INTERNATIONAL BUSINESS MANAGEMENT

LESSON 6:
WHAT IS FRANCHISING?

Learning Objective minds of current and future customers about how the
• To understand the concept of Franchising in International company’s products and services can help them. It is a method
Context for distributing products and services that satisfy customer
needs.
• To analyze what are the prerequisites of Franchising Franchising is a network of interdependent business relation-
• To understand the merits of Franchising ships that allows a number of people to share:
• To understand the demerits of Franchising in International • A brand identification
Context • A successful method of doing business
• To find out the difficulties firms have faced in going for • A proven marketing and distribution system
Franchising In short, franchising is a strategic alliance between groups of
people who have specific relationships and responsibilities with
• To look at Franchising from practical point of view
a common goal to dominate markets, i.e., to get and keep more
• To search for various business opportunities in Franchising customers than their competitors.
• To understand how to evaluate a franchising Arrangement There are many misconceptions about franchising, but probably
• To learn from the past mistakes of corporate world the most widely held is that you as a franchisee are “buying a
franchise.” In reality you are investing your assets in a system to
Interaction utilize the brand name, operating system and ongoing support.
A company franchises because it wants to quickly and in great
You and everyone in the system are licensed to use the brand
numbers replicate its successful company operations without
name and operating system.
significantly increasing its debt. Because it has been successful at
The business relationship is a joint commitment by all franchi-
teaching its own employees to operate the business, the
sees to get and keep customers. Legally you are bound to get
company believes it can repeat the same success by teaching
and keep them using the prescribed marketing and operating
others to do it.
systems of the franchiser.
In short, franchising is a strategic alliance between groups of
To be successful in franchising you must understand the
people who have specific relationships and responsibilities with
business and legal ramifications of your relationship with the
a common goal to dominate markets, i.e., to get and keep more
franchiser and all the franchisees. Your focus must be on
customers than their competitors.
working with other franchisees and company managers to
CONCEPTUAL DISCUSSION ON market the brand, and fully use the operating system to get and
keep customers.
What is Franchising?
Throughout this article we will discuss in detail some of the
You are an executive who is being displaced or who is dissatis-
benefits of conducting business as part of a larger group.
fied with the way you are being treated by your company.
Other franchisees and company-operated units are not your
Recently you have been thinking about putting your resume on
competition. The opposite is true. They and you share the task
the street, but more often than not you have found yourself
of establishing the brand as the dominant brand in all markets
thinking about going into business for yourself.
entered and reinforcing the customers’ familiarity with and trust
Whenever you think about going into business for yourself,
in the brand. So in this respect you are working as a team with
you think about the horror stories and statistics you read in
others in the system. Other franchisees share with you the
USA Today and the Wall Street Journal about the failure rate of
responsibility for quality, consistency, convenience, and other
independent businesses. Those statistics dampen your desire to
factors that define your franchise and insures repeat business for
own your own business.
everyone. Increasing the value of the brand name is a shared
Yet every week in those same newspapers you see ads by
responsibility of the franchiser and franchisee.
companies offering franchise opportunities. If you want to be
An “ownership mentality” destroys the reason franchised and
self employed and are intrigued by the idea of operating a
company-operated units are successful. Think about it. If you
franchise and want to find out more about selecting the right
think you “bought” a franchise, you become an “owner” and
one for you, read on.
begin to think and act like an owner. You will want to change
What Is Franchising? the system because of your needs, you will wonder what you
Franchising is one of three business strategies a company may are paying the royalty for, and you will begin thinking of other
use in capturing market share. The others are company owned franchisees as your competitors. For these and many other
units or a combination of company owned and franchised reasons you do not want to think of yourself as an “indepen-
units. dent owner.”
Franchising is a business strategy for getting and keeping
customers. It is a marketing system for creating an image in the As a franchisee you own the assets of your company, which you

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have chosen to invest in someone else’s brand and operating corporation. But you will “do business as a licensee of the

