ENTREPRENEURSHIP
FRANCHISING AND THE ENTREPRENEUR
FRANCHISING AND THE ENTREPRENEUR
TOPIC
9
FRANCHISING AND
THE ENTREPRENEUR
LEARNING OUTCOMES
Upon completion of this topic, you should be able to:
1. Define Franchising.
2. List the types of Franchising.
3. Explain the types of Franchising.
4. Summarise the Benefits of Franchising
5. Describe the Drawbacks of Franchising
6. Determine the trends Shaping Franchising
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FRANCHISING AND THE ENTREPRENEUR
IX
STRUCTURE
9. FRANCHISING AND THE ENTREPRENEUR
9.1 INTRODUCTION
9.2. TYPES OF FRANCHISING
9.3. BENEFITS / DRAWBACKS OF FRANCHISING
9.4. TRENDS SHAPING FRANCHISING
9.5.
SUMMARY
9.6. KEY TERMS
9.7.
QUESTIONS
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FRANCHISING AND THE ENTREPRENEUR
9.1
INTRODUCTION
McDonald is the superior franchising company is the world. Eighty percentage of
McDonald’s fast food chain is operated by Franchise Business Model. Entrepreneurs
magazine lists the top five hundred franchise companies every year. The fact is every
year, McDonald’s features one among the top 10 franchise companies . Eighty Eight
percentage of its franchisees operators own more than one unit of McDonald’s.
Absentee ownership model for McDonald’s is not permitted.
Before the start of operations, the McDonald’s franchisee has to attend minimum of
12daysin Hamburger University,
Illinois. The franchisees gets trained in various
business processes and procedures right from scrapping the grill to running
a
successful, profit oriented and community friendly franchise unit as a successful
business.
Hamburger University was set up in 1961 by Fred Turner who was
McDonald’s senior chairman at that time and Ray Kroc, the McDonald’s first grill man
in the basement of McDonald’s , Elk Grove village, Illinois. Hamburger University
provides the McDonald’s franchisees with high quality operations, procedures and
leadership training.McDonald’s are well known for their success cloning of franchises.
McDonald’s as a franchisor puts in heavy emphasis on delivering consistent high
quality fast foodservices. Hence, any McDonald’s restaurant in the entire chain will
serve the same consistent high quality fast foods. McDonald’s franchise is not an easy
way to make money. The opportunity to earn money is available but needs to be
earned. McDonald’s franchise opportunities are given to selected people who have
solid similar career expertise and experience. They need to be exhibiting strong
leadership characteristics. Their qualities includes

Personal Integrity

Individuals with strong people management skills.

Excellent Communication skills
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FRANCHISING AND THE ENTREPRENEUR

Financial expertise

Strong Personalities.
Franchisees should have strong relationship with the local community. They need
to be active in the local community events. The extensive training for franchisee
includes various class room sessions as well as visits to many McDonald’s
franchisees restaurant.
Illustration 9.1
The following are list of
franchise start up enablement activities done by
McDonald’s with Franchisees during the initial 12 months

Research and Application of Franchisee

Interview

5 day in Restaurant Evaluation.

Meeting with existing Franchisees

Security Checks
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FRANCHISING AND THE ENTREPRENEUR

