RECOGNIZING

FRANCHISING
OPPORTUNITIES
Chapter 2



Paulink C. Barba
BSBA Marketing Management

KEY POINTS:

I. The
advantages of
franchising for
both franchisor
and franchisee
II. The potential
disadvantages
of franchising to
the franchisor
and the
franchisee
III. The seven
steps for
franchise
protection
before investing
in a franchise
IV. The typical
elements
included in a
franchising
agreement
A. THE ADVANTAGES OF FRANCHISING FOR
FRANCHISEE




1. ESTABLISHED PRICE PRODUCT OR SERVICE




This advantage is where the consumers are already
AWARE of the name and reputation of the product
or service the franchise system offers. Such
franchisors generally spend a large portion of
advertising budget on national campaigns or
television and radio, magazines and newspapers to
keep their public awareness.
2. TECHNICAL AND MANAGERIAL ASSISTANCE

This type of advantage is
provided by the franchisor.
The new franchisee will
receive technical assistance
which often includes location
and site selection, store
layout and design, store
remodelling (if the franchisee
is converting an existing
site), inventory purchase and
control methods, equipment
and fixture purchasing or
leasing and assistance with
the grand opening of the new
franchise business.
3. QUALITY CONTROL STANDARDS

This third type of advantage is again provided by
the franchisor. By setting and maintaining high
standards, a franchisor does the franchisee a
genuine service. Properly administered and
controlled, such standards help the franchise to
achieve positive results by ensuring product service
uniformity throughout the franchise system.

4. LESS OPERATING CAPITAL

Franchising offers its prospects with less
cash than if he or she were to open a
business independently.

This is because
1. The business may not require as much inventory as a
comparable nonfranchised business
2. Knowledge and experience is always provided by the
franchisor concerning how much stock is needed and
when to reorder.

This can dramatically reduce the potential aging
of stock, waste, spoilage and unprofitable
storage of low item demands 3. A new franchisee
may be able to receive some financial assistance
in the form of credit, as cash or inventory from
the franchisors resources.
5. OPPORTUNITY FOR GROWTH

This fifth potential advantage
concerns growth opportunities for
operating a territorial franchise. A
territorial franchise guaranties no
competition from the same franchisor
within a specified geographic boundary. It
may later be in a position to sub franchise
or license other persons to operate stores
belonging to the territorial franchisee. If a
new franchised company is enjoying
successful growth, its franchisees could
have more opportunity for financial gain
as territorial franchisees.
B. THE POTENTIAL DISADVANTAGES OF
FRANCHISING TO THE FRANCHISEE

1. FAILED EXPECTATIONS

These are the expectations of the franchisee to the
franchisors business expertise, experience, selling
methods, trademark and advertising. Because of
the following elements the franchisor had, the
franchisee sees the value of franchisor-franchisee
relationship. Without such assistance, there would
be little reason for a prospective business owner to
enter a franchising agreement.
2. SERVICE COSTS


These services are expense items to the franchisee
which are provided by the franchisor. In some
instances, they may be of dubious value. These
include franchise fees and royalties which the
franchisee might find excessive especially after
being in business for several months and realizing
the effect that the royalties and fees are having on
the franchisees anticipated return on investment.

3. OVERDEPENDENCE

This type of disadvantage again points to the
franchisor-franchisee relationship. A franchisee can
become too dependent on the advice of the
franchisor to address operations, crises, changing
market conditions, pricing strategy or promotions
and so may fail to apply commonsense and
knowledge of local customers and market
conditions.
4. RESTRICTIONS OF FREEDOM OWNERSHIP
The franchising contract may
contain restrictions or
requirements that an
independent business person
would not have to satisfy. For
example, territorial
restrictions imposed by the
franchisor may limit the potential
customer contacts a franchisee
might see or territories may
overlap or be inequitably
determined by a franchisor.
5. TERMINATION OF AGREEMENT

