powerpoint presentation by charlie cook the university of west alabama william b. gartner marlene g....

© 2010 South-Western, a part of Cengage LearningAll rights reserved.© 2010 South-Western, a part of Cengage LearningAll rights reserved.

PowerPoint Presentation by Charlie CookThe University of West Alabama

PowerPoint Presentation by Charlie CookThe University of West Alabama

William B.

GartnerWilliam B.

GartnerMarlene G.

BellamyMarlene G.

Bellamy

CHAPTER 11CHAPTER 11

PART THREE: Enterprising StrategiesPART THREE: Enterprising Strategies

FranchisingFranchising

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–2

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S1. Buying a franchise enables enterprisers to sell brand-name

goods and services by entering into a contractual business

relationship with a franchisor, the parent business. Franchisees

can own one unit or obtain the rights to develop multiple units in

a territory. The Federal Trade Commission regulates the offer

and sale of franchises, and many states have their own

franchise laws.

2. Choosing a franchise requires the same careful due diligence

process as other prospective business ventures. Franchising’s

benefits include training, help and support, system synergies,

financing assistance, and economies of scale. However, the

franchisee must comply with the franchisor’s operating

restrictions and contractual obligations and pay the franchisor

an initial fee as well as ongoing fees and royalties.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–3

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S3. Entrepreneurs with an easily replicated business model, a

strong brand or trademark, and a unique concept can use

franchising to grow their businesses quickly. Other enterprisers

become franchisees and provide talent and capital. While

becoming a franchisor can be quite profitable, the franchisor

loses some profits to the franchisees and also gives up a

degree of operating control. Successful franchisors know what it

takes to be a good franchisee, have systems in place to recruit

and train franchisees, and work closely with system members.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–4

The Franchise Route to The Franchise Route to Business OwnershipBusiness Ownership

• FranchiseFranchise The rights to offer specific products or services under The rights to offer specific products or services under

explicit guidelines at a certain location for a declared explicit guidelines at a certain location for a declared period of time.period of time.

• FranchisingFranchising A type of business ownership where a parent A type of business ownership where a parent

business (the franchisor) provides an investor (the business (the franchisor) provides an investor (the franchisee) with the rights to sell its products or franchisee) with the rights to sell its products or services and use its trademark and operating services and use its trademark and operating procedures.procedures.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–5

Franchises by Industry Categoryexhibit

11.1

Source: “The Profile of Franchising,” Franchising World, March 2007,p.58.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–6

Direct Contribution of Franchising to the U.S. Economyexhibit

11.2

Source: Economic Impact of Franchised Businesses, a study conducted by PricewaterhouseCoopers for the IFA Educational Foundation, 2004.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–7

How Franchising WorksHow Franchising Works

• Franchise FormatsFranchise Formats Business format franchiseBusiness format franchise

A type of franchise where the franchisee purchases a A type of franchise where the franchisee purchases a product and a complete system to operate the business.product and a complete system to operate the business.

Affiliation or conversion franchisingAffiliation or conversion franchising A business format franchise in which an operating business A business format franchise in which an operating business

becomes part of a franchise system to take advantage of the becomes part of a franchise system to take advantage of the brand but has more flexibility with regard to operating format. brand but has more flexibility with regard to operating format.

The unit name may reflect both the franchisor and the local The unit name may reflect both the franchisor and the local entity.entity.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–8

How Franchising Works (cont’d)How Franchising Works (cont’d)

• Franchise Formats (cont’d)Franchise Formats (cont’d) Product and trademark (product distribution) franchiseProduct and trademark (product distribution) franchise

Franchise arrangement under which manufacturers grant Franchise arrangement under which manufacturers grant franchisees, or dealers, the right to buy, sell, and advertise franchisees, or dealers, the right to buy, sell, and advertise the products under the manufacturer’s trademarked name.the products under the manufacturer’s trademarked name.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–9

How Franchising Works (cont’d)How Franchising Works (cont’d)

UnitFranchise

Area Development

Franchise

Master Franchise

(subfranchising)

Franchise Purchase Options

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–10

Legal Aspects of FranchisingLegal Aspects of Franchising

• Federal Regulation of Franchise SalesFederal Regulation of Franchise Sales FTC Rule 436FTC Rule 436

Federal Trade Commission regulation that governs Federal Trade Commission regulation that governs disclosure requirements for the offer and sale of franchises disclosure requirements for the offer and sale of franchises in all 50 states.in all 50 states.