INTERNATIONAL BUSINESS MANAGEMENT

system and ongoing support. You own the assets of your franchiser.
company, but you are licensed to operate someone else’s Before You Select A Franchise . . .
business system.
Step 1: Evaluate Yourself
Finally, your desire to become a franchisee must be grounded in
Your job is to make an informed business decision about
your belief that you can be more successful using someone
whether a franchiser’s business opportunity meets your needs
else’s brand and operating according to their systems and
and whether you can provide what the franchiser wants and
methods, than you could if you opened up your own indepen-
needs in a franchisee.
dent business and competed against them. You want to look
You need to ask yourself basic questions:
for a franchiser who is building a system of interdependent
What do you want from life at this time? What are your wants,
franchisees who are committed to getting and keeping custom-
needs, and desires? What are your goals, objectives, and
ers, to growing faster than the market, to growing faster than
dreams? What are you looking for in a business? Have you
the competitors, and to do all of that with high margins. When
decided to leave what you are now doing–not just the job, but
you discover a franchiser who understands this relationship, you
also the profession?
have a franchisers worth your consideration.
Have you made a decision to become a part of another
The Strength of Franchising organization? Remember that in franchising you joined
Franchising is the most popular system for growing a business someone else’s business. You are going to be using their
in the United States today. According to every government marketing system to generate customers and their operating
survey, franchising has experienced explosive growth since the system to satisfy them.
mid-70s and is expected to be the leading method of doing Do you have the kind of personality that can accept running the
business in the new century. business according to someone else’s plan without feeling that
In the United States, there are over 2,500 franchise systems. it compromises your individuality? Do you have an interest in
These systems have in excess of 534,000 franchise units, which doing this kind of work for the length of the agreement? Have
represent 3.2% of the total businesses. This 3.2% of all you ever worked for one company for five or ten years? Do you
businesses controls over 35% of all retail and service revenue in have related skills, knowledge, abilities, and work-related
the U.S. economy. experiences similar to the ones required for running the
Franchising advantages over going into business for yourself franchise you are considering? Do you have the financial
include; opening quicker, experiencing success sooner, develop- resources to open and operate the business successfully? Can
ing a customer base faster, having less risk and being more the business support your lifestyle needs? Which of the
profitable. franchises you are reviewing meets your financial needs short
Your success as a franchisee is based on the proven success of and long term?
the franchiser to operate company units and upon the success Step 2: Evaluate the Franchise
of existing franchisees. [It should be able to show that the Opportunity
business can be successful in various markets and in different Evaluate the legal documents from a business perspective.
conditions.] Determine whether the franchiser has territory policies that
A company franchises because it wants to quickly and in great might make franchisees less competitive in a highly competitive
numbers replicate its successful company operations without environment. Many prospective franchisees erroneously believe
significantly increasing its debt. Because it has been successful at that having a large territory is best for them. It could, in fact, be
teaching its own employees to operate the business, the the worst thing for them. For example, if you have too few
company believes it can repeat the same success by teaching franchisees in a market and competitors have more units than
others to do it. you have, it could leave you at a disadvantage in terms of
In franchising, the operating system becomes identified with dominating the market for your product or service in your area.
the brand or trade name that you license as a franchisee. Each Look for a franchiser who can communicate a strategy not just
franchise system uses precise methods to service and satisfy the for market presence but for dominating markets; look for a
customer. By documenting these practices, the franchiser franchiser interested in establishing a competitive edge and
institutionalizes the buying experience. Because customers don’t increasing market share. If a franchiser cannot talk about these
like surprises this consistency in operations, unit to unit, builds issues, it is entirely possible the franchiser is using franchising as
customer loyalty to the brand. a way to generate franchise fees and royalty revenue rather than
Franchising is successful because we Americans are people of to establish a competitive position in the marketplace.
habit and are brand-driven when we purchase goods and Evaluate the marketing/advertising fee. Many franchisers and
services. We trust brands that we see everywhere, every day. We prospective franchisees erroneously believe that a low marketing
tend to be loyal to a product or service delivered to us the same fee is a good thing. In fact, the marketing fee should be related
way all the time. to the amount of money each franchisee needs to contribute to
Investing in a Franchise support an advertising campaign that will generate enough new
In reality you are taking your assets, which you own, and and repeat business for each of them. A 1% advertising fee may
investing them in someone else’s’ brand and operating system. look good now, but when you need 5% from everyone to be
You will always own your assets. You will always own your competitive, it might not be possible to convince all franchisees

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 to participate. Corporate Example
INTERNATIONAL BUSINESS MANAGEMENT

