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Abdm4223 lecture week 6 080612
ABDM4233 ENTREPRENEURSHIP Franchising & Social Franchising by Stephen OngPrincipal Lecturer (Specialist) Visiting Professor, Shenzhen University
The Franchising Boom More than 3,000 franchisors operate more than 909,000 outlets in the United States. Each year, franchises produce goods and services that are worth $881 billion, 4.4% of the U.S. GDP. Franchises employ one in every 12 workers in the U.S. in more than 230 major industries.
The Franchising Boom Economic impact of franchising on the U.S. economy: $2.3 trillion. A new franchise opens somewhere in the world every 8 minutes.
Introduction to Franchising Introduction Franchising is growing in popularity. In 2007 (the most recent year statistics are available), nearly 766,000 franchise outlets were operating in the U.S. History The word “franchise” comes from an old dialect of French and means privilege or freedom. Many of the most popular franchises, including KFC (1952), McDonald’s (1955), and H&R Block (1958) started as early as the 1950s. 15-5
What is Franchising? Franchising Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment. Some franchisors are established firms (like McDonald’s) while others are first-time enterprises being launched by entrepreneurs. 15-6
FranchisingA system in which semi-independentbusiness owners (franchisees) payfees and royalties to a parentcompany (franchiser) in return forthe right to become identified withits trademark, to sell its products orservices, and often to use itsbusiness format and system.
The Franchising RelationshipElement The Franchisor The FranchiseeSite Selection Oversees and approves; may choose site Chooses site with franchisor’s approvalDesign Provides prototype design Pays for and implements designEmployees Makes general recommendations and Hires, manages, and fires training suggestions employeesProducts and Services Determines product or service line Modifies only with franchisor’s approvalPrices Can only recommend prices Sets final pricesPurchasing Establishes quality standards and suppliers Must meet quality standards and purchase only from approved suppliersAdvertising Develops and coordinates national ad Pays for national ad campaign; complies with campaign; may require minimum level of local advertising requirements; gets franchisor spending on local advertising approval on local adsQuality Control Sets quality standards and enforces them Maintains quality standards; trains employees with inspections; trains franchisees to implement quality systemsSupport Provides support through an established Operates business on a day-to-day basis with business system franchisor’s support FIGURE 6.1 Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5. 6-8
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?”
Greenstar : Social Franchise in Healthcare (Pakistan) Less than 100 Employees Served 3.0 million patients, with high quality affordable services to more poor patients than government clinics 8,000 in Facilities Network 24,000 health professionals trained in reproductive and family health issues; 1.3 million people contacted regarding reproductive health awareness; 19 family health care products through 80,000 retail outlets 2nd largest provider of family planning services, over 26% of all contraceptives
Vitaloc : Social Enterprise Franchise http://www.youtube.com/watch?feature=player_embedded&v=GpfLAzk_DOo#! Live Music Station to provide services for pain relief and healthy lifestyle Employment of at least 1/3 of staff from disadvantaged groups, such as middle-aged unemployed, single mom To provide small business for early retirees and laid-off workers to rebuild their confidence
Types of Franchising Tradename Product distribution Pure (Business format)
Two Types of Franchise Systems 1 of 2 Product and Trademark Franchise An arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of dealers or distributors. For example, General Motors has established a network of dealers that sell GM cars and use the GM trademark in their advertising and promotions. Other examples of product and trademark franchisors include agricultural machinery dealers, soft drink bottlers, and beer distributorships. 15-14
Two Types of Franchise Systems 2 of 2 Business Format Franchise An arrangement under which the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance. Fast-food restaurants, convenience stores, and motels are well-known examples of business format franchises. Business format franchises are by far the most popular form of franchising, particularly for entrepreneurial firms. 15-15
Top 10 Business Lines in Which Business Format Franchises Operate1. Automotive2. Commercial and residential services3. Quick service restaurants4. Table/Full-service restaurants5. Retail food6. Lodging7. Real Estate8. Retail products and services9. Business services10. Personal services 15-16
Types of Franchise Agreements1 of 3 Individual Franchise Agreement 15-17
Types of Franchise Agreements2 of 3 Area Franchise Agreement 15-18
Types of Franchise Agreements3 of 3 Master Franchise Agreement 15-19
When to Franchise? From the Franchisor’s Point of View 1 of 2 Approach Franchising With Caution and Care Establishing a franchise system should be approached carefully and deliberately. Franchising is a complicated business endeavor, and an entrepreneur must look closely at all its aspects before deciding to franchise. Regulations An entrepreneur should also be aware that over the years a number of fraudulent franchise organizations have come and gone and have left financially ruined franchise owners behind. 15-20
