Transcript THREE KINDS OF FRANCHISES Trade Name Franchise

Franchising
Franchising
• Franchising
– A marketing system revolving around a two-party
agreement, whereby the franchisee conducts business
according to the terms specified by the franchisor
• 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
Franchising Arrangements
THREE KINDS OF FRANCHISES
• Trade Name Franchise
– Grants the right to use a widely recognized name within a particular
territory
• True Value Hardware, Associated Grocers Inc (AGI), Century 21
• Product Distribution Franchise (…Dealership)
– Allows you to sell a specific, brand-name product in a specified
territory
• Snap-On Tools, Toyota
• Business Format Franchise
– Provides an entire business plan, marketing, and operating system
– Guidance from the franchisor is ongoing; supervision & monitoring
are continuous
• Subway, McDonalds
The Pros and Cons of Franchising
• Advantages
– Probability of success
• Proven line of business
• Pre-qualification of franchisee
• Overall lower failure rates
– Training
• Franchisor-provided
– Financial assistance
• Loans & loan guarantees
– Operating benefits
• Location feasibility study
• Marketing assistance
• Quick start-up time
• Limitations
– Franchise costs
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Initial franchise fee
Investment costs
Royalty payments
Advertising costs
– Restrictions on business
operations
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Products sold
Hours of operation
Restrictions on expansion/growth
Franchisor only source of supplies
– Loss of independence
– Lack of franchisor support
•
Termination/renewal clauses
Franchisor Controls on Franchisees
• Restricted sales territory
• Requires site approval and imposes requirements on
the outlet’s appearance
• Restricts the goods/
services that can be sold
• Requires specific
operating hours
• Controls advertising
An Attractive Franchise Opportunity Includes: - 1
• Registered trademarks
• Successful prototype stores with a track record of
profitability and a positive reputation
• A business that can be systematized so that it can be easily
replicated.
• A product or service that can be successful in many
different geographic regions.
An Attractive Franchise Opportunity Includes: - 2
• An operations manual that specifies all the functions of
the business and their associated policies
• A training and support system
• Site selection criteria and architectural standards
• A detailed prospectus that spells out the franchisee’s
rights, responsibilities, and risks.
The Federal Trade Commission requires disclosure...Uniform Franchise Offering
Circular [UFOC]
Before Buying a Franchise
ASK QUESTIONS
Questions to Ask Before Buying a Franchise
• Does the franchisor have an excellent reputation in the
industry?
• Is the franchisor in partnership or any other legal relationship
with another franchisor? If so, how will the franchisee be
protected should that relationship fail?
• Is the franchisee required to do anything that appears
questionable from a legal or ethical perspective?
• Under what circumstances can the franchisee or franchisor
terminate the franchise agreement and what are the
consequences to either party?
• Will the franchisor grant an exclusive territory? Is that area
subject to reduction or modification? If so, under what
conditions?
Questions to Ask Before Buying a Franchise - 2
• Will the franchisor reveal the certified financial figures for
one of its franchises and can those figures be verified with
the franchisee?
• Will the franchisor provide a management training
program, an employee training program, public relations
and advertising support, or credit?
• Does the franchisor assist in finding a suitable location?
• What is the financial health of the franchisor? Can
financial statements be verified?