Uniform Franchise Offering Circular (UFOC)Uniform Franchise Offering Circular (UFOC) A document prepared by franchisor for prospective A document prepared by franchisor for prospective

franchisees that includes 23 issues that disclose background franchisees that includes 23 issues that disclose background information and financial condition of the franchisor.information and financial condition of the franchisor.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–11

Rule 436 ProvisionsRule 436 Provisions

BasicRequirements

CoverageDisclosureDocument

No Filing

Remedies

Purpose

Rule 436Provisions

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–12

Rule 436 RequirementsRule 436 Requirements

BasicDisclosures

EarningsClaims

AdvertisedClaims

FranchiseAgreements

Refunds

ContradictoryClaims

Rule 436Requirements

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–13

Summary of the Uniform Franchise Disclosure Document (UFDD)exhibit

11.3

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–14

Summary of the Uniform Franchise Disclosure Document (cont’d)exhibit

11.3

Section Description

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–15

Summary of the Uniform Franchise Disclosure Document (cont’d)exhibit

11.3

Section Description

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–16

Summary of the Uniform Franchise Disclosure Document (cont’d)exhibit

11.3

Section Description

Source: North American Securities Administrators Association, Inc. 2008 Franchise Registration and Disclosure Guidelines, North American Securities Administrators Association, http://www.nasaa.org (June 14, 2008).

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–17

State Regulation of Franchisesexhibit

11.4

Source: “State Offices Administering Franchise Disclosure Laws,” Federal Trade Commission, http://www.ftc.gov/bcp/ franchise/netdiscl.htm (February 15, 2007).

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–18

Why Buy a Franchise?Why Buy a Franchise?

Proven Business Model

Training and Support

Brand Name and Recognition

FinancingSystem

Synergies

Economies of Scale

Benefits of Franchising

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–19

Why Buy a Franchise?Why Buy a Franchise?

OperatingRestrictions

InterdependenceCosts

ContractualObligations

BusinessRisks

MissedExpectations

Downside ofFranchising

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–20

Franchise CostsFranchise Costs

• Cost Categories for Business Format FranchisesCost Categories for Business Format Franchises

1.1. Initial Franchise FeeInitial Franchise Fee

2.2. Capital costsCapital costs

3.3. Other start-up costsOther start-up costs

4.4. Royalty paymentsRoyalty payments

5.5. Advertising feesAdvertising fees

6.6. Other feesOther fees

7.7. Purchase of suppliesPurchase of supplies

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–21

Costs to Buy a Franchiseexhibit

11.5

Source: Adapted from the “2008 Franchise 500,” Entrepreneur.com, http://www.entrepreneur.com/franchise500/index.html (June 16, 2008).

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–22

Costs to Buy a Franchise (cont’d)exhibit

11.5

Source: Adapted from the “2008 Franchise 500,” Entrepreneur.com, http://www.entrepreneur.com/franchise500/index.html (June 16, 2008).

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–23

Evaluating a Franchise OpportunityEvaluating a Franchise Opportunity

• Due Diligence Guidelines for Evaluating Due Diligence Guidelines for Evaluating the Franchise:the Franchise: DemandDemand

CompetitionCompetition

Brand equityBrand equity

Franchisor’s backgroundFranchisor’s background

Training and supportTraining and support

Operating restrictionsOperating restrictions

Other questionsOther questions

Site visitsSite visits

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–24

Acquiring a FranchiseAcquiring a Franchise

• The Franchise License AgreementThe Franchise License Agreement Gives the franchisee the right to use the franchisor’s Gives the franchisee the right to use the franchisor’s

registered brands and trademarks together with a registered brands and trademarks together with a specific business operating system.specific business operating system.

