Chapter 4.2 Own a Franchise or

Start a BusinessMrs. Leonard

Entrepreneurship

Franchise Ownership A franchise is a legal agreement that gives an

individual the right to market a company’s products or services in a particular area Ex. Jiffy Lube stations, McDonald’s

Franchisee is a person who purchases a franchise agreement

Franchisor is a person or company that offers a franchise for purchase More than 500,000 people in the U.S. own franchises Franchising opportunities are available in every field,

from motels to pet stores

Sources for finding out about Franchise Ownership and Opportunities Franchise Opportunities Handbook – publication of the

U.S. Department of Commerce Lists more than 1,400 franchise opportunities by category Provides information about costs and capital requirements

Consumer Guide to Buying a Franchise Publisher by the Federal Trade Commission

Books on franchising available at your public library The Wall Street Journal Magazines such as Forbes, Barron’s Business Start-Ups,

Entrepreneur, and Inc

Operating Costs of a Franchise Initial Franchise Fee – fee the franchise

owners pays in return for the right to run the franchise Fee can run anywhere from a few thousand to a

few hundred thousand dollars (usually non-refundable)

Start-Up Costs – costs associated with beginning a business Include the costs of renting a facility, equipping

the outlet, and purchasing inventory

Operating Costs of a Franchise

Royalty Fees – weekly or monthly payments made by the owner of the franchise to the seller of the franchise Payments usually are a percentage of your franchise’s

income Advertising fees – fees paid to support television,

magazine, or other advertising of the franchise as a whole

Advantages of Owning a Franchise1. An entrepreneur is provided with an established product or service

Allows entrepreneurs to compete with giant companies

2. Franchisors offer management, technical, and other assistance

On-site training or classes, aid with starting the new business and handling daily operations, and tips on crisis management

Offer help on everything from site selection and building design to equipment purchase and recipes

Most maintain a toll-free telephone number that franchises can call for advice

Advantages of Owning a Franchise

3. Equipment and supplies can be less expensive Because franchises are part of large chains, they can

purchase in bulk

4. A guarantee of consistency attracts customers Franchise contract mandates a certain level of quality,

consumers know what they can walk into a franchise anywhere and receive the same product and service

Disadvantages of Owning a Franchise1. Franchises can cost a lot of money and cut down on profits

Initial capital is needed to purchase a franchise business is high

Some of the profits you earn as a franchise owner are returned to the franchisor as royalty fees

2. Owners of franchises have less freedom to make decisions than other entrepreneurs

Many business decisions have already been made Products and services, prices set by franchisors

Disadvantages of Owning a Franchise3. Franchisees are dependent on the performance of other franchisees in the chain

If other franchises run sloppy operations, customer opinions of the chain will decline – which will make customers stop going

4. The franchisor can terminate the franchise agreement

If franchisee fails to pay royalty payments or meet other conditions, the investment in the franchise could be lost

If the franchise expires, the franchisor can choose not to renew the agreement

Evaluating a FranchiseAsk these questions to evaluate a specific franchise1. What is the projected demand for the franchised

product or service in the area I want to locate in?2. Will I be guaranteed an exclusive territory for the

duration of the franchise term, or can the franchisor sell additional franchises in the territory

3. What are the costs and royalty fees associated with the franchise

4. How profitable have other franchises in the area been? What do other franchisees think of the franchisor?

Evaluating a Franchise

5. How long has the franchisor been in business? How profitable is the franchisor?

6. What services does the franchisor provide? Will the franchisor help me with marketing, merchandising, and site selection?

7. Are benefits provided by the franchisor worth the loss of independence and the cost of purchasing the franchise?

8. What happens if I want to cancel the franchise agreement?

Evaluating a Franchise Some franchisors make false or misleading claims

about their franchises Carefully study the documents the franchisor gives you Be suspicious of any company that will not back up its

claims with written financial statements Beware of high-pressure sales tactics – never allow

yourself to be pressured into making the decision to quickly

Consult an attorney before signing a franchise agreement, these are complicated documents

Who is interested in starting a franchise?On page 88 look at table of top 10 Franchises – which

would you want to open?

Starting your own business

As an entrepreneur, you might want to establish a business of your own

Who wants to start their own business?

Advantages of Starting your own Business

Entrepreneurs who start their own business get to make decisions about everything from where to locate, prices to charge, and employees to hire They are completely independent and create their own

destinies Entrepreneurs find great satisfaction in starting

their own business Attracted to the challenge of creating something new Feel triumph when their business turns a profit

Disadvantages of Starting your Own Business There is no certainty that customers will

purchase what you offer –you must estimate the demand for your product or service

Must make decisions that other types of entrepreneurs need not make What product/service to offer, the location, what

employees to hire

4.2 Assessment

Thinking Critically 4.2 (p.91) Questions 1-3 Type the questions and your answers (answer in

bold) Save!

4.2 true/false and multiple choice worksheet Put in your notebook