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- 1. Section 2: The Entrepreneurial Journey Begins Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved
- 2. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Essentials of Entrepreneurship and Small Business Management Ninth Edition Chapter 8 Franchising and the Entrepreneur
- 3. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives (1 of 2) 1. Describe the three types of franchising: trade name, product distribution, and pure. 2-A. Explain the benefits of buying a franchise. 2-B. Explain the drawbacks of buying a franchise.
- 4. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives (2 of 2) 3. Understand the laws covering franchise purchases. 4. Discuss the right way to buy a franchise. 5. Describe the major trends shaping franchising.
- 5. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Franchising Boom • About 3,800 franchisors operate more than 750,000 outlets in the United States. • Franchises generate more than $710 billion in annual sales and account for 2.3% of the U.S. GDP. • Franchises employ 7.8 million workers in the United States in more than 300 major industries.
- 6. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Number of Franchised Outlets in the United States Figure 8.1 Number of Franchised Outlets in the United States Source: Based on data from Franchise Business Economic Outlook for 2017, IHS Economics and the International Franchise Association Educational Foundation, January 2017, p. 2.
- 7. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchised Outlets by Industry Figure 8.2 Franchised Outlets by Industry Source: Based on data from Franchise Business Economic Outlook for 2017, IHS Economics and the International Franchise Association Educational Foundation, January 2017, p. 2.
- 8. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchising • Franchising: – A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system.
- 9. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchising Basics • Franchisee gets the right to use all of the elements of a fully integrated business operation. • Essence of what franchisees purchase from the franchisors: Experience. • Key Question: “What can a franchise do for me that I cannot do for myself?”
- 10. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Franchising Relationship Figure 8.3 The Franchising Relationship Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association Educational Foundation, Copyright 2004 by the International Franchise Association. eprinted with permission.
- 11. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Types of Franchising • Trade-Name: – A franchisee purchases the right to use the franchisor’s trade name without distributing particular products exclusively under the franchisor’s name. • Product Distribution: – A franchisor licenses a franchisee to sell its products under the franchisor’s brand name and trademark through a selective, limited distribution network. • Pure: – A franchisor sells a franchisee a complete business format and system.
- 12. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchise Business Index Figure 8.4 Franchise Business Index Source: Franchise Business Economic Outlook for 2017, IHS Economics and International Franchise Association Educational Foundation, January 2017, p. 4.
- 13. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Benefits of Franchising (1 of 3) • A business system • Management training and support – Start-up – Ongoing • Brand name appeal – “Cloning” • Standardized quality of goods and services
- 14. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Benefits of Franchising (2 of 3) • National advertising programs – Franchisees contribute 1% to 5% of sales. • Financial assistance – About 20% of franchisors offer direct financial assistance to franchisees. – SBA – Franchise Registry
- 15. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Benefits of Franchising (3 of 3) • Proven products and business formats • Centralized buying power • Site selection and territorial protection – Important issue: Territorial encroachment • Greater chance for success
- 16. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Drawbacks of Franchising (1 of 3) • Franchise fees and ongoing royalties – Average upfront franchise fee = $25,147 – Royalties range from 1% to 11% of franchisees’ sales – Average royalty = 6.7% of sales
- 17. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Planned Sources of Financing for Prospective Franchisees Figure 8.5 Planned Sources of Financing for Prospective Franchisees Source: Prospective Franchisee Survey Results, FranchiseDirect, 2016, www.franchisedirect.com/information/prospectivefranchiseesurveyresults2016/?r=5380.
- 18. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchise Royalty Fees Figure 8.6 Franchise Royalty Fees Source: Based on 2015 Franchise Sales Trends Report, FranConnect, 2015, p. 6.
- 19. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Drawbacks of Franchising (2 of 3) • Strict adherence to standardized operations • Restrictions on purchasing – Approved suppliers only • Limited product line • Contract terms and renewal – Average term = 10.5 years
- 20. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Drawbacks of Franchising (3 of 3) • Unsatisfactory training programs • Market saturation • Less freedom – “No independence” – “Happy prisoners”
- 21. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchise Breakdown by Number of Outlets Figure 8.7 Franchise Breakdown by Number of Outlets Source: Based on 2015 Franchise Sales Trend Report, FranConnect, 2015, p. 3.
- 22. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Ten Myths of Franchising (1 of 2) 1. Franchising is the safest way to go into business because franchises never fail. 2. I’ll be able to open my franchise for less money than the franchiser estimates. 3. The bigger the franchise organization, the more successful I’ll be. 4. I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how. 5. All franchises are the same.
