Ch. Outline-Franchising
1. The terminology and structure of
financing
2. The pros and cons of franchising
3. Evaluating franchising opportunities
4. Legal considerations in franchising
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1.
Franchising Terms (Suggestion: the terminology of franchising is confusing
to many students, so emphasize correct usage of the terms below.)
► Franchising: a marketing system revolving around a two-party legal agreement,
whereby the franchisee conducts business according to terms specified by the
franchisor
► Franchisee: the party in a franchise contract who is granted selling and other
privileges whose power is limited by the franchising organization
► Franchisor: the party in a franchise contract who specifies the methods to be
followed by
the franchisee
► Franchise contract: the legal agreement between franchisor and franchisee
► Franchise: the privileges in a franchise contract
► Product and trade name franchising: a franchise relationship granting the right to
use a widely recognized product name
► Business format franchising: the franchisee obtains an entire marketing system
and ongoing guidance from the franchisor
► Master licensee: firm or individual acting as a sales agent with the responsibility
for finding new franchisees within a specified territory
► Multiple-unit ownership: a situation in which a franchisee owns more than one
franchise from the same company
► Area developers: individuals or firms that obtain the legal right to open
several
outlets in a given area
► Piggyback franchising: the operation of a retail franchise within the physical2
facilities of a host store
The Structure of Franchising
Franchise
Parties
Franchise
Facilitators
Franchisor
Industry Associations
(example: IFA)
Master Licensee/
Area Developers
FranchiseeOwned
Operating Units
Federal/State Agencies
(example: FTC)
CompanyOwned
Stores
Business/Consulting
Firms (example:
Franchise Connections)
Fig.3 6-1
Alternative Franchising Systems
System A
Franchisor is a
producer or
creator
System B
Franchisor is a
wholesaler
System C
Franchisor is a
producer or
creator
Franchisee is a
wholesaler, such
as a soft drink
bottler
Franchisee is a
retail
establishment,
such as a
hardware store
Franchisee is a
retail
establishment,
such as a fastfood restaurant
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The Pros and Cons of
Franchising
• Advantages
– Probability of success
• Proven line of business
• Pre-qualification of
franchisee
– Training
• Franchisor-provided
– Financial assistance
• Franchisor assistance
– Operating benefits
• Franchisor-aided
• Limitations
–Franchise costs
•
•
•
•
Initial franchise fee
Investment costs
Royalty payments
Advertising costs
–Restrictions on
Business Operations
–Loss of independence
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Limitations of Franchising
(Franchisees Perspective)
1. Franchise Costs
2. Restrictions on Business Operations
3. Loss of Independence
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Evaluating Franchise
Opportunities
• Locating a Franchise Opportunity
• Investigating the Potential Franchise
– Information sources
• Independent, third-party sources
• Franchisors themselves
• Existing and previous franchisees
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Franchising from the
Franchisor’s Perspective
• Benefits
– Reduction of capital
requirements
– Increase in
management
motivation
– Speed of expansion
• Drawbacks
– Reduction in
control
– Sharing of profits
– Increase in
operational support
costs
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Franchise Disclosure Requirements
A. Basic Requirement: Franchisors must furnish potential franchisees
with written disclosures providing important information about the
franchisor, the franchised business and the franchise relationship, and
give them at least ten business days to review it before investing.
B. Disclosure Option: Franchisors may make the required disclosures
by following either the Rule’s disclosure format or the Uniform Franchise
Offering Circular Guidelines prepared by state franchise law officials.
C. Coverage: The Rule primarily covers business-format franchises,
product franchises, and vending machine or display rack business
opportunity ventures.
D. No Filing: The Rule requires disclosure only. Unlike state disclosure
laws, no registration, filing, review or approval of any disclosures,
advertising or agreements by the FTC is required.
E. Remedies:The Rule is a trade regulation rule with the full force and
effect of federal law. The courts have held it may only be enforced by the
FTC, not private parties. The FTC may seek injunctions, civil penalties
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and consumer redress for violations.