Second Interview

Panel Interview

9 months training

Handover
The illustration depicted above gives the flow of activities involved in Franchise
startups .
TIPS
Sale of Franchise unit by Franchisor requires
disbursement of relevant information to the
franchisee. This is done with the use of a standard
attractive document called Franchise Disclosure
Statement. The following are the contents of the
Franchise Disclosure Statement.
 Franchising Fee
 Clear statements regarding franchise
investments
 Royalty and the method of calculation
 Franchisor
Background
information,
Information about Executives, litigation
information about the company.
 Restrictions regarding sources of supply
 The procedures the franchisors will offer
(Training,
Operational
procedures,
trademarks, trade names, marketing plan
etc.)
 Existing Franchisees Information and their
locations.
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FRANCHISING AND THE ENTREPRENEUR
9.2
TYPES OF FRANCHISING
illustration 9.2
The Illustration depicted above highlights a Franchise Agreement.
A franchise is based on aagreement or a licence between to legally separateindividuals
or an group of individuals . There are two parties involved in this transaction, they
are the franchisor and franchisee. The franchisor allocates the right to market the
product or service using the trademarks or trade names to the
franchisee. The
franchisee can use the franchisors operational procedures and methods to market the
products or services. The franchiseeobliged
to pay
to the franchisor for the
rightsobtained. The franchisor is obliged
provide
rights and support to the
to
franchisee.The support given to franchisees includes training, guidance etc. Franchise
business arrangement includes names like dealerships and distributorships.
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FRANCHISING AND THE ENTREPRENEUR
Franchising enables the franchisor to expand its geographic reach
branches in many locations through dedicated franchisees.
by setting up
The franchisee and
Franchisors are both Entrepreneurs. Franchising is a roadmap to Entrepreneurship.
Franchising is a mode for making wealth for the entrepreneur.
DID YOU KNOW
In a study by Arthur Anderson & Company of 366
franchise companies, nearly 97% were still in business
after 5 years.
From the point of view of the customer or consumer, there is not much of a difference
between the franchised unit and the unit operated directly by the corporate entity. In
terms of business transactions, the purpose why franchisor and franchisee enters into a
franchise agreement is for profits. In a franchise agreement, the franchisees makes
profit by marketing and selling the products or services to the customer. In the case of
franchisor, the profits are generated by allowing the franchisee to use its know how
package and Intellectual property rights on Trade names and Trade marks. Both the
parties to the contract has to offer some thing in order to have a meaningful franchise
relationship. The franchisor has a successful business and a effective and proficient
business format with continuously upgrading and improving the capability and
knowledge and operational processes . The most important asset that is shared with
the franchisee by franchisor is the intellectual property rights which includes
trademarks and trade names. The franchisee should be capable to invest the required
capital in the franchise for setup and development of the franchise unit of operations.
Hence both parties to the
contract has to offer
franchisee franchisor partnership.
9
certain assets for
a successful
FRANCHISING AND THE ENTREPRENEUR
Franchising is the direct method to develop the product and service of the business.
Often certain existing business which has direct retail outlets to discontinue its direct
outlet business and may seek franchisees. This is done for the business to grow fast into
a wide geographic area without loss of quality. Franchising is one of the effective
Illustration 9.3
methods to expand to new geographical areas specifically in international locations.
The above illustration depicts the types of franchising.
There are threemain types of franchising models trade name franchising, products
distribution franchise and Business Format Franchise.
TIPS
Albert Singer is popularly known as the father of
modern-day franchise model, specifically in the
United States of America . Singer was the first
person to create a franchise contract as early as mid
1800 century in order to distribute singer Sewing
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FRANCHISING AND THE ENTREPRENEUR
machines. .
Trade name Franchising
In this type of Franchising, the trade mark and trade names are only usedby the
franchisee without selling
of products specifically associated with franchisor’s
name.Examples are Western Auto, True value hardware . True value hardware has
been operating in 58 countries with 2000 members in the cooperative operations where
in only the brand name is shared.
Product Distribution Franchise
In this type of Franchising, the product is manufactured by the Franchisor and it is