- 23. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Ten Myths of Franchising (2 of 2) 6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful. 7. Anyone can be a satisfied, successful franchise owner. 8. Franchising is the cheapest way to get into business for yourself. 9. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee. 10.Once I open my franchise, I’ll be able to run things the way I want to.
- 24. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Franchising and the Law • Franchise Disclosure Document (FDD) – Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC) – Requires franchisors to disclose to potential franchisees information on 23 important topics – Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions. • Joint Employer Liability – Browning-Ferris Industries (BFI) decision
- 25. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Right Way to Buy a Franchise (1 of 3) • Evaluate yourself: What do you like and dislike?
- 26. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Are You Franchise Material? • Successful franchise owners have: – Commitment – A willingness to work with others – A positive attitude – Leadership ability – Solid people skills – Adequate capital – Compatible values – A learning attitude – Patience – General business skills – Coachability – Adequate capital – A willingness to follow the system
- 27. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Right Way to Buy a Franchise (2 of 3) • Evaluate yourself: What do you like and dislike? • Research your market. • Consider your franchise options. • Get a copy of the Franchisor’s FDD – and read it!
- 28. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Factors that Make a Franchise Appealing • Unique concept or marketing approach • Profitability • Registered trademark • Business system that works • Solid training program • Affordability • Positive relationship with franchisees
- 29. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Right Way to Buy a Franchise (3 of 3) • Evaluate yourself: What do you like and dislike? • Research your market. • Consider your franchise options. • Get a copy of the Franchisor’s FDD – and read it! • Talk to existing franchisees. • Ask the franchiser some tough questions. • Make your choice.
- 30. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Trends Shaping Franchising (1 of 6) • Changing face of franchisees – Minorities own 31.2% of all franchises compared to 14.6% of independent businesses. – Modern franchisees are also better educated, more sophisticated, more financially secure, and have more business acumen compared to just 20 years ago.
- 31. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Age Distribution of Franchisees Figure 8.8 Age Distribution of Franchisees Source: Based on “Prospective Franchisees Survey 2016,” FranchiseDirect, July 5, 2016, www.franchisedirect.com/information/prospectivefranchiseesurvey2016/?r=5380.
- 32. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Trends Shaping Franchising (2 of 6) • International opportunities – Many franchises are focusing on international markets as a source of growth. McDonald’s earns 67% of its sales internationally. Yum! Brands has more than 14,000 restaurants outside the United States.
- 33. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Top 10 Franchise Markets Table 8.4 Top 10 Franchise Markets Rank Country 1 Canada 2 Australia 3 China 4 Indonesia 5 South Africa 6 Mexico 7 India 8 Vietnam 9 Colombia 10 Brazil Source: 2016 Top Markets Report: Franchising, U.S. Department of Commerce, International Trade Administration, 2016, pp. 2–3.
- 34. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Trends Shaping Franchising (3 of 6) • Mobile Franchises – Putting businesses on wheels. • Smaller, nontraditional locations – Intercept Marketing: putting a franchise’s products or services directly in the paths of potential consumers, wherever they may be. • Conversion Franchising – Owners of independent businesses become franchisees to gain the advantage of name recognition.
- 35. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Trends Shaping Franchising (4 of 6) • Refranchising – Franchisors sell their company-owned outlets to franchisees. • Multi-unit franchising – IFA: 20% of franchise owners are multiple-unit owners. – Typical multiple-unit franchises own five outlets.
- 36. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Trends Shaping Franchising (5 of 6) • Area development and master franchising – Area Development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time. – Master Franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.
- 37. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Trends Shaping Franchising (6 of 6) • Co-Branding – Aka piggyback or combination franchising: Two or more franchises team up to sell complementary products or services under one roof.
- 38. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Conclusion • Franchising: – Is a key part of the small business sector – Increases the chance of business success for the entrepreneur – Growth continues
- 39. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Copyright
Editor's Notes
- If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available)
- In this chapter, you will: 1. Describe the three types of franchising: trade name, product distribution, and pure. 2.A. Explain the benefits of buying a franchise. 2.B. Explain the drawbacks of buying a franchise.
- In addition, you will: 3. Understand the laws covering franchise purchases. 4. Discuss the right way to buy a franchise. 5. Describe the major trends shaping franchising.
- Most franchised outlets are small, but as a whole, they have a significant impact on both the U.S. and global economies.
- In the United States alone, about 3,800 franchisors operate nearly 750,000 franchise outlets, and more are opening constantly.
- Figure 8.2 provides a breakdown of the franchise market by industry.
- Franchising also has a significant impact on the global economy. Because the United States franchise market is the most mature in the world, U.S. franchisors are expanding globally to reach their growth targets.
- Franchisees do not establish their own autonomous businesses; instead, they buy a “success package” from the franchisor, who shows them how to use it.
