CHAPTER 6CHAPTER 6

FRANCHISESFRANCHISES

CHAPTER OBJECTIVES!

To explain the importance of franchises to the To explain the importance of franchises to the economy.economy.To discuss why franchising thrives.To discuss why franchising thrives.To explain the advantages and disadvantages of To explain the advantages and disadvantages of franchise.franchise.To detail a procedure for evaluating a franchise To detail a procedure for evaluating a franchise opportunity.opportunity.To explain why contracts are the backbone of any To explain why contracts are the backbone of any franchiserfranchiser--franchisee relationships.franchisee relationships.

LECTURE OUTLINE!LECTURE OUTLINE!

I.I. History and definition of franchising.History and definition of franchising.A.A. General motors began franchising dealerships in 1898.General motors began franchising dealerships in 1898.B.B. There were many oil, grocery, motel, and fastThere were many oil, grocery, motel, and fast--food food

franchises by the early part of the twentieth century.franchises by the early part of the twentieth century.C.C. The definition of a franchise varies from industry to The definition of a franchise varies from industry to

industry.industry.D.D. Franchising benefits the franchiser also.Franchising benefits the franchiser also.E.E. Today’s franchising has invaded most industries.Today’s franchising has invaded most industries.F.F. As franchising matures, bigness will follow.As franchising matures, bigness will follow.

LECTURE OUTLINE!LECTURE OUTLINE!

II. Kinds of franchising systems.II. Kinds of franchising systems.A.A. Manufacturer and manufacturer.Manufacturer and manufacturer.B.B. Manufacturer and wholesaler.Manufacturer and wholesaler.C.C. Manufacturer and retailer.Manufacturer and retailer.D.D. Wholesaler and wholesaler.Wholesaler and wholesaler.E.E. Wholesaler and retailer.Wholesaler and retailer.F.F. Retailer and retailer.Retailer and retailer.G.G. Services and services.Services and services.

LECTURE OUTLINE!LECTURE OUTLINE!III. Myths about franchising.III. Myths about franchising.A.A. The promise of instant wealth has spawned many The promise of instant wealth has spawned many

get rich quick franchising schemes.get rich quick franchising schemes.B.B. It is a myth that franchisees are independent It is a myth that franchisees are independent

businesspersons.businesspersons.C.C. Another myth is that franchises are risk free.Another myth is that franchises are risk free.

LECTURE OUTLINE!LECTURE OUTLINE!IV. Selecting a franchise.IV. Selecting a franchise.A.A. Before buying a franchise, an entrepreneur should follow Before buying a franchise, an entrepreneur should follow

a stepa step--byby--step evaluation procedure.step evaluation procedure.1.1. Do a self analysis.Do a self analysis.2.2. Choose a product or service.Choose a product or service.3.3. Seek out likely franchises.Seek out likely franchises.B. The entrepreneur should use a checklist to thoroughly B. The entrepreneur should use a checklist to thoroughly

analyze a franchise opportunity.analyze a franchise opportunity.1.1. The franchise opportunity itself.The franchise opportunity itself.2.2. The franchiser.The franchiser.3.3. The franchisee.The franchisee.44 The marketThe market

SELECTING A FRANCHISE!SELECTING A FRANCHISE!B. The entrepreneur should use a checklist to B. The entrepreneur should use a checklist to

thoroughly analyze a franchise opportunity.thoroughly analyze a franchise opportunity.1.1. The franchise opportunity itself.The franchise opportunity itself.2.2. The franchiser.The franchiser.3.3. The franchisee.The franchisee.4.4. The market.The market.C. An entrepreneur should ask the franchiser for it’s C. An entrepreneur should ask the franchiser for it’s

disclosure statement.disclosure statement.D. An entrepreneur should hire a lawyer.D. An entrepreneur should hire a lawyer.

SELECTING A FRANCHISE!SELECTING A FRANCHISE!E. It is vital that both franchiser and franchisee behave E. It is vital that both franchiser and franchisee behave

ethically.ethically.1.Definition of good faith.1.Definition of good faith.2. Example of good faith and fair play.2. Example of good faith and fair play.F. The entrepreneur must be sure to understand the franchise F. The entrepreneur must be sure to understand the franchise

contract.contract.1.1. It is crucial to know under what conditions the It is crucial to know under what conditions the

franchisee may pull out of a franchise contract.franchisee may pull out of a franchise contract.2.2. A franchisee’s must know under what conditions the A franchisee’s must know under what conditions the

franchiser may cancel a contract.franchiser may cancel a contract.3.3. The franchisee’s right concerning sale or transfer to the The franchisee’s right concerning sale or transfer to the

franchise must be clear. franchise must be clear.

SELECTING A FRANCHISE!SELECTING A FRANCHISE!

G. Evaluating the franchiser’s training G. Evaluating the franchiser’s training program is crucial.program is crucial.

H. Entrepreneurs must be sure to get an H. Entrepreneurs must be sure to get an accurate estimate of what a franchise will accurate estimate of what a franchise will cost.cost.

LECTURE OUTLINE!LECTURE OUTLINE!

