FRANCHISING
What is Franchising?
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.
How Does Franchising Work?
There are two distinctly different types of franchise systems:
⇰ 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 distributors.
⇰ The business format franchise is by far the more popular approach to franchising and is more commonly used by entrepreneurs and entrepreneurial ventures. Example: automotive, business services, commercial & residential services, retail food.
For both product and trademark franchises and business format franchises, the franchisor-franchise relationship takes one of three forms of a franchise agreement. The most common type of franchise arrangement is an individual franchise agreement, which involves the sale of a single franchise for a specific location. An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area. A master franchise agreement, in addition to having the right to open and operate a specific number of locations in a particular area, also has the right to offer and sell the franchise to other people in its area. The people who buy franchises from master franchisees are typically called subfranchisees. By owning more than one unit, a multiple unit franchisee can capture economies of scale and reduce its administrative overhead per unit of sale. The disadvantages is the franchisor takes more risk and makes a deeper commitment to a single franchisee.
Franchising is perhaps especially attractive to young firms in that the majority of the money needed for expansion comes from the franchisees. Franchising is appropriate when a firm has a strong or potentially strong trademark, a well-designed business model and a desire to grow.
✅ Steps to Franchising a Business
Develop a franchise business plan ➸ Get professional advice ➸ Conduct an intellectual property audit ➸ Develop franchise documents ➸ Prepare operating manuals ➸ Plan an advertising strategy and a franchisee-training program ➸ Put together a team for operating new franchise units ➸ Plan a strategy for solicitating prospective franchisees ➸ Help franchisees with site selection and the grand opening of their franchise outlets.
✅ Selecting and Developing Effective Franchisees
👀 Qualities to Look for in Prospective Franchisees
- good work ethic
- ability to follow instructions
- team oriented
- experience in the industry in which the franchise competes
👀 Ways Franchisors Can Develop the Potential of Their Franchisees
- provide mentoring that supersedes routine training
- keep product, services, and business systems up-to-date
- encourage franchisees to develop a franchise association
- maintain the franchise system's integrity
👍 a concept called agency theory argues that for organizations with multiple units, it is more effective for the units to be run by franchisees than by managers who run company-owned stores. The theory is that managers, because they are usually paid a salary, may not be as committed to the success of their individual units as franchisees, who are in effect the owners of the units they manage.
Before deciding to franchise, a firm should consider the following:
- The uniqueness of its product or service
- The consistent profitability of the firm
- The firm's year-round profitability
- The degree of refinement of the firm's business system
- The clarity of the business proposition
👎 loss of control
👎 friction with franchisees
👎 managing growth
👎 differences in required business skills
👎 legal expenses
Answering the following questions will help determine whether franchising is a good fit for people thinking about starting their own entrepreneurial venture:
- are you willing to take orders?
- are you willing to be part of a franchise "system" rather than an independent business person?
- how will you react if you make a suggestion to your franchisor and your suggestion is rejected?
- what are you looking for in a business?
- how willing are you to put your money at risk?