When to Franchise? 2 of 2 When Is Franchising Most Appropriate? Franchising is most appropriate when a firm has a strong or potentially strong trademark, a well-designed business method, and a desire to grow. A franchise system will ultimately fail if the franchisee’s brand doesn’t add value for customers and its business method is flawed or poorly developed. 15-21
Nine Steps in Setting Up a Franchise System 15-22
Qualities to Look for in Prospective Franchisees• Good work ethic• Ability to follow instructions• Ability to operate with minimal supervision• Team oriented• Experience in the industry in which the franchise competes• Adequate financial resources and good credit history• Ability to make suggestions without becoming confrontational or upset if the suggestions are not adopted• Represents the franchisor in a positive manner 15-23
Ways Franchisors Can Develop the Potential of Their Franchisees• Provide mentoring that supersedes routine training.• Keep operating manuals up-to-date.• Keep products, services, and business systems up to date.• Solicit input from franchisees to reinforce their importance in the larger system.• Encourage franchisees to develop a franchise association.• Maintain the franchise system’s integrity. 15-24
Advantages and Disadvantages of Franchising as a Method of Business Expansion Advantages Disadvantages• Rapid, low-cost market expansion • Profit sharing• Income from franchise fees and • Loss of control royalties • Friction with franchisees• Franchisee motivation • Managing growth• Access to ideas and suggestions • Differences in required business skills• Cost savings • Legal expenses• Increased buying power 15-25
Buying a Franchise From the Franchisee’s Point of View 1 of 3 Buying a Franchise Purchasing a franchise is an important business decision involving a substantial financial commitment. Potential franchise owners should strive to be as well informed as possible before purchasing a franchise and should be aware that it is often legally and financially difficult to exit a franchise relationship. 15-26
Benefits of Franchising A business system Management training and support Start-up Ongoing Brand name appeal “Cloning” Standardized quality of goods and services
Benefits of Franchising National advertising programs Franchisees contribute 1% to 5% of sales Financial assistance Only 20% of franchisors offer direct financial assistance to franchisees. SBA – Franchise Registry Proven products and business formats
FIGURE 6.3 Franchisor Financial Assistance Source: The Profile of Franchising 2006, International Franchise Association (Washington, DC: 2007), p. 70.
Benefits of Franchising Centralized buying power Site selection and territorial protection Important issue: Territorial encroachment Greater chance for success
Drawbacks of Franchising 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 Strict adherence to standardized operations Restrictions on purchasing Approved suppliers only
Drawbacks of Franchising (continued) Limited product line Contract terms and renewal Average term = 10.3 years Unsatisfactory training programs Market saturation Less freedom – “No independence” “Happy prisoners”
Buying a Franchise 2 of 3 Answering the following questions will help determine if franchising is right for you• Are you willing to take orders? Franchises are typically very particular about how outlets operate.• Are you willing to be part of a franchise “system” rather than be an independent businessperson?• How will you react if you make a suggestion to your franchisor and your suggestion is rejected?• What are you looking for in a business? How hard do you want to work? 15-33
Buying a Franchise 3 of 3 Answering the following questions will help determine if franchising is right for you• How willing are you to put your money at risk? How will you feel if your business is operating at a net loss but you will have to pay royalties on your gross income? 15-34
The Costs Involved With Buying a Franchise 1 of 3 Initial Franchise Fee The initial fee varies depending on the franchisor. Capital Requirements The costs vary but may include the cost of buying real estate, the cost of putting up a building, the purchase of inventory, and the cost of obtaining a business license. Continuing Royalty Payment Is usually around 5% of monthly gross income. 15-35
The Costs Involved With Buying a Franchise 2 of 3 Advertising Fees Franchisees are often required to pay into a national or regional advertising fund. Other Fees Other fees may be charged for various activities, including: Training additional staff Providing management expertise when needed Providing computer assistance Providing a host of other items or support services 15-36
The Costs Involved With Buying a Franchise 3 of 3 15-37
Advantages and Disadvantages of Buying a Franchise Advantages Disadvantages• A proven product or service within • Cost of the franchise an established market • Restrictions on creativity• An established trademark or • Duration and nature of the commitment business system • Risk of fraud, misunderstandings, or• Franchisor’s training, technical lack of franchisor commitment expertise, and managerial expertise • Problems of termination or transfer• An established marketing network • Poor performance on the part of other• Franchisor ongoing support franchisees• Availability of financing • Potential for failure• Potential for business growth 15-38
Watch Out! Common Misconceptions About Franchising• Franchising is a safe investment.• A strong industry ensures franchise success.• A franchise is a “proven” business system.• There is no need to hire a franchise attorney or an accountant.• The best systems grow rapidly and it is best to be part of a rapid-growth system.• I can operate my franchise outlet for less than the franchisor predicts.• The franchisor is a nice person—he’ll help me out if I need it. 15-40
Ten Myths of Franchising1. 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.