- Franchising is built on an ongoing relationship between a franchisor and a franchisee. The franchisor provides valuable services, such as a proven business system, training and support, name recognition, and many other forms of assistance; in return, the franchisee pays an initial franchise fee as well as an ongoing percentage of his or her outlet’s sales to the franchisor as a royalty and agrees to operate the outlet according to the franchisor’s terms.
- Three basic types of franchises operate in almost every industry: trade-name franchising, product distribution franchising, and pure franchising.
- Figure 8.4 shows the International Franchise Association’s Franchise Business Index, a composite measure of the economic health of the franchise industry that includes six different indicators.
- For many first-time entrepreneurs, access to a business model with a proven track record is the safest way to own a business.
- An effective advertising program is essential to the success of every franchise operation. A basic principle of franchising is to use franchisees’ money to grow their businesses, but some franchisors realize that because start-up costs have reached breathtakingly high levels, they must provide financial help for franchisees.
- A franchise owner does not have to build the business from scratch.
- Prospective franchisees must understand the disadvantages of franchising before choosing this method of doing business. Perhaps the biggest drawback of franchising is that a franchisee must sacrifice some freedom to the franchisor.
- Franchisees use many of the same sources to finance franchises that independent entrepreneurs use to finance start-up companies.
- This figure shows a breakdown of franchise royalty fees.
- Although franchisees own their businesses, they do not have the autonomy that independent owners have. To protect its image, a franchisor requires that franchisees maintain certain operating standards.
- Before signing on with a franchise, it is wise to find out the details of the training program the franchisor provides to avoid unpleasant surprises.
- Figure 8.7 shows a breakdown of the number of outlets operated by U.S.-based franchises.
- Many myths surround franchising.
- The FDD applies to all franchisors, even those in the 35 states that lack franchise disclosure laws. The purpose of the regulation is to assist potential franchisees’ investigations of a franchise deal and to introduce consistency into the franchisor’s disclosure statements. In a recent decision known as Browning-Ferris Industries (BFI), the National Labor Relations Board (NLRB) overturned more than 30 years of regulatory practice and franchise law by declaring that franchisors are considered “joint employers” with their franchisees. Even though franchisees make decisions about hiring, paying, scheduling, and firing their employees, the ruling holds franchisors jointly responsible for those decisions.
- By asking the right questions and resisting the urge to rush into an investment decision, potential franchisees can avoid being taken by unscrupulous operators.
- Do you have what it takes to be a successful franchise owner?
- Franchising has experienced three major growth waves since its beginning. The first wave occurred in the early 1970s, when fast-food restaurants used the concept to grow rapidly. The second wave took place in the mid-1980s, as the U.S. economy shifted heavily toward the service sector. A third wave began in the early 1990s and continues today. It is characterized by new low-cost franchises that focus on specific market niches. In the wake of major corporate downsizing and the burgeoning costs of traditional franchises, these new franchises allow would-be entrepreneurs to get into proven businesses faster and at reasonable costs. Franchisees today are a more diverse group than in the past.
- People of all ages and backgrounds are choosing franchising as a way to get into business for themselves.
- One of the major trends in franchising is the internationalization of American franchise systems. Franchising has become a major export industry for the United States, with franchises focusing on international markets to boost sales and profits as the domestic market has become saturated.
- This table shows the top 10 countries that present the greatest potential for franchisors, according to a cross-country analysis of five factors, including the availability of business infrastructure and a suitable labor force, sufficient market size, and the government regulatory environment. .
- Mobile franchising is one of the fastest-growing segments in the franchise market because mobile franchises typically have lower capital requirements than brick-and-mortar businesses, and they offer a marketing advantage: the ultimate in convenience for customers because the product or service comes to them. As the high cost of building full-scale locations continues to climb, more franchisors are searching out nontraditional locations in which to build smaller, less expensive outlets. It is not unusual for entrepreneurs who convert their independent stores into franchises to experience an increase of 20% or more in sales because of the instant name recognition the franchise offers.
- Refranchising not only increases franchisors’ profitability because it generates more royalty income for franchisors but also provides capital to finance international expansion. Franchisors are finding that multi-unit franchising is an efficient way to do business. For a franchisor, the time and cost of managing 10 franchisees each owning 10 outlets are much less than managing 100 franchisees each owning 1 outlet. A multi-unit strategy also accelerates a franchise’s growth rate. Not only is multiple-unit franchising an efficient way to expand quickly, it also is effective for franchisors who are targeting foreign markets, where having a local representative who knows the territory is essential.
- Driving the trend toward multiple-unit franchising are area development and master franchising.
- This “buddy-system” approach works best when the two franchise ideas are compatible and appeal to similar customers.