Evaluate the effectiveness of the Franchise Advisory Council. Bob Gappa is president of Management 2000, Houston, TX, a
Does the franchiser incorporate the franchisees’ input in the firm specializing in assisting companies in the use of franchis-
decisions that affect the future direction of the system? Does ing as a growth strategy. A respected leader in the field of
the franchiser involve franchisees’ input in decisions? franchise consulting, Bob’s 25 years’ experience includes design
Be sure you can answer the question “How will I make money and implementation of systems in franchise development and
in this business?” There should be a very simple answer to this operations, compensation planning, human resource manage-
question. It will not violate earnings claims restrictions for the ment, strategic planning, and marketing strategies. Bob has an
franchiser to answer it because you are not asking “How much in-depth understanding of the process of connecting
money will I make?” You simply want to know how money is franchisers with franchisees and is currently offering a program
made in the business. Spend as much time as possible speaking for franchisers on the subject entitled “How to recruit and Select
to existing franchisees. Ask them if they would do it again. More Qualified Franchisees.” Management 2000 has been
How long did it take them to recoup their investment? How responsible for innovative thinking in getting people to
much money are they making? Does the operating system understand franchising as a business strategy. Management 2000
work? Are they provided with good marketing programs? Do has offices in Houston, Texas Edmonton.
the franchisees get along well with each other and with the
Making the Franchise Decision
franchiser? What are the major problems with the business? Do
It is a quiet Saturday morning. If you are the average American,
they use all of the operating system? Is the franchiser’s ongoing
the downturn in the economy has started you to think about
support adequate and helpful? The answers to these questions
how it will impact your career and the opportunities for your
will help you make your decision.
children as they enter the workforce. Articles about Enron and
Step 3: Evaluate the Franchiser’s Tyco and Global Crossing and other corporate scandals abound
Business Plan and some of the most respected brand names internationally
The franchiser should have a business plan for the system that are talking about layoffs and bankruptcy.
covers at least the length of the agreement you are being asked Surfing the web you read stories about entrepreneurship and
to commit to. Ask for the plan for the market where you are wealth creation by individuals who grabbed a piece of the
going to locate the operation. Ask for their analysis of the “Great American Dream” of individual business ownership.
competition. Ask how many units are being planned for your But you don’t know where to start to look for your opportu-
area and why that many. Why not more, why not less? Ask how nity. One-way may be to simply open up your own
much is going to be spent on marketing in your area. independent business - but even here you don’t know where to
Ask to look at the operations manuals or at least to see an begin. The simplest way may be to join a growing franchise or
outline of them. This is important because the operations business opportunity network. But you don’t know which one
manuals are your guideline to a successful operation. You need is right for you. You are not even sure of the differences
to feel comfortable that they are complete and clear and meet between a biz-op and a franchise and you are not certain you
your abilities, needs, and goals. really need to care.
The investment opportunities for business ownership that you
Ask to receive a full explanation of the initial and subsequent
find on the web today range from the instantly recognizable fast
training programs. Ask how people are trained. Is it classroom
food and brake and muffler franchises to businesses which offer
or hands-on practice? Are there case studies and discussions or
you the opportunity to place beverage vending machines in
is it straight lecture?
offices. While on the surface, the messages from the various
Ask for a full explanation of the pre-opening assistance offered
sites seem similar; the legal and business relationships being
by the franchiser. Understand any help franchisers give for site
offered are vastly different.
selection and lease negotiation. Be clear about what ongoing
support the franchiser provides to the franchisees. Business Opportunity
Business opportunities are a highly regulated method of
In Summary…
business expansion where a company provides outsiders the
• Franchising is a business strategy centered around a strategic opportunity, for a fee, to go into business. Because of the
alliance between groups of people who share specific historic high rate of fraudulent schemes the federal government
relationships and responsibilities in addition to being and many states have enacted regulations and disclosure
licensed to use a franchiser’s brand name and proprietary way requirements that govern these types of relationships. Unfortu-
of doing business. nately, the rules regarding business opportunities can vary
• Other franchisees are not your competitors; they work in between the federal government and the states and even then
tandem with you to establish and reinforce brand-name they can vary from state to state.
dominance in your area. Determining whether an opportunity is a franchise or a
• Keep in mind that you own the assets of your company but business opportunity can be tricky and even competent legal
are licensed to operate someone else’s business. counsel will occasionally find it difficult. The distinction is
• Franchising is successful because we Americans are people of usually most noticeable in two key areas:
habit and are brand-driven.