Ten Myths of Franchising (continued)5. All franchises are the same.6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful.3. Anyone can be a satisfied, successful franchise owner.
Ten Myths of Franchising (continued)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.
Legal Aspects of the Franchise Relationship Federal Rules and Regulations The offer and sale of a franchise are regulated at the federal level. According to Federal Trade Commission (FTC) rule 436, franchisors must furnish potential franchisees with written disclosures that provide information about the franchisor, the franchised business, and the franchise relationship. In most cases, the disclosures are made through a lengthy document referred to as the Franchisor Disclosure Document (FDD). The FDD contains 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor. 15-44
Franchising and the LawFranchise 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
The Right Way to Buy a Franchise Evaluate yourself - What do you like and dislike? Research your market. Consider your franchise options. Get a copy of the Franchisor’s Franchise Disclosure Document (FDD) – and read it! Talk to existing franchisees. Ask the franchisor some tough questions. Make your choice.
Factors That Make a Franchise Appealing In addition to the text Unique concept or marketing approach Profitability Registered trademark Business system that works Solid training program Affordability Positive relationship with franchisees
More About Franchising 1 of 2 Franchise Ethics The majority of franchisors and franchisees are highly ethical. There are certain features of franchising, however, that make it subject to ethical abuse. These features are as follows: The get-rich-quick mentality The false assumption that buying a franchise is a guarantee of business success Conflicts of interest between franchisors and franchisees 15-48
Detecting Dishonest Franchisers In addition to the text Claims that the contract is “standard; no need to read it.” Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Poorly prepared operations manual. Promises of future earnings with no documentation. High franchisee turnover or termination rate. Unusual amount of litigation by franchisees.
Detecting Dishonest Franchisers (continued) In addition to the text Attempts to discourage your attorney from evaluating the contract before signing it. No written documentation. A high pressure sale. Claims to be exempt from federal disclosure laws. “Get rich quick” schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions.
More About Franchising 2 of 2 International Franchising International opportunities for franchising are becoming more prevalent for the following two reasons: The markets for certain franchised products in the U.S. have become saturated (i.e., fast food). The trend toward globalization continues. Steps to take before buying a franchise overseas: Consider the value of the franchisor’s name in the foreign country. Get a good lawyer. Determine whether the product or service is saleable in the foreign country. Find out how much training and support you will receive from the franchisor. 15-51
Trends Shaping Franchising Changing face of franchisees Better educated with more business acumen Multiple-unit franchising 52% of franchisees operate multiple outlets (and growing) International opportunities IFA Survey: 52% of U.S. franchisors have an international presence Master franchising
Trends Shaping Franchising Smaller, nontraditional locations Intercept marketing Conversion franchising 72% of North American franchisors use as a growth strategy Piggybacking (or combination or multi-branded franchising) Serving dual-career couples and baby boomers
ConclusionFranchising: Is a key part of the small business sector Increases the chance of business success for the entrepreneur Growth continues
Further Reading Scarborough, Norman, M. 2011. Essentials of Entrepreneurship and Small Business Management. 6th edition. Pearson. Judd, R.J. and Justis, R.T. (2008) Franchising: An entrepreneur’s guide. 4th ed. Thomson Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching new ventures 4th edition, Pearson. Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Entrepreneurship and Small Business. 3rd Asia Pacific edition. John Wiley.
Appendix : A Franchise Checklist - 4Pn Productn Profitabilityn Processn People