Buying a Franchise

Or Franchising Your BusinessOr Franchising Your Business

14-1Copyright © 2011 Nelson Education Ltd.

chap

t er

chap

ter

14141414

Prepared byRon KnowlesAlgonquin College

& Jennifer Rouse BarbeauCanadore College

Chapter OverviewChapter 14 will: Introduce you to the world of

franchising. Help you decide if buying a franchise

or becoming a franchisor is right for you.

14-2Copyright © 2011 Nelson Education Ltd.

chap

t er

chap

ter

14141414

Learning Opportunities Appreciate the vast world of franchising. Understand the key franchising terms and

conditions in an agreement. Understand the relationship between franchisor

and franchisee. Learn the benefits and liabilities of owning and

operating a franchise. Learn how to become a master franchisee. Learn the process involved in purchasing a

franchise. Understand what it takes to become a franchisor. Decide whether buying a franchise is the right

step for you.

14-3Copyright © 2011 Nelson Education Ltd.

chap

t er

chap

ter

14141414

What is a Franchise?A franchise franchise is:

A special kind of partnership in which one company (the franchisor) grants the right to sell its products or services to another company or individual (the franchisee).

A franchisor franchisor is:A firm that sells the rights to do business under

its name and continues to control the business.

A franchisee franchisee is:The individual operator who is licensed to

operate under the franchisor’s rules and directives.

14-4Copyright © 2011 Nelson Education Ltd.

The Franchising Industry Franchised businesses account for 40% of all retail sales. 78,000 franchises across Canada Canadian Franchise Association membership grows 10% yr Franchising directly employs 1,000,000 people Every year, thousands of Canadians are improving their

lives by becoming franchisees Franchising accounts for $90 billion/yr in nation sales &

10% of Canada’s Gross Domestic Product (GDP) Franchising accounts for 1 out of 5 consumer dollars spent

in Canada on goods & services

14-5Copyright © 2011 Nelson Education Ltd.

Franchise SystemsA business format business format franchise is:

A type of franchise in which the product, method of distribution, sales and management procedures are highly controlled.

Example: 1-800-GOT JUNK?

A type of franchise in which the franchisee buys the right to distribute a franchisor’s product or service.

Example: Home Hardware or PropertyGuys.com

14-6Copyright © 2011 Nelson Education Ltd.

Franchise NetworksDirect franchising Direct franchising is:A business arrangement in which a franchisee deals directly

with the franchisor. Example: Anna Babin dealt directly with PropertyGuys.com.

Master franchising Master franchising is:A business arrangement or network in which a

franchisor sells the rights of an area or territory to a franchisee who is normally required to sell (or establish) and service a specified number of franchises in a specified time period within its area. Example: Don Swanston and Matt Eldridge purchased 18

franchise units in British Columbia’s Greater Vancouver Area.

14-7Copyright © 2011 Nelson Education Ltd.

What the Customer Receives

Key reasons for buying a franchise: Customer satisfaction & brand loyaltyCustomer satisfaction & brand loyalty

A consistent standard of service and product.

A sense of security and familiarity.

A perception that the owner is close by and ready to help.

14-8Copyright © 2011 Nelson Education Ltd.

The franchiseefranchisee expects to receive:Brand-name recognition Support from the corporation (franchisor)Training Financial supportA business template—a proven plan and

business strategyPurchasing powerCorporate monitoring and assistance Less risk of failureNational/regional promotionAdditional units—an opportunity to grow

14-9Copyright © 2011 Nelson Education Ltd.

What the Franchisee Receives

The franchisorfranchisor expects to receive: Franchise feesRoyalty feeProfit on items sold to franchiseeVolume rebatesAdvertising feesGrowth and market penetration

14-10Copyright © 2011 Nelson Education Ltd.

What the Franchisor Receives

Franchise Agreement You will likely be required to sign a contract that

could be 50 pages long. This contract lays out the system, rules and

regulations that you will be bound by. Get legal and financial advice. Do not deposit any money until you have

consulted with a lawyer. Do your research. (Complete Action Step 62

and Box 14.4).

14-11Copyright © 2011 Nelson Education Ltd.

Purchasing a Franchise:The Process Explore franchising Contact and pre-qualification Application Franchisor contact and review Franchise agreement provided Negotiate terms Agreements signed and business begins

14-12Copyright © 2011 Nelson Education Ltd.

Buyer BewareIssues that plague the franchising industry: Encroachment Ground-floor opportunities Renewal period Verbal agreements Minimum franchise legislation Signing personally Few facts Saturated markets Poor training Supplies stipulation Insiders first Non-refundable deposits

14-13Copyright © 2011 Nelson Education Ltd.

Evaluating a Franchise Ask additional questions Choose your product or service with

care Reasons for not buying a franchise

You know the business as well as the franchisorWhy pay a franchise fee?Your individuality may be stifled See textbook for more

A final word about franchisesCan you work under the franchise controls?

14-14Copyright © 2011 Nelson Education Ltd.

Become the Franchisor Aileen Reid franchised her A.P. Reid Insurance

Stores Ltd. business. Ken LeBlanc franchised his PropertyGuys.com

business. Your business must:

Have a proven and profitable business track record. Have a competitive advantage. Be credible, teachable and transferable. Not be dependent on your personality

You must have the time, money and expertise to develop and grow the franchise system.

14-15Copyright © 2011 Nelson Education Ltd.

Chapter 14 introduces you to the world of franchising:Buying a FranchiseBecoming a Franchisor

14-16Copyright © 2011 Nelson Education Ltd.

Business Plan Business Plan Building Block

Why have you selected a franchise as your method of start-up?

What were your lawyer’s comments on the franchise agreement?

Do your personal vision, goals, and personality match a franchise form of ownership?

Have you considered a master franchise? Is there a possibility you can franchise your

business in the future?

14-17Copyright © 2011 Nelson Education Ltd.

Checklist for Your Business PlanYour Business Plan

PropertyGuys.comPropertyGuys.com is a successful, high-growth

Canadian franchise system.

Answer Chapter 14 case study questions to learn: What was PropertyGuys.com major driving force or

competitive strategy? Which franchise system and network did

PropertyGuys.com use? Begin a franchise checklist. What are the most important franchise evaluation

criteria? Are you ready to franchise your business? What

questions should you be asking?

14-18Copyright © 2011 Nelson Education Ltd.

CaseStudy