💰 The cost of a Franchise
The following costs are typically associated with buying a business format franchise:
- initial franchise fee
- capital requirements
- continuing royalty payment
- advertising fees
- other fees
💰 Advantages of Buying a Franchise
- a proven product or service within an established market
- an established trademark or business system
- franchisor's training, technical expertise, and managerial experience
- an established marketing network
- franchisor's ongoing support
- availability of financing
- potential for business growth
💰 Disadvantages of Buying a Franchise
- cost of the franchise
- restrictions on creativity
- duration and nature of the commitment
- risk of fraud, misunderstandings, or lack of franchisor commitment
- problems of termination or transfer
- poor performance on the part of other franchisees
- potential for failure
⇾ franchising is a safe investment
⇾ a strong industry ensures franchise success
⇾ a franchise is a "proven" business system
⇾ there is no need to hire a franchise attorney or an accountant
⇾ the best systems grow rapidly, and it is best to be a part of a rapid-growth system
⇾ i can operate my franchise outlet for less than the franchisor predicts
⇾ the franchisor is a nice person - he'll help me out if I need it
In fact, instances of problems between franchisors and their franchisees tend to be isolated occurrences rather than prevalent practices. There are certain features of franchising:
- the get-rich-quick mentality
- the false assumption that buying a franchise is a guarantee of business success
- conflicts of interest between franchisors and their franchisees
🔎 International Franchising
International opportunities for franchising are booming more prevalent as the markets for certain franchised products in the United States have become saturated. These are some of the steps to take before buying a franchise in a foreign country:
- consider the value of the franchisor's name in the foreign country
- work with a knowledgeable lawyer
- determine whether the product or service is salable in a foreign country
- uncover whether the franchisor has experience in international markets
- find out how much training and support you will receive from the franchisor
- evaluate currency restrictions
🔎 The Future of Franchising
Franchising represents a large and growing segment of the retail and service sectors of U.S. businesses and is in some cases replacing more traditional forms of business ownership. There are also innovations taking place today in franchising, such as the extensive use of social media that is occurring in many franchise organizations. There are a growing number of Internet-based franchise organization, example: My Destination (www.mydestination.com) which is an Internet franchise opportunity. The franchisees make money in a number of ways, including by selling their content to business directories and local businesses. Franchisees are carefully selected, and they must have a unique passion and love for the destination their are purchasing.
⇰ The business format franchise is by far the more popular approach to franchising and is more commonly used by entrepreneurs and entrepreneurial ventures. Example: automotive, business services, commercial & residential services, retail food.
For both product and trademark franchises and business format franchises, the franchisor-franchise relationship takes one of three forms of a franchise agreement. The most common type of franchise arrangement is an individual franchise agreement, which involves the sale of a single franchise for a specific location. An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area. A master franchise agreement, in addition to having the right to open and operate a specific number of locations in a particular area, also has the right to offer and sell the franchise to other people in its area. The people who buy franchises from master franchisees are typically called subfranchisees. By owning more than one unit, a multiple unit franchisee can capture economies of scale and reduce its administrative overhead per unit of sale. The disadvantages is the franchisor takes more risk and makes a deeper commitment to a single franchisee.
Establishing a Franchise System
✅ When to FranchiseFranchising is perhaps especially attractive to young firms in that the majority of the money needed for expansion comes from the franchisees. Franchising is appropriate when a firm has a strong or potentially strong trademark, a well-designed business model and a desire to grow.
✅ Steps to Franchising a Business
Develop a franchise business plan ➸ Get professional advice ➸ Conduct an intellectual property audit ➸ Develop franchise documents ➸ Prepare operating manuals ➸ Plan an advertising strategy and a franchisee-training program ➸ Put together a team for operating new franchise units ➸ Plan a strategy for solicitating prospective franchisees ➸ Help franchisees with site selection and the grand opening of their franchise outlets.
✅ Selecting and Developing Effective Franchisees
👀 Qualities to Look for in Prospective Franchisees
- good work ethic
- ability to follow instructions
- team oriented
- experience in the industry in which the franchise competes
👀 Ways Franchisors Can Develop the Potential of Their Franchisees
- provide mentoring that supersedes routine training
- keep product, services, and business systems up-to-date
- encourage franchisees to develop a franchise association
- maintain the franchise system's integrity
Advantages of Establishing a Franchise System
👍early in the life of an organization, capital is typically scarce, and rapid growth is needed to achieve brand recognition and economies of scale. Franchising helps a venture grow quickly because franchisees provide the majority of the capital.👍 a concept called agency theory argues that for organizations with multiple units, it is more effective for the units to be run by franchisees than by managers who run company-owned stores. The theory is that managers, because they are usually paid a salary, may not be as committed to the success of their individual units as franchisees, who are in effect the owners of the units they manage.
