4
Franchising
Chapter 4 Copyright © 2010 by Nelson Education Ltd.
PowerPoint Presentation by
Ian Anderson, Algonquin College

After studying this chapter, you should be able to:
1. Describe the significance of franchising in Canada.
2. Identify the major advantages and limitations of franchising
3. Discuss the process for evaluating a franchise opportunity.
4. Evaluate franchising from the franchisor’s perspective.
5. Describe the critical franchisor/franchisee relationship.
6. Understand issues related to franchise regulation in Canada and know the warning signs of franchise fraud
4-2 Chapter 4 Copyright © 2010 by Nelson Education Ltd.

• Franchising

A marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to the terms specified by the franchisor
• Franchise contract

The legal agreement between franchisor and franchisee
• Franchise

The privileges conveyed in the franchise contract
…continued
4-3 Chapter 4 Copyright © 2010 by Nelson Education Ltd.

• Franchisee

An entrepreneur whose power is limited by a contractual agreement with a franchisor
• Franchisor

The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party
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• Product and Trade Name Franchise

Grants the right to use a widely recognized product or name
(i.e. gas stations)
• Business-Format Franchise

Provides an entire marketing system and ongoing guidance from the franchisor (i.e. fast-food)
• Piggyback Franchising

The operation of a retail franchise within the physical facilities of a host store (i.e. complementary food service in a fast food store)
…continued
4-5 Chapter 4 Copyright © 2010 by Nelson Education Ltd.

• Master Licensee

An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory
• Multiple-Unit Ownership
 Holding by a single franchisee of more than one franchise from the same company
• Area Developers

Individuals or firms that obtain the legal right to open several franchised outlets in a given area
4-6 Chapter 4 Copyright © 2010 by Nelson Education Ltd.

Pluses
Formalized training
Financial assistance
Proven marketing methods
Managerial assistance
Quicker startup time
Overall lower failure rates
Minuses
Franchise fees
Royalties
Restrictions on growth
Less independence in operations
Franchisor may be sole supplier of some supplies
Termination/renewal clauses
Exhibit 4-2
Copyright © 2010 by Nelson Education Ltd.
Chapter 4

• Advantages
– Probability of success
•
Proven line of business
•
Pre-qualification of franchisee
– Training
•
Franchisor-provided
–
Financial Assistance
• Franchisor assistance
–
Operating assistance
• Franchisor-aided
• Limitations
–
Franchise costs
• Initial franchise fee
•
Investment costs
• Royalty payments
• Advertising costs
–
Restrictions on
Business Operations
–
Loss of independence
Copyright © 2010 by Nelson Education Ltd.
Chapter 4 4-8

• Proven marketing concept and customer base
– The use of an established, nation-wide brand.
• Training
– May help alleviate managerial weaknesses.
• Financial assistance
– Start-up business costs are normally high and thus by teaming up with a franchise organization, the individual can increase her/his chance of receiving financial help.
• Operating assistance
– The franchisor provides a range of operating services including site selection, bulk purchasing of equipment, and inventory.
Chapter 4 Copyright © 2010 by Nelson Education Ltd.
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• Franchise costs
• Restrictions
– Sales territory
– Site approval required
– Outlet appearance
– Goods/services to be sold
– Resale of franchise
– Advertising and hours of operation
• Loss of independence
Copyright © 2010 by Nelson Education Ltd.
Chapter 4 4-10

• Locating a Franchise Opportunity
• Investigating the Potential Franchise

Information sources
• Independent, third-party sources
• Franchisors themselves
• Existing and previous franchisees
4-11 Chapter 4 Copyright © 2010 by Nelson Education Ltd.

• Franchise fee
• First and Last Month’s
Rent
• Leasehold Improvements
• Equipment
• Furniture and Fixtures
• Signage
• Insurance, Licences and
Permits
• Training
• Initial Inventory
• Working Capital
• Royalty
Copyright © 2010 by Nelson Education Ltd.
Chapter 4

• Historically, many Canadian franchisors have expanded into the United States.
• Canadian franchising enterprises are now expanding into countries beyond North America.
– Yogen Fruz – 1,580 stores in 30 countries
• Attractive growth prospects:
– Industrializing countries with large populations
– Countries with an expanding middle class and higher disposable income
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• Three sources of information:
– independent third party sources
– franchisors
– existing and previous franchisee
This is a 2-way effort
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• Disclosure document
– a detailed statement of information such as the franchisor’s finances, experience, size, and involvement in litigation
Chapter 4 Copyright © 2010 by Nelson Education Ltd.
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•
Why would a businessperson wish to become a franchisor? Three benefits can be identified:
1.
Reduction of capital requirements
2.
Increase in management motivation
3.
Speed of expansion
•
Drawbacks associated with franchising from the franchisor’s perspective:
1.
Reduction in control
2.
Sharing of profits
3.
Increase in operating support
Copyright © 2010 by Nelson Education Ltd.
Chapter 4
…continued
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• Elements to look for in a franchise relationship:
• Responsiveness
• Empathy
• Communication
• Dependability
• Accessibility
• Give and take
• Anticipation
• Structure
• Open-mindedness
Chapter 4 Copyright © 2010 by Nelson Education Ltd.
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• The Rented Rolls Royce Syndrome
• Don’t you want to be like me?
• The Hustle
• Territories are going fast…
• The Cash-Only Transaction
• The Boast
• We never met an exaggeration we didn’t like
• The Big-Money Claim
•
Earn $10,000/month in your spare time
• The Disclosure Dance
• Umm, we’re not a public corporation
Chapter 4 Copyright © 2010 by Nelson Education Ltd.
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