This concerns the franchisees decision to terminate
the franchising relationship as a result of perceived
or real differences with the franchisor. Lack of
cooperation from the franchisor can make it
difficult to sell the business to a prospective buyer
or to simply dissolve the business entirely.
6. PERFORMANCE OF OTHER FRANCHISEES

This is the least-considered potential disadvantage to
the franchisee. If the franchisor becomes lax in
managing the franchise system or does not enforce the
quality standards imposed throughout the network, poor
performance by some in the franchise network can
affect the sales of others. Usually, a customer of a
multiunit franchised company will tend to blame the
entire franchise and nit the single operating unit for poor
service or low quality.
C. ADVANTAGES TO THE FRANCHISOR

1. EXPANSION

Most businesses grow through
expansion of their distribution
system. Yet the average business
owner wishing to broaden
distribution of a product or service
may not have the same options to
consider as Sloan. In fact,
franchising may be the only viable
option for growth, unless that owner
would choose to become part of a
larger existing company as a captive
producer or a franchisee, or choose to
expand at a slow pace by saving
profits earned from the principal
business.
2. MOTIVATION

Another advantage to the franchisor is that the
franchisee is usually more motivated that the
company-employed manager, When a franchised
unit is operated by an owner as opposed to a
company-employed manager, that unit will usually
benefit from the owners motivation, self-direction
and personal interest in the success of the
Operation.
3. OPERATION OF NON-UNION BUSINESS


In the decision whether to
franchise, a business owner should
also give consideration to the area
of employee and labor relations.

There is greater likelihood that
company-owned units would be more
attractive to union organizers than
franchised units, largely because a
single franchised operating unit is less
likely to be unionized and to develop
labor relations appropriate to the local
supply-and-demand conditions of the
labor pool.
4. BULK PRICING

An advantage exists for franchisors in business
that require inventory of parts, completed units for
sale and supplies or packaging associated with the
production or sale of the product, Economy of scale
in purchasing can be achieved more rapidly by a
company choosing franchising compared with a
company that expands through company-owned
units.
D. DISADVANTAGES TO THE FRANCHISOR
POTENTIAL PROBLEMS

A. RECRUITMENT

The recruitment problem concerns the difficulty of
finding promising franchisees. Although many seek
franchising as a means to enter business, most
prospective franchisee candidates lack the
experience, motivation, or the proper capital
backing needed to become successful franchises.

B. COMMUNICATION

As in any business relationships, communication
problems can arise. In franchising, a franchisee
may develop a sense of independence and no longer
feel a need to rely on the franchisor for the
successful operation of the business; he or she may
conclude that the business would run just as
smoothly without the franchisors advice and seek
to discontinue the relationship.

C. LOSS OF FREEDOM

Independent business persons can easily
make decisions and change policies within
their organizations; but once a franchise
system is developed, the franchisor or
parent company must get permission from
franchisees to introduce new products, to
add or eliminate services, or to change
operating policies. Thus the franchisor
stands to lose a substantial amount of
control as a franchises system increases its
size. It can become difficult for the
franchisor to modify product or process in
order to meet the ever-changing needs of
customers, particularly if the franchise
system increases its size.

E. 7 STEPS FOR FRANCHISE PROTECTION
BEFORE INVESTING IN A FRANCHISE

1. Protect yourself by self-evaluation
2. Protect yourself by investing the
franchise
3. Protect yourself by studying the
disclosure document.
4. Protect yourself by checking out the
disclosures
5. Protect yourself by questioning
earnings claims
6. Protect yourself by obtaining
professional advice
7. Protect yourself by knowing your legal
rights

F. THE TYPICAL ELEMENTS INCLUDED IN A
FRANCHISING AGREEMENT

1. Franchising
2. Fee
3. Signs
4. Quality Control
5. Business Hours
6. Advertising
7. Decor
8. Products and services
available
9. Reporting

10. Royalties
11. Bookkeeping
12. Equipment
13. Supplies
14. Location requirements
15. Personnel (appearance
and training)
16. Facilities
17. Franchisor-Franchisee
Relationships
18. Maintenance

THANK YOU