sold to customers by the Franchisees. This type of product distribution is applicable
for Industries like Beverages, Automobiles, Automobiles parts and gasoline are some
examples. Coca Cola, Ford, John Deere, and Good Year tires are few companies that
has product distribution franchises. The product distribution franchise looks quite
similar to the supplier dealer relationship. But the fundamental difference lies in the
intensity of the relationship.
The product distribution franchise markets and sells only the franchisor products
exclusive mode or partially exclusive mode. However, in the case of
Supplier
dealership mode, the dealer can sell multiple products from different manufacturers. In
products distribution, the manufacturer controls how the franchisee sells the goods.
The franchisor does not give the complete knowledge of the processes and procedures
required to perform the entire set of business activities . The franchisor only provides
the licence for its logo, trademarks, and trade names . Product distribution franchising
represents highest proportion of retail product sales. The franchisor uses an limited
distribution network for its product. This type of Franchising is commonly used for
automobiles. For example, Cheverolet, Lincoln and Chrysler.
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FRANCHISING AND THE ENTREPRENEUR
Business Format Franchising
This type of Franchising is called Pure Franchising or Comprehensive franchising. The
franchisor shares the complete business format to the franchisee.
The franchisor provides the license for the trademark, trade names andthe product or
services to be sold. The franchisor provides the knowledge and expertise to setup the
physical plant. The franchisee receives the complete information about various
operational procedures regarding all the applicable business processes relevant to the
products or services to be sold in the market. The franchisor also provides a detailed
marketing plan . The marketing plan gives complete information about the advertising
strategy, marketing activities to generate leads in the local market of the franchise and
recommendations about media mix . The Franchisor also provides the marketing
research information. The quality assurance and control processes are provided to the
franchisee.2 way communication mechanism is set up between the franchisor and
franchisee. Field support by the franchisor representative is one of the important
process in the franchisor and franchisee relationship. In Business format franchising,
the franchisee buys the complete success package that consists of all the components of
the franchisors business operations.
Business format type franchising is the most
common and popular type of Franchising . In US, total number of business format
franchising is four times than that of product distribution franchising. Business Format
franchising is commonly implemented in Fast Food Restaurants, Hotels, Business
services, car rentals and beauty salons.
DID YOU KNOW
The original Gold’s Gym was started in Venice in 1965
California is famously
called “The Mecca of
bodybuilding. Today, Gold’s Gym is the largest global
co-ed gym in the world in 700 locations in 20 countries
with members that range from novices to professionals,
including popular
Hollywood star like Arnold
Schwarzenegger, Dwayne Johnson. etc.,
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FRANCHISING AND THE ENTREPRENEUR
9.3
BENEFITS/DRAW BACKS OF FRANCHISING
There are both benefits and drawbacks in Franchising. But for the Entrepreneur, the
benefitssurpasses the drawbacks. With the help of Franchising , the entrepreneur gets
the opportunity to start a business for himself , but not solely by himself. Franchising
offers
certain degree of autonomy to perform all the activities of his business.
Franchise break even in a shorter duration than that of the independent business since
there is an existing customer base and proven products or services.
Since the franchisor has previously worked with the setup and franchise operations,
the experience is a very useful knowledge shared with the franchisee by franchisor.
The franchisor can provide all the secrets behind the success of the franchisor.
Franchise provides an already entrenched
and proven product or service to the
entrepreneur to market.Entrepreneurs gets a successful and assured business model
for his business. Theproduct or servicecould have been firmly rooted in the market
and extensively recognised. The entrepreneur gets the advantages of an already
existing customer base. This established market normally takes years to develop when
it is started afresh.In Franchising , the customers can easily recognise the brand name,
logo, store design and products . This may not be so in independent business.
For the entrepreneur, franchising greatly improves the probability of success due to
already established products and services.
The customers get the value in the form of high quality and dependable products
which is necessary due to the franchise agreement.
Franchisors provides the entrepreneur the support in initial setup operations.