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The franchiser will generally insist on consistency from location distinction between a simple license and a license that, has

INTERNATIONAL BUSINESS MANAGEMENT

to location and that includes requiring the franchisee to operate crossed the barrier and become a franchise.
their business under their brand name. Business opportunities 1. The licensee is given the right to distribute goods and services
are frequently more entrepreneurial and less structured. that bear the licensor’s trademark, service mark, trade name,
While both may provide training, the hallmark of franchising is advertising or other commercial symbols;
in continual support to its franchisees -something that most 2. The licensor exercises significant control over, or provides the
biz ops lack. licensee with significant assistance and, the licensee’s method
There are three primary types of business opportunities. of operations; and
Distributorship 3. The licensee is required to make a payment of $500.00 or
The purchaser buys the rights to sell the company’s product more to the licensor or a person affiliated with the franchiser
within a territory and the territory may or may not be exclusive. at any time before or within six months after the licensee
Generally, the local business is not known by the company’s commences business operations.
name nor does it use the company’s logo in identifying the When these three elements are in place, the license is generally
business. considered a franchise and the franchiser must abide by certain
License rules generally focused on how they offer their opportunity to
The purchaser obtains the right for access to proprietary data, the public.
marks or technology from which products or services can then Franchising describes the system of delivery, not the specific
be offered to the public. product or services associated with the delivery as in a business
The major advantage of a business opportunity over a franchise opportunity.
is that it offers a buyer a greater degree of flexibility in conduct- The chief differences between Business Opportunities and
ing their business than does the typical franchise - and usually at Franchising is in the degree of the relationship:
a lower cost of entrance and without the need to make ongoing Franchising: The franchisee’s business is identified by the
royalty payments. It can be a very good method for home- franchiser’s trademark and consistency from location to location
based, part time or second income businesses. is usually important to the franchiser.
Its most significant drawback is that typically the business Biz Ops generally are not identified by the franchiser’s trademark
owner does not receive significant management systems, and the trademark if used is generally incidental to the products
training, ongoing support and marketing which are typical of a or services being offered.
franchise relationship. Franchising provides an infrastructure
Franchising: Franchisees generally receive training, marketing
and ongoing support that business opportunities generally
and other support on a continual and ongoing basis from their
don’t.
franchiser.
Depending on the business opportunity, there may be system-
Business Opportunity: Other than some initial training,
wide savings on the cost of products and services sold to
ongoing training, marketing and other support is usually not
customers - a standard also with most well developed franchise
provided and is incidental to the relationship.
systems.
Franchising: The franchisee offers products or services typically
An expression frequently used in franchising is that “You are in
on an exclusive or semi-exclusive basis and operates their
business for yourself but not by yourself”. In most biz ops
business based upon standards of performance and product
your business is your own and ongoing support is generally not
line dictated by their franchiser.
something you can count on. However, depending on your
entrepreneurial nature and talents a biz op may be the perfect Business Opportunity: Business opportunities typically allow
opportunity for you to start your new business. the business owner to handle a variety of lines since consistency
from location to location is generally not part of the opportu-
Franchising nity being offered.
Franchising finds its roots before the Middle Ages. It first
Franchising: The cost of entering into the franchise fee is
appeared commercially in the United States before the Civil War,
typically significantly higher than the minimum payment of
likely with Robert Fulton and his licensing of his steamboats
$500. The payment is made for the right to enter into the
and emerged as a force to be reckoned with in the post World
relationship and for the use the franchiser’s system and
War II 1950’s. It boomed in the 60’s. It policed itself in the 70’s
trademark.
and it matured in the 80’s and 90’s. Franchising has become one
of the most dominant forces in the world economy today. Business Opportunity: Under a business opportunity the cost
of entrance usually relates to the purchase of identified
Franchising is considerably more structured than business
products or services that will be resold and any fee to join the
opportunities. However, just as with business opportunities
system can be very modest.
there are variations in the definitions used by the Federal Trade
Commission (FTC) and some states and there are even Franchising: The franchisee generally pays a continual royalty to
variations among the states. The most common definition cited the franchiser, which is often based on the gross sales from the
though is the one promulgated by the FTC, which makes the franchisee’s business. The payment allows the franchisee to
continue in the relationship.

