Franchising Opportunities

Pursuing New Venture Opportunities

Franchising Opportunities

PowerPoint Presentation by Charlie Cook

12e

Copyright © 2003 South-Western College Publishing. All rights reserved.

Looking Ahead After studying this chapter, you should be able to: 2. Explain franchising terms and the structure of the

industry. 3. Identify the major pros and cons of franchising 4. Describe the process for evaluating a franchise

opportunity. 5. Discuss certain legal considerations in franchising.

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6–2

Franchising Terms • Franchising – A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor

• Franchise contract – The legal agreement between franchisor and franchisee

• Franchise – The privileges conveyed in the franchise contract

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6–3

Franchising Terms (cont’d) • 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

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6–4

Types of Franchises • Product and Trade Name Franchise – Grants the right to use a widely recognized product or name

• Business Format Franchise – Provides an entire marketing system and ongoing guidance from the franchisor

• Piggyback Franchising – The operation of a retail franchise within the physical facilities of a host store

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6–5

Types of Franchises (cont’d) • Master Licensee – An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory

• Multiple-Unit Ownership – Holding by a single franchisee of more than one franchise from the same company

• Area Developers – Individuals or firms that obtain the legal right to open several franchised outlets in a given area

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6–6

The Structure of Franchising Franchise Parties

Franchise Facilitators

Franchisor

Industry Associations

Master Licensee/ Area Developers

FranchiseeOwned Operating Units

Federal/State Agencies

CompanyOwned Stores

Business/Consulting Firms

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6–7

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

• Limitations – Franchise costs  Initial franchise fee  Investment costs  Royalty payments  Advertising costs

– Restrictions on Business Operations – Loss of independence

– Operating benefits Franchisor-aided Copyright © by South-Western College Publishing. All rights reserved.

6–8

Franchisor Controls on Franchisees • Restricting of sales territory • Requiring site approval and imposing requirement on the outlet’s appearance • Restricting the goods/ services that can be sold • Requiring specific operating hours • Controlling advertising

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6–9

The Pros and Cons of Franchising

Pluses

Minuses

Formalized training

Franchise fees

Financial assistance

Royalties

Proven marketing methods

Restrictions on growth

Managerial assistance Quicker startup time Overall lower failure rates

Less independence in operations Franchisor may be sole supplier of some supplies Termination/renewal clauses

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6–10

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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6–11

Franchising from the Franchisor’s Perspective • Benefits – Reduction of capital requirements – Increase in management motivation – Speed of expansion

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• Drawbacks – Reduction in control – Sharing of profits – Increase in operational support costs

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Legal Considerations in Franchising • The Franchising Contract – Signed with legal counsel present – Contains a termination and transfer provision – Contains statement of rights to renew contract

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6–13

Franchise Disclosure Requirements •

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.

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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.

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Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures.

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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.

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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 and consumer redress for violations. Fig. 6-3

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