Selection of the location or site for facility.

Design of facility
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FRANCHISING AND THE ENTREPRENEUR

Building the facility

Knowledge Transfer from Franchisor about operations.

Managerial training program before setup.

8et up processes and procedures.
The franchisor provides on going support in the following areas.

Knowledge Transfer by training.

Advertising and Marketing processes and procedures .

Nation level advertising benefits all franchisees.

Set up Quality standards.

Functioning processes and procedures of the business.

Management support and Managerial knowledge.

Supervision

Increased economic power

Research and development

Bulk Purchasing, Providing a list approved suppliers.
The franchisees procure the franchisors experience in the
form of a complete
successful business system . Franchisee gets the benefits of
large magnitude
centralised buying power of the franchisor. If the franchisor does the procurement of
raw materials for franchisees, then they pass on the savings got from the high volume
purchases.The economy of scale is a clear advantage for the franchisees when
compared to the independent business. Franchisors do extensive research before
selecting the location for the franchise. They do research on the vehicles movements,
customer
profiling, demographics, census, market data analysis, competitive
analysis,market potential analysis and site impact analysis on whole store network.
Store network optimisation is another important advantage for franchisees. The above
mentioned due diligence, research and analysis is not done with high precision and
intensity in the case of independent business. Some Franchisees get exclusive rights in
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FRANCHISING AND THE ENTREPRENEUR
the specific territory and that geography cannot be shared with other franchisees.
Franchisees has high chances of success and there is no steep learning curve like that of
independent business. The franchisees do not learn by trial and error which normally
happen in independent business. Franchisees can have symbiotic relationship with the
other franchisees and enhance their synergy.
TIPS
Guidelines to createdigital presenceof thefranchise
in the Internetfrugally.
 Use social media to do more than selling
products or services. Create Interesting
stories, articles about the industry
 Avoid purchase of backlinks (Links from
other websites to the franchise website.)
 Use Instagram
 Secure domain matching the franchise
industry.
 Build the franchise websites using
affordable website builders. Godaddy,
Webnode etc.,
Drawbacks
Franchisee may not be totally independent. There are procedures and regulations to be
adhered by the franchisee set forth by franchise agreement. franchisor can have control
over certain aspects like territory, the products and prices. The franchisees needs to
adhere to regulations and precedents set up by the franchise agreement. There are
additional fees applicable apart from the initial franchise fees. They may be in the form
of royalty and advertising fees paid to franchisor periodically.
Franchisee may need to meet the business goals and objectives amidst equalising the
restrictions from franchisors , support given by the franchisors and his own expertise.
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FRANCHISING AND THE ENTREPRENEUR
There may be a damage in the brand image caused due to poor performance of other
franchisees or due to unanticipated issues being faced by
franchisors. This
deterioration of brand value can impact the franchisee’s business.
The duration of the franchise agreement can be considerably short. The franchise
agreement can hence terminate and the franchisee may not be able to prevent the
termination or the terms of termination. Franchisor usually do not provide financial
assistance in the form of loans for the initial franchise fees.
CHECK YOUR PROGRESS
Jack has 20 years of experience in Sales and
Marketing of Consumer Electronics . Jack
is highly entrepreneurial professional.
There are two opportunities available for
Jack to venture into. First option is to start
a franchise for a Television brand(Show
Room). The second Option is to start a
Multi brand,
Consumer electronics
showroom.Which option is best suitable
for Jack?
9.4
TRENDS SHAPING FRANCHISING
The trends that is defining and driving franchising can be the following.

