Summary Chapter 15

Chapter 15

Franchising

The word franchise comes from an old dialect of French and means “privilege” or “freedom”.

Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchisees) in exchange for an initial franchise fee and an ongoing royalty.

Comfort keepers is a timely idea that addresses a need for a particular target market.

2 types of franchise systems:

1.      A product and trademark franchise is an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of dealers or distributions.

Three types of product and trademark franchise:

a.       Individual franchise agreement : involves the sale of a single franchise for a specific location.

b.      Area franchise agreement: allows a franchisee to own and operate a specific number of outlets in a particular geographic area.

c.       Master franchise agreement: similar to an area franchise agreement, with one major difference.
People who buy franchises from master franchisees are typically called subfranchisees.

2.      Business format franchise is by far the more popular approach to franchising and is more commonly used by entrepreneurs and entrepreneurial ventures.

A person who owns and operates more than one outlet of the same franchisor, whether through an area or a master franchise agreement is called a multiple unit franchisee.

There are the advantage and the disadvantage of multiple unit franchisee.

Advantage: can capture economies of scale and reduce its administrative overhead per unit of sale.

Disadvantage: the franchisor takes more risk and makes a deeper commitment to a single franchisee.

Franchising is a complicated business endeavor, which means that an entrepreneur must look closely at all of its aspects before deciding to franchise.

Steps to franchising a business

1.      Develop a franchise business plan

2.      Get professional advice

3.      Conduct an intellectual property audit

4.      Develop franchise documents

5.      Prepare operating manuals

6.      Plan an advertising strategy and a franchisee training program

7.      Put together a team for opening new franchise units

8.      Plan a strategy for solicitating prospective franchisees

9.      Help franchisees with site selection and the grand opening of their franchise outlets.

Advantages and disadvantages of establishing a franchise system

Advantage: helps a venture grow quickly because franchisees provide the majority of the capital and there are a concept called agent theory argues that for organizations with multiple units its more effective for the units to be run by franchisees than by managers who run company owned stores.

Disadvantage: an organization allows others to profit from its trademark and business model.

Before deciding to franchise, a firm should consider the following:

1.      The uniqueness of its product or service

2.      The consistent profitability of the firm

3.      The firm’s year round profitability

4.      The degree of refinement of the firm’s business systems

5.      The clarity of the business proposition

Buying a franchise

1.      Is franchise right for you?

Entrepreneurs should weigh the possibility of purchasing a franchise against the alternatives of buying an existing business or launching their own venture from scratch.

2.      The cost of a franchise

The initial cost of a business format franchise varies, depending on the franchise fee, the capital needed to start the business and the strength of the franchisor.

The following costs are typically associated with buying a business format franchise:

a.       Initial franchise fee

b.      Capital requirements

c.       Containing royalty payment

d.      Advertising fees

e.       Other fees

3.      Finding a franchise

The most critical step in the early stages of investigating franchise opportunities is for the entrepreneur to determine the type of franchise that is the best fit.

Advantage and disadvantages of buying a franchise

Advantages:

1.      A proven product or service within an established market

2.      An established trademark or business system

3.      Franchisor’s training, technical expertise, and managerial experience

4.      An established  marketing network

5.      Franchisor’s ongoing support

6.      Availability of financing

7.      Potential for business growth

Disadvantages:

1.      Cost of the franchise

2.      Restrictions on creativity

3.      Duration and nature of the commitment

4.      Risk of fraud, misunderstandings, or lack of franchisor commitment

5.      Problems of termination or transfer

6.      Poor performance on the part of other franchisees

7.      Potential for failure

Steps in purchasing a franchise

1.      Visit several of the franchisor’s outlets

2.      Meet with a franchise attorney

3.      Meet with the franchisor and check the franchisor’s references

4.      Review all franchise documents with the attorney

5.      Sign the franchise agreement

6.      Attend training

7.      Open the franchise business

Common misconceptions about franchising

1.      Franchising is a  safe investment : franchising is an another form of business ownership.

2.      A strong industry ensures franchising success : the strength of an industry does not make up for a poor product, a poor business model, poor management, or inappropriate advertising.

3.      A franchising is a “proven” business system : a franchisor sells a franchisee the right to use a particular business model.

4.      There is no need to hire a franchise attorney or an accountant : provisional advice is almost always needed to guide a prospective franchisee through the franchise purchase process.

5.      The best systems grow rapidly and its best to be a part of a rapid growth system : while some franchise systems grow rapidly because they have a good trademark and a polished business model other franchise systems grow quickly because their major emphasis is on selling franchises.

6.      I can operate my franchise outlet for less than the franchisor predicts : the operation of a franchise outlet usually cost just as much as the franchisor predicts.

7.      The franchisor is a nice person-he’ll help me out if I need it : although it may be human nature to rely on the goodwill of others, don’t expect anything from your franchisor that isn’t spelled out in the franchise agreement.

Legal Aspects of the Franchise Relationship

1.      Legal rules and regulations

2.      State rules and regulation

Franchise Ethics

1.      The get rich quick mentality

2.      The false assumption that buying a franchise is a  guarantee of business success

3.      Conflicts of interest between franchisors and their franchisees

International franchising

1.      Consider the value of the franchisor’s name in the foreign country

2.      Work with a knowledgeable lawyer

3.      Determine whether the product or service is salable in a foreign country

4.      Uncover whether the franchisor has experience in international markets

5.      Find out how much training and support you will receive from the franchisor

6.      Evaluate currency restrictions