•Evaluate franchise ownership•Recognize the advantages and disadvantages of starting a new business•More than 909,000 franchises are operating in the United States and growing.

Franchise OwnershipPurchasing a franchise is another route by

which you can become an entrepreneur. A franchise is a legal agreement that

gives an individual the right to market a company’s products or services in a particular area. A franchisee is the person who purchases a

franchise agreement. A franchisor is the person or company that

offers a franchise for purchase.

Operating Costs of a FranchiseThe initial franchise fee is the fee the

franchise owner pays in return for the right to run the franchise.

Startup costs are the costs associated with beginning a business.

A royalty fee is a weekly or monthly payment made by the owner of the franchise to the seller of the franchise.

Advertising fees are paid to support television, magazine, or other advertising of the franchise as a whole.

Business Math Connection Franchise operators often charge franchisees a

percentage of sales as a royalty fee. If your sales totaled $6,000 in a month and the royalty is 10 percent a month, how much royalty fee would you pay?

To calculate the royalty fee, multiply the sales by the royalty rate.

Sales x Royalty rate = Royalty fee $6,000 x 0.10 = $600.00

Advantages of Owning a FranchiseAn entrepreneur is provided with an

established product or service.Franchisors offer management, technical,

and other assistance.Equipment and supplies can be less

expensive.A guarantee of consistency attracts

customers.

Disadvantages of Owning a FranchiseFranchises can be expensive and cut

down on profits. Owners of franchises have less freedom to

make decisions than other entrepreneurs. Franchisees are dependent on the

performance of other franchises in the chain.

The franchisor can terminate the franchise agreement.

Evaluate a Franchise1.1. What is the projected demand for the

franchised product or service in the area in which I want to locate? Will I be guaranteed an exclusive territory for the duration of the franchise term, or can the franchisor sell additional franchises in the territory?

2.2. What are the costs and royalty fees associated with the franchise?

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

Evaluate a Franchise4.4. How long has the franchisor been in business?

How profitable is the franchisor?5.5. What services does the franchisor provide? Will

the franchisor help me with marketing, merchandising, and site selection?

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

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

Starting Your Own Business—AdvantagesComplete independenceSatisfaction from starting a business

Challenge of creating something new

Feeling of triumph when business succeeds

Starting Your Own Business—DisadvantagesRisk of failureUncertainty about demand for product or service

Responsibility for all decisions

Advantages of Buying an Existing BusinessThe existing business already has

customers, suppliers, and procedures.The seller of a business may train a

new owner.There are prior records of revenues,

expenses, and profits.Financial arrangements can be easier.

Disadvantages of Buying an Existing BusinessMany business are for sale because

they are not making a profit.Serious problems may be inherited.Capital is required.

Steps in Purchasing a BusinessWrite specific objectives about the

kind of business you want to buy, and identify businesses for sale that meet your objectives.

Meet with business sellers or brokers to investigate specific opportunities.

Visit during business hours to observe the company in action.

Steps in Purchasing a Business (Cont)Ask the owner to provide you with a

complete financial accounting of operations for at least the past three years.

Ask for important information in written form.

Determine how you would finance the business.

Get expert help to determine a price to offer for the business.

Advantages of a Family BusinessEnjoy the pride and sense of mission

that comes with being part of a family enterprise.

Enjoy the fact that their businesses remain in the family.

Like knowing that their efforts are benefiting others whom they care about.

Disadvantages of a Family BusinessSenior management positions are

often held by family members, regardless of their ability.

Sometimes means that poor business decisions are made.

Difficult to retain good employees who are not members of the family.

Disadvantages of a Family Business (cont)Family politics often enter into business

decision making.Distinction between family life and

private life is blurred in family-owned businesses.

Business problems end up affecting family life.

Family business must be prepared to make compromises.

Questions to considerWhen you purchase an existing business, why is it

important to know the owner’s reason for selling?What steps would you take when purchasing an

existing business?What kind of information should you request before

purchasing a business?Your family owns a successful business that

distributes clothing from around the world to local retailers. Both your parents work full time in the business. The y have offered you a position in the company after you graduate from college. Will you accept their offer? Why or Why not?

Operating Costs of a FranchisePurchase a Franchise – you will have to pay an

initial franchise fee, startup costs, royalty fees, and advertising fees. You may also be asked to pay for nationwide advertising of the franchise.