Before deciding to franchise, a firm should consider the following:
- The uniqueness of its product or service
- The consistent profitability of the firm
- The firm's year-round profitability
- The degree of refinement of the firm's business system
- The clarity of the business proposition
Disadvantages of Franchising as a Method of Business Expansion
👎 profit sharing👎 loss of control
👎 friction with franchisees
👎 managing growth
👎 differences in required business skills
👎 legal expenses
Buying a Franchise
💰 Is Franchising Right for You?Answering the following questions will help determine whether franchising is a good fit for people thinking about starting their own entrepreneurial venture:
- are you willing to take orders?
- are you willing to be part of a franchise "system" rather than an independent business person?
- how will you react if you make a suggestion to your franchisor and your suggestion is rejected?
- what are you looking for in a business?
- how willing are you to put your money at risk?
💰 The cost of a Franchise
The following costs are typically associated with buying a business format franchise:
- initial franchise fee
- capital requirements
- continuing royalty payment
- advertising fees
- other fees
💰 Advantages of Buying a Franchise
- a proven product or service within an established market
- an established trademark or business system
- franchisor's training, technical expertise, and managerial experience
- an established marketing network
- franchisor's ongoing support
- availability of financing
- potential for business growth
💰 Disadvantages of Buying a Franchise
- cost of the franchise
- restrictions on creativity
- duration and nature of the commitment
- risk of fraud, misunderstandings, or lack of franchisor commitment
- problems of termination or transfer
- poor performance on the part of other franchisees
- potential for failure
Steps in Purchasing a Franchise
Visit several of the franchisor's outlets ⇰ Meet with a franchise attorney ⇰ Meet with the franchisor and check the franchisor's references ⇰ Review all franchise documents with the attorney ⇰ Sign the franchise agreement ⇰ Attend training ⇰ Open the franchise businessCommon Misconceptions About Franchising
The following is a list of misconceptions franchisees often have about franchising:⇾ franchising is a safe investment
⇾ a strong industry ensures franchise success
⇾ a franchise is a "proven" business system
⇾ there is no need to hire a franchise attorney or an accountant
⇾ the best systems grow rapidly, and it is best to be a part of a rapid-growth system
⇾ i can operate my franchise outlet for less than the franchisor predicts
⇾ the franchisor is a nice person - he'll help me out if I need it
Legal Aspects of the Franchise Relationship
In the United States, there are a number of rules and regulations at both the federal and individual state levels that pertain to franchising. The premise behind all of these rules and regulations is that the public interest is best served when prospective franchisees have as much accurate information as possible about the characteristics of individual franchisors. The offer and sale of a franchise is regulated in some form or fashion in countries outside the United States. The Franchise Disclosure Document (FDD) is a document with 23 categories of information that is used prominently in the United States. This document provides a prospective franchisee a broad base of information about a franchisor's background and financial health. The FDD must be provided by the franchisor to a prospective franchisee at least 10 business days before a franchisee contract can be signed or the franchisee pays the franchisor any money.More About Franchising
🔎 Franchise EthicsIn fact, instances of problems between franchisors and their franchisees tend to be isolated occurrences rather than prevalent practices. There are certain features of franchising:
- the get-rich-quick mentality
- the false assumption that buying a franchise is a guarantee of business success
- conflicts of interest between franchisors and their franchisees
🔎 International Franchising
International opportunities for franchising are booming more prevalent as the markets for certain franchised products in the United States have become saturated. These are some of the steps to take before buying a franchise in a foreign country:
- consider the value of the franchisor's name in the foreign country
- work with a knowledgeable lawyer
- determine whether the product or service is salable in a foreign country
- uncover whether the franchisor has experience in international markets
- find out how much training and support you will receive from the franchisor
- evaluate currency restrictions
🔎 The Future of Franchising
Franchising represents a large and growing segment of the retail and service sectors of U.S. businesses and is in some cases replacing more traditional forms of business ownership. There are also innovations taking place today in franchising, such as the extensive use of social media that is occurring in many franchise organizations. There are a growing number of Internet-based franchise organization, example: My Destination (www.mydestination.com) which is an Internet franchise opportunity. The franchisees make money in a number of ways, including by selling their content to business directories and local businesses. Franchisees are carefully selected, and they must have a unique passion and love for the destination their are purchasing.
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