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 Business Opportunity: If there are any continual payments, cash flow. Without this guidance many independent operators
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they are usually for the identifiable products or services supplied fail soon after opening.
by the company to the business owner for resale.
Ongoing Benefits
There is a growing perception today that franchising is a “sure In exchange for paying an ongoing royalty and other payments,
fire” method of expansion for business and is always a safe franchisees generally receive continual training programs and
investment for franchisees. While it is true that a properly other ongoing home office and field support and assistance.
designed franchise program can be an exceptional method of
Group purchasing power is a major benefit of well-developed
expansion ñ that is not always the case. The same is true for
franchise systems. Frequently buying groups established by the
local franchises. Business comes with risk ñ and a well-struc-
franchiser allow the franchisees to benefit from a lower cost of
tured and managed franchise system can only reduce some of
goods, equipment, and supplies than that available to indepen-
those risks. Franchising can never be a guarantee of success.
dent operators.
Your decision to purchase a franchise should be based upon
Leveraging off the contributions of the entire franchise system,
two broad understandings:
franchisers are able to create professionally designed point of
1. An understanding of the advantages and disadvantages of sale, advertising, grand opening programs and other marketing
franchising in general. materials that independents could never afford. Franchise
2. An understanding of a particular franchise and how to programs can also afford to continue to modernize the system
evaluate them. through ongoing research and development and the test
marketing of new products and operating programs.
Advantages of Franchise Ownership
The benefits of franchise ownership are only as strong as the Franchising is a critical mass business both with a market and
franchise you select. Generally speaking, the benefits can be system wide. The spending power of the individual dollar,
classified in several broad areas: combined with their fellow franchisees within their market and
the rest of the system enable franchises not only to dominate
Overall Competitive Benefits local markets and established independents but also to compete
The public has become accustom to a certain level of quality and effectively against the established large chains.
consistency from brand name franchised locations. Whether you
believe a company’s product is superior or mediocre, the secret Disadvantages for Franchisees
for their success is usually that it is consistent. The consumer One of the benefits most often cite for becoming a franchisee
knows the level of quality they will receive in every location they may also be one of its major disadvantages. It is the loss of
visit. This brand identification often provides the new franchi- independence that is necessary in any good franchise system. By
see with an established customer base accustomed to shopping definition, franchisees are not entrepreneurs. If they were, they
under the company’s brand and that makes it easier to compete would never buy a franchise. At best, franchisees are “entrepre-
with the well-established independent operators and even neur lites”. For the truly entrepreneurial person, franchising is
against other well-established franchised competitors. the wrong choice because the structure of the system requires
them to give up considerable independence in the way they
Pre-Opening Benefits conduct their business.
Franchisers have made mistakes. Another advantage of
This loss of independence, if taken to the excess leads to a
franchising is that they have survived their mistakes and can
further disadvantage of franchising - over-dependence on the
guide their franchisees not to make the same mistakes. Upon
system. Franchising succeeds best when franchisees are at risk
joining an established franchise system new franchisees generally
and are motivated by their financial and emotional risk to
receive comprehensive initial training in the operating of the
succeed. Where franchisees rely totally on the system for their
franchise system, its product, services and methodologies.
success their over-dependence can also cause problems. The
While the cost of entrance into a franchise system includes a
franchisee therefore must therefore balance the system’s
franchise fee - often cited as a disadvantage - the franchisee
restrictions with their personal ability to manage their own
benefits from a host of services including operations manuals,
business.
site selection, store design, construction programs and reduced
cost of equipment to name just a few. Additionally, they have Another strength that is also a weakness is the expectations of
not only their franchiser as a seasoned partner to ask questions the public when they shop at a branded location. The principal
to but the network of other franchisees within the system that reason for franchising success is the public’s perception of
can be of assistance. quality and consistency throughout a franchise system. There-
fore when the public receives great service at one location the
In essence, the major stumbling block for pre-destined failure is
assumption is that the system has great service in all its
removed by the franchiser - lack of preparedness. Most
locations. This can be a major problem as well because the
independent businesses don’t fail because their product or
reverse is also true. Poorly performing fellow franchisees will
services were inadequate. They fail because they did not
damage your business even when they don’t even share your
anticipate problems. Chief among these is working capital.
market.
Well-developed franchise programs ensure that before they
accept a new franchisee that they have adequate capital, even after If the hamburger is bad in one location, the public assumes it is
servicing their debt and taking into account seasonally adjusted bad throughout the system. If one location makes the nightly
news, all of the other locations under the brand are impacted by

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that news ñ both the good and the bad. To protect its franchi- Here again though is a double-edged sword. Franchising