Globalisation

Internet based Franchising

Conversion Franchising

multiple-unit Franchising

master Franchising

piggybacking and

Meeting Baby boomers needs.
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FRANCHISING AND THE ENTREPRENEUR
TIPS
Seed Capital is defined as the initial amount used
to create the start upoff the ground. The seed
capital is provided by the founder, usually a small
amount during the concept stage for Research and
development expenses. It is considered as a high
risk investment but can produce massive rewards
as the firm grows.
.
Global Opportunities
The greatest trend which is influencing franchising is globalisation. There is very
massive potential for growth when franchising is expanded to global markets. For
example, the franchises of US products and services are set up in multiple countries
globally. Franchising in UShas now become an leading revenue generating export
oriented industry . Global markets like Europe are Asia Pacific are experiencing rising
per capita income and increasing
urban life style
which
are providing huge
opportunitiesforfranchises. Franchising United States products and services have huge
demand inEurope and Asia Pacific countries . Consumer durables are in great demand
in these countries. Franchising in global markets, the products and services have to
adapted to the local context. This is a vital influencing factor for success of franchising
in global scale. In Franchising for global markets,the
basic business systems
remainsunchanged . However, the products and services has to be modified according
to local customs and traditions. This adaptation is done to attract the target audience
of that specific region. The number of franchises set up outside United States of
America is10.3 percent compared to 1.3 percent for franchises inside United States of
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FRANCHISING AND THE ENTREPRENEUR
America in 2014.Recent Free trade agreements between countries provides a boost for
franchising globally. The increasing number of middle class segment of the economy in
many countries aids franchising in the global markets.
Smaller in scale , non traditional and Intercept Marketing approach .
The franchises are being set up in the places where customers are. This is called
intercept marketing. This concept is used due to the high costs in setting up full scale
franchise. The intercept marketing is done in specific locations like Universities, Banks,
Schools airports and hospitals . The franchise set up is a scale down outlet placed
directly in these locations where there are lot of customers movement. This type of
Franchising is getting traction due to lower costs involved. In the intercept marketing
mode of franchising, when the total value generated is compared with the full scale
franchises, the revenue generated are the same, where as the costs have been reduced
to a fraction of the full scale franchise.
Internet Franchises
There are many opportunities for internet based franchise business model. The
opportunities exists in computer products, wireless technologies, video games,
education, internet marketing and other business consulting services. The investments
involved for internet based franchise is very low compared to Brick and Mortar based
franchise. The benefits of Internet based franchise includes flexible working hours,
working from home and minimal information technology knowledge .
Social Media
Social media has been used extensively by the franchisees to market their products to
the local community. Franchisees usually post tips, news and events notices using
social media tools to engage with local community.
Crowdfunding
Crowdfunding is an internet based funding solutions for franchises. Equity based
crowdfunding solutions are great opportunities for raising funds for the franchisee.
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FRANCHISING AND THE ENTREPRENEUR
Conversion Franchising
Conversion franchising is a type of Franchising where independent businesses are
converted into franchisees to benefit from the franchisor Trade name and Trademarks
including brand value of the franchisor. The franchisor gets the benefit of quick entry
to new markets and territories.
The conversion franchise will under go a redesign of the store decor , reformat the
logos, trademarks and trade names to align the independent business to be part of
Franchise store Network. Conversion Franchising often becomes the growth strategy
for the Franchisor. 72 percent of Franchisors in United States of America used
conversion franchising as growth strategy.
Multiple-unit Franchising
Multiple-unit franchising is the type of Franchising where in a franchisee can own
more than one franchise units in a geographic territory within a certain duration.
Multiple Unit franchising had started in early nineties in United States of America. This
format of franchise has been growing in a rapid pace. The number of Franchise units
can be from 3 to 6 and can also include additional units also.The entrepreneur has to
be very experienced in the business area and should have adequate resources to
operate multiple units at the same time. The multiple units franchising is an efficient
and effective way to gain entry in the global markets in a short time span. Multiple
Unit franchising is successful method for Franchisor to grow in the new international
territories often with aid of a local representative who is expert in legal framework of
the country, local customs and traditions.Franchisees operating multiple Unit of
franchise leverage deep discounts up to 25 percent in the initial Franchising fees.The
franchisees can often acquire fast growing territories with multiple Unit franchising.
34 percent of the franchises have multiple unit franchising in United States of America.
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FRANCHISING AND THE ENTREPRENEUR
Illustration 9.4
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FRANCHISING AND THE ENTREPRENEUR
TIPS
Retro franchising or Refranchising can be defined
as the process of franchising existing locations that
is currently operated by Franchisor. The existing
locations
may or may not have ever been
franchised. Re Franchising is a common
phenomenon in Fast food chains and Restaurants.
The fast food retail chain uses re Franchising
strategy to increase the number of franchise units,
in order to reduce costs and improve on profit
margins.
MasterFranchising