V. Franchising opportunities.V. Franchising opportunities.A.A. There are many minority franchisees now There are many minority franchisees now

than in the past.than in the past.B.B. Minorities have a long way to go before Minorities have a long way to go before

they own their proportionate share of they own their proportionate share of franchises.franchises.

LECTURE OUTLINE!LECTURE OUTLINE!

VI. Women in franchising.VI. Women in franchising.A.A. Until the 1980’s Few franchisees were Until the 1980’s Few franchisees were

women.women.B.B. The number of franchises owned by The number of franchises owned by

women is growing but is still small.women is growing but is still small.

LECTURE OUTLINE!LECTURE OUTLINE!

VII. Global franchising.VII. Global franchising.A.A. There is a global boom in franchising.There is a global boom in franchising.B.B. Global franchising is a two way process, Global franchising is a two way process,

with foreign franchisers seeking with foreign franchisers seeking opportunities in the U.S.opportunities in the U.S.

DISCUSSION AND REVIEW DISCUSSION AND REVIEW QUESTIONS!QUESTIONS!

Why would someone choose to buy a franchise rather Why would someone choose to buy a franchise rather than start a venture from scratch or buy out an than start a venture from scratch or buy out an existing business.existing business.

This question requires a personal response from This question requires a personal response from students, with little comment from the instructor.students, with little comment from the instructor.

DISCUSSIONAND REVIEW DISCUSSIONAND REVIEW QUESTIONS!QUESTIONS!

How would you evaluate a franchise opportunity?How would you evaluate a franchise opportunity?Students generally respond by repeating the step by Students generally respond by repeating the step by

step procedure suggested in the chapter.step procedure suggested in the chapter.Do a self analysis.Do a self analysis.Choose a product or service.Choose a product or service.Search out likely franchise candidates.Search out likely franchise candidates.Review a checklist of questions.Review a checklist of questions.Hire a lawyer.Hire a lawyer.Compare franchises and pick out the best one. Compare franchises and pick out the best one.

DISCUSSION AND REVIEW DISCUSSION AND REVIEW QUESTIONS!QUESTIONS!

Describe the various franchising arrangements between Describe the various franchising arrangements between franchiser and franchisee.franchiser and franchisee.

Students generally respond by repeating the franchising Students generally respond by repeating the franchising arrangements.arrangements.Business format franchises.Business format franchises.Piggyback franchises.Piggyback franchises.Conversion franchises.Conversion franchises.Distributors.Distributors.Area franchises.Area franchises.Single unit franchises. > Trade name franchises Single unit franchises. > Trade name franchises Multi unit franchises. > Sub franchisesMulti unit franchises. > Sub franchises

DEFINE THESE TERMS!DEFINE THESE TERMS!

FRANCHISEFRANCHISEFRANCHISORFRANCHISORFRANCHISEEFRANCHISEE

UFOCUFOCFRANCHISE FEEFRANCHISE FEEWORKING CAPITOLWORKING CAPITOLROYALTIESROYALTIES

FRANCHISE!FRANCHISE!

A continuing relationship between the A continuing relationship between the franchiser and the franchisee in which the franchiser and the franchisee in which the sum total of the franchiser's knowledge, sum total of the franchiser's knowledge, image, success, and manufacturing and image, success, and manufacturing and marketing techniques are supplied to the marketing techniques are supplied to the franchisee for a fee.franchisee for a fee.

FRANCHISOR!FRANCHISOR!

The seller of rights to market a product or The seller of rights to market a product or service. A service. A franchisor franchisor may also be one who may also be one who sells the rights to use a process for sells the rights to use a process for manufacturing a product.manufacturing a product.

UFOCUFOCA statement giving detailed information about a A statement giving detailed information about a

franchise. All franchisers are now required by franchise. All franchisers are now required by federal law to provide disclosure statements giving federal law to provide disclosure statements giving such information as:such information as:Financial statements.Financial statements.A description of any lawsuits in which the franchiser A description of any lawsuits in which the franchiser has been involved.has been involved.A list of names of other franchisersA list of names of other franchisersA complete statement of the basis of any profit A complete statement of the basis of any profit claims made to the would be franchisee.claims made to the would be franchisee.

FRANCHISE FEE!FRANCHISE FEE!A payment to the franchiser that gives the franchisee A payment to the franchiser that gives the franchisee

the right to do business at a specific site or in a the right to do business at a specific site or in a specific territory. specific territory.

WORKING CAPITOL!WORKING CAPITOL!

The money needed to buy inventory and pay The money needed to buy inventory and pay salaries until costumers pay up.salaries until costumers pay up.

ROYALTIES!ROYALTIES!

Payments made to the franchiser throughout Payments made to the franchiser throughout the life of the franchise to cover such the life of the franchise to cover such services supplied by the franchiser as services supplied by the franchiser as advertising, financial statements, and advertising, financial statements, and management advice. Royalties Generally management advice. Royalties Generally range from 0 to 15 percent of sales revenue. range from 0 to 15 percent of sales revenue.

KICK BACK NOW, RELAX, KICK BACK NOW, RELAX, GET READY FOR CHAPTER GET READY FOR CHAPTER

77REVIEW YOUR NOTES ALSO!!REVIEW YOUR NOTES ALSO!!