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sees, great franchise systems are usually the ones that impose strength is its consistency. Should the franchiser be willing to
the strongest controls necessary to ensure that standards are met negotiate with the prospective franchisee on significant issues,
in each location. they are likely to do so with others. Their reasons may be based
Some prospective franchisees have unrealistic expectations upon their need to sell you a franchise to meet next week’s
concerning the income they will earn from their business. If payroll or to ensure that their franchise broker won’t drop them
unmet these unmet expectations can cause the franchisee as a client because they are not flexible enough for the broker to
financial problems and make them regret the investment they earn their commission. Remember, brokers only make money
made. While unmet expectations are a weakness inherent in when you make a purchase. Even if these are not the reasons
franchising, it is also a weakness of every business whether they are willing to negotiate, another word for flexibility is
franchised or independent. Realism is important in making inconsistency. And inconsistency is not what you or the public
investment decisions. In franchising though, if the prospect wants from a branded operation like a franchise.
conducts an independent and thorough evaluation of the Most franchiser’s today have web pages with tons of informa-
opportunity this risk can be significantly reduced. tion on their companies and their franchise opportunities.
Almost every restriction placed on a franchisee by the franchisor Examine each one thoroughly and contact each franchiser you
takes away a bit of the franchisee’s independence and therefore are interested in for any additional information they may have
can be considered a disadvantage. Some issues such as restric- available. Fancy graphics is not a good reason to select a
tions on product and services offered, limitations on territory, company. You need to understand the philosophy of the
the possibility of termination for failure to follow the system, company. Compare their services as well as their fees. Lower fees
restrictions on independent marketing and advertising are a should be the least important reason to select a company over
double edge sword - depending on how you perceive the another. How are the fees structured? If franchise fees are high
relationship. However ask any franchisee whose investment has but royalty fees low can you surmise that the franchiser is more
been put at risk by another franchisee’s poor performance if interested in selling their franchises than having continual
they benefited by the franchisors ability to terminate the other revenue to provide you with services? If royalty fees are high,
franchisee. You will likely understand the importance of does the franchiser worth the extra percentages provide the
selecting a franchise system that has the ability and the track services?
record of enforcing its standards. Your answers will come from two sources, personal meetings
with the franchiser at their headquarters and contact with their
Making your Franchise or Business
franchisees.
Opportunity Selection
Most any business can be offered as a franchise or business Visit the headquarters of each franchiser you are seriously
opportunity and many appear the same on the surface. It is interested in. Do not buy a franchise without visiting the
important that you sort out the good from the bad before headquarters. Even large established franchisers have problems
making your decision. that can only be determined from personal visits. Allow the
franchiser the opportunity of introducing you to the system, its
The first step in franchise selection is a personal audit. Make
services and key personnel. Make certain that you meet with
certain that the industry you select is one that meets your
those individuals who you will be having a long-term relation-
personal needs. If you will be embarrassed to tell your friends
ship with including the Operations, Training, Marketing and
that you own a dry-cleaning business or have a janitorial service,
Field Organization. Ask questions and do not accept superficial
even if they are highly lucrative, then don’t buy one. Personal
answers. What are the continuing services provided and by
happiness is important. There are at least 85 different industries
whom? How long is the training program, who conducts it,
using franchising spanning any number of product or service
where is it conducted and what topics are covered? Does the
related areas. Personally examine your feelings toward each one
company have solid marketing? Do they own their trademarks?
to begin to make an industry selection.
And - a hundred other questions you may think of. Remember,
Once you have created a short list of industries you are comfort- the franchiser has been through this process many times before,
able with, begin with an examination of the companies within it is likely your first time. Come prepared with your questions
those industries. Make certain that the industry has legs and is written down and ask them. Be satisfied with the answers and
not just the next fad or worse, a fad that is already passed. Look do not be reluctant to probe for further information. Buying
not only at the franchised competition in the industry but the your franchise is likely to be one of the most important
established company owned chain operations as well. business decisions you will ever make. We have provided a
Finally, when you have selected the industry for you, begin your workbook at the end of this article that can be used as a guide.
examinations of the companies. The obvious choice may be the Issues of serious interest should include profitability and return
well-established company with hundreds of franchisees but on investment; proven product and service; operating systems;
keep in mind that many of the newer opportunities have training; marketing; expansion plans (is the franchiser more
entered the market with innovations that may not be possible interested in worldwide expansion or individual franchisee
in older systems. Also, older established systems are less flexible success); field services; research and development; franchisee
should you want to negotiate any terms while newer systems relations; franchise system goals and ability to support the
may be willing to consider certain points as negotiable. goals; and of course the financial health of the franchiser. At the