Master Franchising involves selling the rights to set up an quasi autonomous business
unit which has responsibility to recruit, sell, and set up
other franchisees in the
assigned territory. Master Franchisee acquire the right to set up sub franchises in the
wide geographic region or territory or a whole country. Master Franchising is
applicable in global markets since the master franchisee may have the experience,
expertise and knowledge of the market in local area or territory. Master Franchisee
usually will be an expert in the local laws of the country . Refer Illustration given
above for organisation structure of master franchisee.
Piggyback
This type of Franchising involves co branding and setting up franchisees for two or
moredifferent complimentary products in a single store. The products have to be
compatible in order to reap the benefits of piggybacking. Piggybacking franchisees are
common in Restaurants and Fast Food industry. Various operational costs are reduced
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FRANCHISING AND THE ENTREPRENEUR
to a minimum which can include leasing, staff, maintenance and advertising.
Successful piggybacking franchisees often drives revenue and profits considerably
more than the single franchise unit.
Serving the Needs of Baby Boomers(Born between 1946 to 1964)
Franchises are successful in targeting the Baby Boomers segment by providing
innovative products and services. Customers are ready to pay high prices for premium
products and services which are time saving and provides convenience.
Illustration 9.5
Home delivery of meals, house-cleaning and repair services, continuing education,
leisure activities, products and services aimed at home-based businesses and health are
the industry segments in which franchises targets baby boomers and are growing in
rapid pace. The above illustration highlights the differences based on franchises units.
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FRANCHISING AND THE ENTREPRENEUR
CHECK YOUR PROGRESS
Suggest two pairs of suitable products as
examples that can piggybac?
ACTIVITY
You are an Entrepreneur, who has the expertise and
experience to start an enterprise. You have sufficient
financial resources to invest in the franchise
opportunity. .
Identify a suitable franchise opportunity, evaluate
suitable franchise opportunity which you are
interested. List at least 10 suitable questions to be
considered for which answers are required before the
investment in the franchise opportunity. Determine
the answers for the questions by doing the research
on the selected franchise opportunity. Draft detailed
report from the findings ?
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FRANCHISING AND THE ENTREPRENEUR
9.5
SUMMARY
McDonald is the superior franchising company is the world. Eighty percentage of
McDonald’s fast food chain is operated by Franchise Business Model. Entrepreneurs
magazine lists the top five hundred franchise companies every year. The fact is every
year, McDonald’s features one among the top 10 franchise companies . Eighty Eight
percentage of its franchisees operators own more than one unit of McDonald’s.
Absentee ownership model for McDonald’s is not permitted.
A franchise is based on a agreement or a licence between to legally separate
individuals or an group of individuals . There are two parties
involved in this
transaction, they are the franchisor and franchisee. The franchisor allocates the right to
market the product or service using the trademarks or trade names to the franchisee.
The franchisee can use the franchisors operational procedures and methods to market
the products or services. The franchisee obliged to pay to the franchisor for the
rights obtained. The franchisor is obliged
to provide rights and support to the
franchisee. The support given to franchisees includes training, guidance etc. Franchise
business arrangement includes names like dealerships and distributorships.
Franchising enables the franchisor to expand its geographic reach by setting up
branches in many locations through dedicated franchisees. The franchisee and
Franchisors are both Entrepreneurs. Franchising is a roadmap to Entrepreneurship.
Franchising is a mode for making wealth for the entrepreneur.
24
FRANCHISING AND THE ENTREPRENEUR
There are three main types of franchising models trade name franchising, products
distribution franchise and Business Format Franchise.
There are both benefits and drawbacks in Franchising. But for the Entrepreneur, the
benefits surpasses the drawbacks. With the help of Franchising , the entrepreneur gets
the opportunity to start a business for himself , but not solely by himself. Franchising
offers
certain degree of autonomy to perform all the activities of his business.
Franchise break even in a shorter duration than that of the independent business since
there is an existing customer base and proven products or services.
The franchisees procure the franchisors experience in the form of a complete
successful business system . Franchisee gets the benefits of
large magnitude
centralised buying power of the franchisor. If the franchisor does the procurement of
raw materials for franchisees, then they pass on the savings got from the high volume
purchases. The economy of scale is a clear advantage for the franchisees when
compared to the independent business. Franchisors do extensive research before
selecting the location for the franchise
The trends that is defining and driving franchising can be the following.
• Globalisation
• Internet based Franchising
• Conversion Franchising
• multiple-unit Franchising
• master Franchising
• piggybacking and
• Meeting Baby boomers needs.
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FRANCHISING AND THE ENTREPRENEUR
9.6
KEY TERMS
KEY TERMS
Master Franchisee
Franchising
Franchisor
Franchisee
Franchising
Multi Unit Franchising
Agreements
Conversion
Piggy
backing
Franchising
franchising
Co branding
Franchising Disclosure
statement
Baby boomers
Social media
Internet franchise
Crowdfunding
Globalisation
Products Distribution
franchise
Pure Franchising
9.7
Trade names
QUESTIONS
Short Questions
1. List the types of franchising ?
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FRANCHISING AND THE ENTREPRENEUR
2. Describe Franchising ?
3. Enumerate the trends Shaping Franchising ?
Long Questions
1. Explain the types of franchising?
2. Summarise the trends Shaping Franchising?
3. Describe the Benefits of Franchising?
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