Franchising - Dr. Nghia Trong Nguyen · An entrepreneur whose power is limited by a contractual agreement with a franchisor •Franchisor The party in the franchise contract that

Chapter 4 Copyright © 2010 by Nelson Education Ltd.

Franchising

4

PowerPoint Presentation by

Ian Anderson, Algonquin College


Looking Ahead

After studying this chapter, you should be able to:

1. Describe the significance of franchising in Canada.

2. Identify the major advantages and limitations of franchising

3. Discuss the process for evaluating a franchise opportunity.

4. Evaluate franchising from the franchisor’s perspective.

5. Describe the critical franchisor/franchisee relationship.

6. Understand issues related to franchise regulation in Canada and

know the warning signs of franchise fraud

4-2


Franchising Terms

• Franchising

A marketing system revolving around a two-party legal

agreement, whereby the franchisee conducts business

according to the terms specified by the franchisor

• Franchise contract

The legal agreement between franchisor and franchisee

• Franchise

The privileges conveyed in the franchise contract

…continued

4-3


Franchising Terms

• Franchisee

An entrepreneur whose power is limited by a

contractual agreement with a franchisor

• Franchisor

The party in the franchise contract that specifies

the methods to be followed and the terms to be

met by the other party

4-4


Types of Franchises

• Product and Trade Name Franchise

Grants the right to use a widely recognized product or name

(i.e. gas stations)

• Business-Format Franchise

Provides an entire marketing system and ongoing guidance

from the franchisor (i.e. fast-food)

• Piggyback Franchising

The operation of a retail franchise within the physical facilities

of a host store (i.e. complementary food service in a fast food

store) …continued

4-5


• Master Licensee

An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory

• Multiple-Unit Ownership

Holding by a single franchisee of more than one franchise from the same company

• Area Developers

Individuals or firms that obtain the legal right to open several franchised outlets in a given area

4-6

Types of Franchises


Exhibit 4-2

Pluses Minuses

Formalized training

Financial assistance

Proven marketing

methods

Managerial assistance

Quicker startup time

Overall lower failure

rates

Franchise fees

Royalties

Restrictions on growth

Less independence in

operations

Franchisor may be sole

supplier of some

supplies

Termination/renewal

clauses

The Pros and Cons of Franchising


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 assistance • Franchisor-aided

• Limitations

–Franchise costs

• Initial franchise fee

• Investment costs

• Royalty payments

• Advertising costs

–Restrictions on

Business Operations

–Loss of independence

4-8


The Advantages of Franchising

• Proven marketing concept and customer base – The use of an established, nation-wide brand.

• Training – May help alleviate managerial weaknesses.

• Financial assistance – Start-up business costs are normally high and thus by teaming up with a

franchise organization, the individual can increase her/his chance of

receiving financial help.

• Operating assistance – The franchisor provides a range of operating services including site

selection, bulk purchasing of equipment, and inventory.

4-9


Limitations of Franchising:

Restriction of Business Operations

• Franchise costs

• Restrictions

– Sales territory

– Site approval required

– Outlet appearance

– Goods/services to be sold

– Resale of franchise

– Advertising and hours of operation

• Loss of independence

4-10


Evaluating Franchise Opportunities

• Locating a Franchise Opportunity

• Investigating the Potential Franchise

Information sources

• Independent, third-party sources

• Franchisors themselves

• Existing and previous franchisees

4-11


Explanation of Costs

• Franchise fee

• First and Last Month’s

Rent

• Leasehold Improvements

• Equipment

• Furniture and Fixtures

• Signage

• Insurance, Licences and

Permits

• Training

• Initial Inventory

• Working Capital

• Royalty


Global Franchising Opportunities

• Historically, many Canadian franchisors have

expanded into the United States.

• Canadian franchising enterprises are now

expanding into countries beyond North America.

– Yogen Fruz – 1,580 stores in 30 countries

• Attractive growth prospects:

– Industrializing countries with large populations

– Countries with an expanding middle class and higher

disposable income

4-13


Investigating the Franchise Candidate

• Three sources of information:

– independent third party sources

– franchisors

– existing and previous franchisee

This is a 2-way effort

4-14


Franchisor as a

Source of Information

• Disclosure document

– a detailed statement of information such as the

franchisor’s finances, experience, size, and

involvement in litigation

4-15


Selling a Franchise

• Why would a businessperson wish to become a

franchisor? Three benefits can be identified:

1. Reduction of capital requirements

2. Increase in management motivation

3. Speed of expansion

• Drawbacks associated with franchising from the

franchisor’s perspective:

1. Reduction in control

2. Sharing of profits

3. Increase in operating support

…continued

4-16


Franchise Relationship

• Elements to look for in a franchise relationship:

• Responsiveness

• Empathy

• Communication

• Dependability

• Accessibility

• Give and take

• Anticipation

• Structure

• Open-mindedness

4-17


Franchising Frauds

• The Rented Rolls Royce Syndrome • Don’t you want to be like me?

• The Hustle • Territories are going fast…

• The Cash-Only Transaction

• The Boast • We never met an exaggeration we didn’t like

• The Big-Money Claim • Earn $10,000/month in your spare time

• The Disclosure Dance • Umm, we’re not a public corporation

4-18

Documents

Franchising - Dr. Nghia Trong Nguyen · An entrepreneur whose power is limited by a contractual agreement with a franchisor •Franchisor The party in the franchise contract that