Chapter 4.2
Own a Franchise or Start a
Business
Mrs. Leonard
Entrepreneurship
Franchise Ownership
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A franchise is a legal agreement that gives an
individual the right to market a company’s products
or services in a particular area
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Ex. Jiffy Lube stations, McDonald’s
Franchisee is a person who purchases a franchise
agreement
Franchisor is a person or company that offers a
franchise for purchase
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More than 500,000 people in the U.S. own franchises
Franchising opportunities are available in every field,
from motels to pet stores
Sources for finding out about Franchise
Ownership and Opportunities
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Franchise Opportunities Handbook – publication of the
U.S. Department of Commerce
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Consumer Guide to Buying a Franchise
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Lists more than 1,400 franchise opportunities by category
Provides information about costs and capital requirements
Publisher by the Federal Trade Commission
Books on franchising available at your public library
The Wall Street Journal
Magazines such as Forbes, Barron’s Business Start-Ups,
Entrepreneur, and Inc
Operating Costs of a Franchise
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Initial Franchise Fee – fee the franchise
owners pays in return for the right to run the
franchise
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Fee can run anywhere from a few thousand to a
few hundred thousand dollars (usually nonrefundable)
Start-Up Costs – costs associated with
beginning a business
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Include the costs of renting a facility, equipping
the outlet, and purchasing inventory
Operating Costs of a Franchise
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Royalty Fees – weekly or monthly payments made
by the owner of the franchise to the seller of the
franchise
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Payments usually are a percentage of your franchise’s
income
Advertising fees – fees paid to support television,
magazine, or other advertising of the franchise as
a whole
Advantages of Owning a Franchise
An entrepreneur is provided with an established
product or service
1.
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Allows entrepreneurs to compete with giant companies
Franchisors offer management, technical, and
other assistance
2.
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On-site training or classes, aid with starting the new
business and handling daily operations, and tips on
crisis management
Offer help on everything from site selection and
building design to equipment purchase and recipes
Most maintain a toll-free telephone number that
franchises can call for advice
Advantages of Owning a Franchise
Equipment and supplies can be less expensive
3.
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Because franchises are part of large chains, they can
purchase in bulk
A guarantee of consistency attracts customers
4.
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Franchise contract mandates a certain level of quality,
consumers know what they can walk into a franchise
anywhere and receive the same product and service
Disadvantages of Owning a Franchise
Franchises can cost a lot of money and cut down
on profits
1.
Initial capital is needed to purchase a franchise
business is high
Some of the profits you earn as a franchise owner are
returned to the franchisor as royalty fees
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Owners of franchises have less freedom to make
decisions than other entrepreneurs
2.
Many business decisions have already been made
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Products and services, prices set by franchisors
Disadvantages of Owning a Franchise
Franchisees are dependent on the performance
of other franchisees in the chain
3.
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If other franchises run sloppy operations, customer
opinions of the chain will decline – which will make
customers stop going
The franchisor can terminate the franchise
agreement
4.
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If franchisee fails to pay royalty payments or meet
other conditions, the investment in the franchise could
be lost
If the franchise expires, the franchisor can choose not
to renew the agreement
Evaluating a Franchise
Ask these questions to evaluate a specific franchise
1. What is the projected demand for the franchised
product or service in the area I want to locate in?
2. Will I be guaranteed an exclusive territory for the
duration of the franchise term, or can the
franchisor sell additional franchises in the territory
3. What are the costs and royalty fees associated
with the franchise
4. How profitable have other franchises in the area
been? What do other franchisees think of the
franchisor?
Evaluating a Franchise
5.
6.
7.
8.
How long has the franchisor been in
business? How profitable is the franchisor?
What services does the franchisor provide?
Will the franchisor help me with marketing,
merchandising, and site selection?
Are benefits provided by the franchisor
worth the loss of independence and the cost
of purchasing the franchise?
What happens if I want to cancel the
franchise agreement?
Evaluating a Franchise
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Some franchisors make false or misleading claims
about their franchises
Carefully study the documents the franchisor gives you
 Be suspicious of any company that will not back up its
claims with written financial statements
 Beware of high-pressure sales tactics – never allow
yourself to be pressured into making the decision to
quickly
 Consult an attorney before signing a franchise
agreement, these are complicated documents
Who is interested in starting a franchise?
On page 88 look at table of top 10 Franchises – which
would you want to open?
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Starting your own business
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As an entrepreneur, you might want to
establish a business of your own
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Who wants to start their own business?
Advantages of Starting your own Business
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Entrepreneurs who start their own business get to
make decisions about everything from where to
locate, prices to charge, and employees to hire
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They are completely independent and create their own
destinies
Entrepreneurs find great satisfaction in starting
their own business
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Attracted to the challenge of creating something new
Feel triumph when their business turns a profit
Disadvantages of Starting your Own
Business
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There is no certainty that customers will
purchase what you offer –you must estimate
the demand for your product or service
Must make decisions that other types of
entrepreneurs need not make
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What product/service to offer, the location, what
employees to hire
4.2 Assessment
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Thinking Critically 4.2 (p.91)
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Questions 1-3
Type the questions and your answers (answer in
bold)
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Save!
4.2 true/false and multiple choice worksheet
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Put in your notebook