchisee receives returns Challenges: based on the business’s profitability and performance. Limited Autonomy: Franchisees operate under the direct supervision Examples: of the franchisor. o Multi-unit franchise Performance Pressure: investments in businesses like Compensation tied to business fast-food chains where the performance, creating pressure to investor does not actively meet targets. manage operations. 4. Investment Franchise o Real estate investment trusts (REITs) that invest in Overview: Exploring a franchise model where franchised properties but do the franchisee provides capital to fund the not manage them directly. business but does not engage in daily operations. Advantages: Key Topics: o Passive Income: Opportunity for income generation without Definition: day-to-day operational o An investment franchise involvement. involves the franchisee 13 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY o Diversification: Ability to o Operational Support: Master invest in multiple franchise franchisee often provides units or concepts. support, training, and oversight to sub-franchisees Challenges: while adhering to the o Lack of Control: Limited franchisor’s overall system influence over operational and standards. decisions and daily o Fee Structure: Master management. franchisee typically pays an o Financial Risk: Potential for upfront master franchise fee financial loss if the business and ongoing royalties to the underperforms. franchisor, and may also collect fees from sub- 5. Master Franchise franchisees. Overview: Exploring a franchise model where Examples: the franchisee operates as a sub-franchisor, developing and managing franchises within a o A master franchisee for a designated territory. global fast-food brand like Subway or Pizza Hut, who Key Topics: then establishes and manages Definition: multiple franchise locations and recruits other o A master franchise involves a franchisees. franchisee (master franchisee) acquiring the rights to develop o An international master and operate multiple franchisee for a brand like franchise units within a Anytime Fitness, responsible specified territory. The master for expanding the brand franchisee also has the across a specific country or authority to sub-franchise to region. other franchisees within that Advantages: territory. o Expansion Opportunities: Components of a Master Franchise: Ability to grow and develop a o Territorial Rights: Exclusive franchise network within a rights to develop and manage large territory. franchises within a defined o Revenue Streams: Multiple geographic area. revenue streams from both o Sub-Franchising: Ability to master franchise fees and recruit, train, and support ongoing royalties from sub- individual franchisees within franchisees. the territory. Challenges: 14 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY o High Investment: Significant initial investment and ongoing costs associated with acquiring master franchise rights and developing the network. o Complex Management: Managing multiple franchise locations and supporting sub- franchisees requires strong organizational and leadership skills. 15 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Lesson 5 Evaluating Franchise the franchisor’s products or Opportunities services. o Evaluate the competitive landscape and identify 1. Criteria for Evaluating Franchise potential market challenges. Opportunities Examples: Overview: Identifying key factors to consider when assessing franchise opportunities to Case studies of successful franchises ensure alignment with personal and financial with strong brand presence and goals. support systems. Key Topics: Real-world examples of franchise failures due to weak market demand Brand Strength and Market or inadequate franchisor support. Presence: Advantages: o Assess the franchisor’s brand recognition, reputation, and Informed Decision-Making: Ability to market share. make well-informed decisions based on comprehensive evaluation criteria. o Evaluate the stability and growth potential of the brand. Risk Mitigation: Reduced risk by choosing franchises with proven Franchisor Support and Training: success and strong market presence. o Review the training programs Challenges: and support systems offered by the franchisor. Information Overload: Managing and analyzing a large volume of o Ensure the franchisor provides information during the evaluation ongoing assistance and process. resources. Bias and Misrepresentation: Financial Performance and ROI: Recognizing and mitigating potential o Analyze the historical financial biases or misrepresentations by performance of existing franchisors. franchisees. o Estimate the return on 2. Conducting Due Diligence investment (ROI) and break- even period. Overview: Understanding the importance of thorough due diligence in evaluating Market Demand and Competition: franchise opportunities to avoid potential o Conduct market research to pitfalls and ensure long-term success. understand the demand for Key Topics: 16 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Financial Statements and Comprehensive Understanding: Projections: Gain a thorough understanding of the franchisor’s business model, financial o Review the franchisor’s health, and operational practices. financial statements, including income statements, Risk Reduction: Minimize risks by balance sheets, and cash flow uncovering potential red flags and statements. validating the franchisor’s claims. o Analyze financial projections Challenges: and assess their realism and Time-Consuming: Due diligence can accuracy. be a time-consuming and resource- Franchise Disclosure Document intensive process. (FDD): Access to Information: Difficulty o Understand the contents and accessing complete and accurate importance of the FDD. information from franchisors or existing franchisees. o Identify critical sections, such as litigation history, financial performance representations, 3. Understanding Franchise Fees and and franchisor obligations. Royalties Franchisee Interviews and Site Overview: Learning about the various fees Visits: and royalties associated with franchising to o Conduct interviews with accurately assess the financial commitment existing franchisees to gain and potential profitability. insights into their experiences Key Topics: and challenges. Initial Franchise Fee: o Visit franchise locations to observe operations and o Definition and purpose of the assess the business initial franchise fee. environment. o Factors influencing the Examples: amount of the initial franchise fee. Case studies of franchises that thrived due to thorough due diligence. Ongoing Royalties: Real-world examples of franchise o Understanding the structure failures caused by inadequate due and calculation of ongoing diligence. royalties. Advantages: o Evaluating the impact of royalty fees on profitability. 17 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung  DON HONORIO VENTURA STATE UNIVERSITY Additional Fees: o Overview of other potential fees, such as marketing fees, training fees, and technology fees. o Assessing the cumulative financial obligations and their implications on cash flow. Examples: Comparative analysis of franchise fees and royalties across different industries. Real-world examples of how franchisees manage and budget for ongoing fees and royalties. Advantages: Financial Clarity: Clear understanding of the financial commitments and obligations associated with franchising. Budgeting and Planning: Ability to budget and plan effectively to ensure financial sustainability. Challenges: Complex Fee Structures: Navigating complex and varied fee structures across different franchises. Hidden Costs: Identifying and accounting for potential hidden costs not explicitly mentioned in the FDD. 18 FRANCHISING Prepared by: Mr. Aymit A. Manalungsung