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Ch. Outline-Franchising

1. The terminology and structure of financing

2. The pros and cons of franchising

3. Evaluating franchising opportunities

4. Legal considerations in franchising

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1.        Franchising Terms (Suggestion: the terminology of franchising is confusing to many students, so emphasize correct usage of the terms below.)

► Franchising: a marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to terms specified by the franchisor

► Franchisee: the party in a franchise contract who is granted selling and other privileges whose power is limited by the franchising organization

► Franchisor: the party in a franchise contract who specifies the methods to be followed by the franchisee

► Franchise contract: the legal agreement between franchisor and franchisee

► Franchise: the privileges in a franchise contract► Product and trade name franchising: a franchise relationship granting

the right to use a widely recognized product name► Business format franchising: the franchisee obtains an entire

marketing system and ongoing guidance from the franchisor► Master licensee: firm or individual acting as a sales agent with the

responsibility for finding new franchisees within a specified territory► Multiple-unit ownership: a situation in which a franchisee owns more

than one franchise from the same company► Area developers: individuals or firms that obtain the legal right to

open several outlets in a given area► Piggyback franchising: the operation of a retail franchise within the

physical facilities of a host store

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Industry Associations(example: IFA)

Business/ConsultingFirms (example:

Franchise Connections)

Federal/State Agencies(example: FTC)

FranchiseFacilitators

Franchisee-Owned

Operating Units

Franchisor

Company-OwnedStores

FranchiseParties

Master Licensee/Area Developers

Fig. 6-1

The Structure of Franchising

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Alternative Franchising Systems

System A

Franchisor is a producer or creator

System B

Franchisor is a wholesaler

System C

Franchisor is a producer or creator

Franchisee is a wholesaler, such as a soft drink bottler

Franchisee is a retail establishment, such as a hardware store

Franchisee is a retail establishment, such as a fast-food restaurant

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The Pros and Cons of Franchising

• Advantages– Probability of success

• Proven line of business• Pre-qualification of

franchisee

– Training• Franchisor-provided

– Financial assistance• Franchisor assistance

– Operating benefits• Franchisor-aided

• Limitations–Franchise costs

• Initial franchise fee

• Investment costs

• Royalty payments

• Advertising costs

–Restrictions on Business Operations

–Loss of independence

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Limitations of Franchising (Franchisees Perspective)

1. Franchise Costs

2. Restrictions on Business Operations

3. Loss of Independence

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Evaluating Franchise Opportunities

• Locating a Franchise Opportunity

• Investigating the Potential Franchise– Information sources

• Independent, third-party sources

• Franchisors themselves

• Existing and previous franchisees

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Franchising from theFranchisor’s Perspective

• Benefits– Reduction of capital

requirements– Increase in

management motivation

– Speed of expansion

• Drawbacks– Reduction in

control– Sharing of profits– Increase in

operational support costs

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Franchise Disclosure Requirements

A. Basic Requirement: Franchisors must furnish potential franchisees with written disclosures providing important information about the franchisor, the franchised business and the franchise relationship, and give them at least ten business days to review it before investing.

B. Disclosure Option: Franchisors may make the required disclosures by following either the Rule’s disclosure format or the Uniform Franchise Offering Circular Guidelines prepared by state franchise law officials.

C. Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures.

D. No Filing: The Rule requires disclosure only. Unlike state disclosure laws, no registration, filing, review or approval of any disclosures, advertising or agreements by the FTC is required.

E. Remedies:The Rule is a trade regulation rule with the full force and effect of federal law. The courts have held it may only be enforced by the FTC, not private parties. The FTC may seek injunctions, civil penalties and consumer redress for violations.