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 meeting with the franchiser you will receive, as mandated by the available from articles about the company and discussions with
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franchise laws, a copy of the franchise disclosure documents. If franchisees. Ask the franchisees you speak with about their
possible, try to obtain a copy in advance of your meeting so you financial performance and don’t forget to check public filings for
can ask your questions about the document in person. any franchiser that is a public company.
Most franchisers do not send out their disclosure documents Franchising or Business Opportunity -
before the meeting because they are costly to produce and The Choice
franchisers want to explain many of the items in the document There is a difference between a franchise and a business
in person. Failure to receive a disclosure document in the mail is opportunity and each has its merits and its potential pitfalls.
not a sign of franchiser deceit. It is a recognized practice in the Keep in mind that the salesman has been selling for a long time
industry not to provide a UFOC before you meet with a and is experienced in their craft. Their job is to get you excited
prospect. Some franchisers though will provide a copy of their about the opportunity and have you make a decision to buy
disclosure document electronically and there are even private from them sooner than later. It is likely your first time making
companies and some state agencies that will sell you a copy of your own franchise decision.
the franchiser’s UFOC.
Suppress your emotions and base your decision on the facts
The disclosure document will provide you with a wealth of and what will benefit you both personally and financially. Seek
information that you should have reviewed by your accountant out independent advice. Read articles and books on the subject.
as well as a qualified franchise attorney. Many prospective There is a tremendous amount of information on the web that
franchisees unfortunately rely upon their local lawyers for advice you can easily access for free.
on franchising matters. Franchising is a complicated and
I should also point out that Franchising for Dummies, a book
somewhat unique branch of the law and requires you to work
I wrote with Dave Thomas the founder of Wendy’s is available
with lawyers that practice in this area. A good source for locating
in most bookstores and on line and may be a very worthwhile
a qualified franchise attorney is through this web site or through
tool for you to have. (Dave and I donated our proceeds to the
the International Franchise Association at or your local bar
Dave Thomas Adoption Foundation so in addition to learning
association.
quite a bit about franchising, you will be helping a wonderful
Today, in increasing frequency you may find yourself working organization do great things.) Franchising for Dummies will
with a franchise broker or a company that represents that they provide you with an understanding of franchising and give you
are your coach, even when the franchiser pays their fees. Since a step by step approach to selecting the right franchise for you.
brokers are paid by the franchisers to get you to buy one of
Good luck in finding your own Great American Dream.
their franchises, they are the franchiser’s agent and not your
advisor. Care should be taken when working with any brokerage How to Select a Franchise
therefore since they only make money when you buy a franchise This is a very big subject so we will try to be as laser like as
from one of their clients - and from no other franchise possible and give you the essence of the information you need
opportunity. If you need an advisor, hire and pay for your own in order to properly select a franchise.
counsel. This is likely to be the most important investment you First, you must ask yourself certain questions and be very
will ever make ñ take care. objective. Why do you want to own a franchise? If it’s to get
The UFOC contains a host of information including the rich or to get on easy street and not have to work, then franchis-
experience of the franchiser and its staff in the business being ing will probably not meet your expectations. If you are like
franchised; the system’s litigation and bankruptcy history; the many people who have the dream of owning your own
cost of opening a franchise as well as the initial and continual business, being your own boss and having control of your life,
fees; an explanation of the relationship and responsibilities of then franchising may be for you.
the franchiser and franchisee together with financial information The truth about franchising is that it’s very rare that franchisees
on the franchiser; the number of franchises opened, closed and get rich. It’s also true that as a franchisee you generally work long
most importantly, a list of existing franchisees. Start with the hours, especially the first year. A franchise business is like nearly
A’s and proceed toward the Z’s and call enough franchisees until all businesses, it’s hands on, you have to be there to make it
you are satisfied that you have adequate information to make an happen. You have to literally keep your hands on it. Generally, a
educated decision. Visit as many of the franchisees as possible. franchise is going to involve longer hours and more stress than
This is a time consuming process, but after all, it is only you would a job where you just put in your time and then go home
and your family’s financial life. If you can find a franchisee and forget about it until the next day. However, franchising
willing to let you work in their location ñ most franchisers will gives you the chance to do something really significant, and
support that decision because it enables you to truly understand that’s to be in business for yourself, be your own boss and
if you are going to like becoming a franchisee. control your own destiny. This is the chance to realize the
The one piece of critical information that you may expect to dream. It’s been said that the truly happy people among us are
find in the disclosure document may not be there - an earnings those who are living their dreams.
claim or any projection of franchisee profitability. For a host of After evaluating yourself, the next step is to begin the search.
supportable reasons the majority of franchisers do not include Look through the information here at the FranInfo site. The
this information. It is therefore critical that you base your critical thing at this point is that you must be realistic and look
financial assumptions on available information, information at opportunities that are in harmony with you, how you think

