BBE2313 • FUNDAMENTAL OF ENTREPRENUERSHIP
CHAPTER 3
Franchising and The
Entrepreneurships
Objectives
• At the end of lecture students should be able to:
– Explain the importance of franchising in the U.S. economy.
– Define the concept of franchising and describe the different types
of franchises.
– Describe the benefits and limitations of buying a franchise.
– Describe the legal aspects of franchising, including the protection
offered by the FTC's Trade Regulation Rule.
– Explain the right way to buy a franchise.
– Describe a typical franchise contract and some of its provisions.
– Explain current trends shaping franchising
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Topics Covered
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Definition of franchising
Types of franchising
Franchising advantages and disadvantages
Limitation of franchising
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What is Franchising
It is the method whereby the owner of knowhow, products, a process or a service (or in
certain circumstances just a name) - the
Franchisor allows another party to use such
know-how products, process, service or name in
exchange for an initial and on-going payment.
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The Franchising Boom!!!
• Sales exceeding $1 trillion from virtually
every product or service imaginable.
• One out of 12 retail businesses in the
U.S. is a franchised operation.
• Franchise sales account for 40% of total
retail sales.
• A new franchise opens somewhere in
the world every six-and-a-half minutes
and in the United States every eight
minutes.
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Franchising Grow th
Num ber of Units (in Thousands)
Number of Franchised Units (in
Thousands)
400,000
341,579
350,000
300,000
337,693
351,459
310,044
290,605
274,265
250,000
200,000
150,000
100,000
50,000
2000
2001
2002
2003
2004
2005
Year
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Franchising
• Franchising – semi-independent business
owners pay fees and royalties to a parent
company in exchange for the right to sell its
products and services under the franchiser’s
trade name and often to use its business
format and system.
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Types of Franchising
• Tradename

Product distribution

Pure (Business format)
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Why Buy a Franchise?
• Franchisees benefit from the franchiser’s
experience.
• Franchisees get a proven business system and
avoid having to learn by trial-and-error.
• Franchisees earn a great deal of satisfaction
from their work.
Before buying, ask: “What can a franchise do
for me that I cannot do for myself?”
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Benefits of Franchising
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Business system
Management training and support
Brand name appeal
Standardized quality of goods and
services
• National advertising program
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Benefits of Franchising
• Financial assistance
• Proven products and business
formats
• Centralized buying power
• Site selection and territorial
protection
• Greater chance for success
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Drawbacks of Franchising
• Franchise fees and profit sharing
• Strict adherence to standardized
operations
• Restrictions on purchasing
• Limited product line
• Unsatisfactory training programs
• Market saturation
• Less freedom
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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.
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Ten Myths of Franchising
4. I’ll use 80 percent of the franchiser’s
business system, but I’ll improve upon it
by substituting my experience and knowhow.
5. All franchises are the same.
6. I don’t have to be a “hands-on” manager.
I can be an absentee owner and be very
successful.
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Ten Myths of Franchising
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 on-going royalty.
10. Once I open my franchise, I’ll be able
to run things the way I want to.
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What Do Franchisers Look
for in a Franchisee?
Yes No Maybe
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Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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What Do Franchisers Look
for in a Franchisee?
Yes No Maybe
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Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
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Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
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•
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•
Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
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•
•
•
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•
•
Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
•
•
•
•
•
•
•
•
Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
•
•
•
•
•
•
•
•
Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
•
•
•
•
•
•
•
•
Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Yes No Maybe
•
•
•
•
•
•
•
•
Experienced?
Hard Working?
Team Player?
Leadership & Management Skills?
Risk Averse?
Educated?
Financially Stable?
A Desire to Succeed?
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Franchising and the Law
• Key protection is the Uniform Franchise
Offering Circular (UFOC).
• Franchisers must deliver a copy of
UFOC before any offer or sale of a
franchise.
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Franchising and the Law
• The UFOC contains information on 23
topics, including:
– Franchiser’s business experience
– Franchise fees and costs
– Lawsuits involving the franchiser
– Financial assistance available
– Territorial protection granted
– Restrictions on purchasing
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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.
• Unsolicited testimonial from “a highly
successful franchisee.”
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Detecting Dishonest
Franchisers
• Unusual amount of litigation by
franchisees.
• Promises of future earnings with no
documentation.
• High franchisee turnover or termination
rate.
• Attempts to discourage your attorney
from evaluating the contract before
signing it.
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Detecting Dishonest
Franchisers
• No written documentation.
• 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.
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How to Buy a Franchise
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Preparation, common sense, and patience
are vital ingredients in choosing the right
franchise.
Evaluate yourself - What do you like and
dislike?
Research the market.
Consider your franchise options.
Get a copy of the franchiser’s Uniform
Franchise Offering Circular (UFOC) and
study it.
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What Should You Look For?
• A unique concept or marketing approach
• Profitability
• A registered trademark
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What Should You Look For?
• A business system that
works
• A solid training program
• Affordability
• A positive relationship with
franchisees
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How to Buy a Franchise
• Talk to existing franchisees.
• Ask the franchiser some tough questions.
• Make your choice.
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Table 4.4 Advantages and Disadvantages of Buying
a New vs. an Established Franchise
New
Franchise
Established
Franchise
Pros
Cons
Can be new and exciting
Business concept can be fresh and
different in the market
Possibility of getting lower fees as
a “pioneer” of the concept
Potential for a high return on
investment
Business is not tested or
established in the market
Unknown brand and trademark
Possibility that the concept is a fad
with no staying power
Franchiser may lack the
experience to deliver valuable
services to franchisees
Business concept likely is wellknown to consumers and market for
the products or services is already
established.
Franchiser has experience in
delivering services to franchisees
Franchiser has had time to work
the “bugs” out of the business
system
High franchise fees and costs that
often are non-negotiable
Concept may be on the wane in the
market
Franchiser’s brand and trademark
may remind customers of an
outdated concept
Franchiser’s “trade dress” may be
in need of updating and redesigning
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Source: Based on Andrew A. Caffey, “Age Issues,” Entrepreneur, January 2002. p. 118.
Franchise Contracts
40% of New Franchisees Sign
Contracts Without Reading
Them !!!
Note clauses covering:
• Termination
• Renewal
• Transfers and Buybacks
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Trends Shaping Franchising
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International opportunities
Smaller, nontraditional locations
Conversion franchising
Multiple-unit franchising
Master franchising
Piggybacking (Combination franchising)
Serving aging baby boomers
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