Franchising

What is a franchise?
 License to use an established brand
 Use is very restrictive – many rules to be
followed.
 Provide a proven successful business
format
 Entrepreneurship for people that are not
particularly entrepreneurial.
Advantages of Franchising
 Buying a name/reputation
 Established markets
 Technical/management assistance
 Standardized procedures
 Quality standards
 Selection of location
 Facility design
 Quicker cash flow
Disadvantages of franchising
 Loss of independence
 High initial fees
 High royalties and advertising allowances
 Contractual restrictions
 Inapplicable advertising
 Termination clauses
 Not receiving promised help
 Unsuitable products
 Lack of competitive advantage
 The Franchisee’s Perspective
Things to Look For
❚ Proven operating location
❚ Credible top management
❚ Skilled field support staff
❚ A trade identity
❚ A proprietary operations manual
❚ Effective training programs
❚ Disclosure and offering documents
❚ Plans for advertising, marketing, PR and promotion
❚ A communications system
❚ Sufficient capital
© 1999 by Prentice Hall 1-15
 Franchising Agreements
Issue Questions to Resolve
Franchise fee Amount? One time? Per unit?
Royalties Amount? Percentage of net or gross? Sliding scale?
Quality control Quality specs? Monitoring practices? Rewards? Sanctions?
Advertising Fee? Local budget? National? Intensity? Messages?
Offerings Product line? Product mix? Requirements? Alternatives?
Equipment Required? Additional? Financing?
Location Site selection requirements? Franchisor aid? Financing?
Operations Signs? Hours? Maintenance? Décor? Personnel policies?
Reporting Types? Frequency? Auditing? Sanctions?
Disputes Resolution methods? Equity of resolution process?
Termination Timing? Causes? Sanctions? Recourse?

© 1999 by Prentice Hall 1-16

 Franchisee Guidelines
❚ Perform a self-evaluation
❚ Investigate the franchisor
❚ Study the industry and competition
❚ Study the Uniform Franchise Offering Circular
❚ Investigate the franchisor’s disclosure
❚ Know your legal rights and retain counsel

© 1999 by Prentice Hall 1-17

The Franchisor’s Perspective
Advantages
 Faster growth
 Lower capital requirements
 Motivation – franchisors are owners of
the franchise
 Control of locations
 Revenue stream – franchise
fees/royalties
The Franchisor’s Perspective
Disadvantages
 Reduced control
 Profit sharing
 Greater commitment to operating
support
 Problem franchisees???