Will clearly state that the franchise company retains Will clearly state that the franchise company retains all ownership rights to the brand, trademarks, and all ownership rights to the brand, trademarks, and proprietary business operating systems.proprietary business operating systems.

• The Purchase ProcessThe Purchase Process Sign the agreement only after you and your attorney Sign the agreement only after you and your attorney

are comfortable with the terms and conditions of the are comfortable with the terms and conditions of the agreement.agreement.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–25

Starting a Franchise SystemStarting a Franchise System

• Why Become a Franchisor?Why Become a Franchisor? Expand the business through the use of other Expand the business through the use of other

people’s capital and talents.people’s capital and talents. Shorten the time to bring the business concept to a Shorten the time to bring the business concept to a

larger market.larger market. Generate income through fees and royalties from Generate income through fees and royalties from

franchisees.franchisees. Harness the effort and creativity of motivated Harness the effort and creativity of motivated

owner/managers.owner/managers. Share costs of advertising and other expenses.Share costs of advertising and other expenses. Increase buying power.Increase buying power.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–26

Starting a Franchise System (cont’d)Starting a Franchise System (cont’d)

• Downside to Becoming a FranchisorDownside to Becoming a Franchisor Lose a portion of profits to franchisees.Lose a portion of profits to franchisees.

Lose some control over operations to franchisees.Lose some control over operations to franchisees.

Face the difficulty of keeping franchisees happy as Face the difficulty of keeping franchisees happy as the franchise grows and changes over time.the franchise grows and changes over time.

Expend significant time and energy to grow the Expend significant time and energy to grow the franchise system.franchise system.

Incur significant legal costs to develop the franchise Incur significant legal costs to develop the franchise system.system.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–27

When to FranchiseWhen to Franchise

• Developing a Franchise System Requires:Developing a Franchise System Requires: A business model that can be replicated in other A business model that can be replicated in other

areas.areas.

A business that will have a strong brand or trademark.A business that will have a strong brand or trademark.

A unique concept.A unique concept.

A business that can be taught easily to others who A business that can be taught easily to others who may not have experience in the industry.may not have experience in the industry.

A business that others can manage.A business that others can manage.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–28

Starting a Franchise System (cont’d)Starting a Franchise System (cont’d)

• Steps in Franchising a Business:Steps in Franchising a Business:

1.1. Develop a business plan for the franchise system.Develop a business plan for the franchise system.

2.2. Hire a franchise attorney and a franchise Hire a franchise attorney and a franchise development consultant.development consultant.

3.3. Identify the intellectual property that serves as the Identify the intellectual property that serves as the basis for the franchise system.basis for the franchise system.

4.4. Develop the UFOC and the franchise agreement.Develop the UFOC and the franchise agreement.

5.5. Develop all operating manuals and procedures Develop all operating manuals and procedures necessary for a potential franchisee to successfully necessary for a potential franchisee to successfully run a franchise unit.run a franchise unit.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–29

Starting a Franchise System (cont’d)Starting a Franchise System (cont’d)

• Steps in Franchising a Business (cont’d):Steps in Franchising a Business (cont’d):

6.6. Identify your franchise development team.Identify your franchise development team.

7.7. Create a process for attracting prospective Create a process for attracting prospective franchisees.franchisees.

8.8. Work closely with franchisees.Work closely with franchisees.

© 2010 South-Western, a part of Cengage Learning. All rights reserved. 11–30

International FranchisingInternational Franchising

• International Franchising ConsiderationsInternational Franchising Considerations Differences in national franchise lawsDifferences in national franchise laws

Lack of familiarity with the concept of franchisingLack of familiarity with the concept of franchising

Development of local partnering arrangementsDevelopment of local partnering arrangements

Availability of local resources to support the franchiseAvailability of local resources to support the franchise

Adaptation of the franchise concept to local customs Adaptation of the franchise concept to local customs and tastesand tastes