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and what your interests are. Imagine yourself operating the 3. Call as many franchisees as possible. Call at least 10. Find

INTERNATIONAL BUSINESS MANAGEMENT

franchises that look interesting. Can you see yourself happy in out how they are doing. The key question is “Would you buy
that environment, day after day, possibly for years. this franchise again?”
If you are interested in any specific companies, send us an email. 4. Visit personally as many operating units as possible. At
We will see that you are contacted. The least you will receive is a least three. Often the owner or manager will be more
letter and a brochure and from some of the more progressive forthcoming in person than over the phone.
companies you will get a video. Examine these materials 5. If everything still looks good, then contact the sales rep
carefully, they are generally very revealing. After you narrow your and get as much definitive sales information as possible.
search down to one or two franchises it’s time to visit a Most franchisers will not make earnings claims but they will
operating unit if you haven’t already. Ask the franchise sales rep provide information with which you may extrapolate gross
where the nearest unit is located and arrange to be met there by sales.
a owner or manager who can answer your questions. Spend as
6. If everything still looks good then go for it.
much time at the unit as you possibly can, be there at different
times of the day, during peak hours and during slow times. Future of Franchising
Talk to the employees, customers and the owner or manager. If The growth of franchising is inevitable, because of the inescap-
you do this thoroughly you should get a good read on the able logic of the underlying concept. Franchising clearly offers
viability of the concept. aspiring, new business owners the best possible chance of
If at this point you want to continue, the next step is to visit succeeding with the least risk. Within a decade or less, franchis-
the home office. Here you will get a guided tour of the offices, ing will comprise over 50% of the retail economy, will employ
meet key people, usually including the President, and generally millions of people, and will enable hundreds of thousands to
you will visit a flagship unit, either company owned or a realize the American dream of successful business ownership.
franchise unit. After the tour you will sit down with a franchise As the U.S. and world economies grow with the ever increasing
sales person and be given the sales presentation, which is of populations, and the move toward free market economies, new
course designed to sell you. You will be given a Uniform franchise concepts will come on the scene and the solid, well
Offering Circular (UFOC) to take with you. This is a compila- managed existing franchise companies will continue to grow.
tion of a great deal of information on the company and the There is a move toward better protection of franchisee rights
opportunity. The Federal Trade Commission requires that you and over time this will push more franchisers towards structur-
be given a UFOC at the first personal meeting. It will have ing their relationships with their franchisees in a totally win/win
information on the history of the company, backgrounds on manner. Franchising is evolving, it’s getting better conceptually
the officers, financial statements on the company, a copy of the and in reality. There are greater opportunities for wealth creation
franchise agreement, a list of current franchises, franchises that among both franchisees and franchisers today then ever before.
have closed and litigation history. This information is critical to The future of franchising is as bright as the sun and if you
evaluating a franchise opportunity. want to take the big step and go into business for yourself or if
Analyzing the UFOC is tricky and professional help at this you have an existing business that you want to optimize, then
point can prove invaluable. You want to pay close attention to you should look closely at franchising as the vehicle to take you
the history of the company, the backgrounds of the officers, the to where you want to be in the 21st century.
financial statements and the litigation history.
Questions for Discussion
The following are the steps you should take upon returning
Q1) what are the relevant considerations you will take into
home.
account before going for a franchising arrangement?
1. Analyze the UFOC (Professional help recommended) In
Q2) Critically evaluate the franchising as a mode to enter
the UFOC you want to see strong financial statements,
International Business on basis of it’s relative merits and
highly experienced people in the key positions, a company
demerits.
that has been in business for 3 years or more, the longer the
better, has a large number of units and has few closed or Q3) How will you select a franchising arrangement
bought back. Q4) What are the steps involved in a franchising arrangement
2. Closely examine the franchise agreement. This is the Q5) Comment on the Scope of Franchising?
contract between you and the company. Franchise agreements
are always biased in favor of the franchiser, that’s just the way
it is. This can be good and bad. The company can be unfair
in it’s dealings with you and the franchise agreement may
allow this, on the other hand you should want a strong
franchiser. For example, McDonalds is so successful because
it is very tough on franchisees that do not maintain
McDonalds high standards of product quality, good service
and cleanliness. This strict compliance is only possible
through a strong franchise agreement.

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