Chapter 2
After studying this chapter, you should be able to:
1. Describe the significance of franchising.
2. Identify the major advantages and limitations of
franchising
3. Discuss the process for evaluating a franchise
opportunity.
4. Evaluate franchising for the franchisor’s
perspective.
5. Describe the critical franchisor/franchisee
relationship.
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
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
Product and Trade Name Franchise
Grants the right to use a widely recognized
product or name
Business Format Franchise
Provides an entire marketing system and ongoing
guidance from the franchisor
…continued
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
Pluses Minuses
Formalized training Franchise fees
Financial assistance Royalties
Proven marketing Restrictions on growth
methods
Less independence in
Managerial assistance operations
Franchisor may be sole
Quicker startup time supplier of some
Overall lower failure supplies
rates Termination/renewal
clauses
Figure 14-1
Proven marketing concept and customer
base
Training
Financial assistance
Operating 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.
The franchisor might chose to use liberal
payment schemes to the franchisee in order
to get over the initial financial hurdle.
The franchisor provides a range of
operating services including site selection,
bulk purchasing of equipment, and
inventory.
Other areas of assistance include the use of
an established, nation-wide brand
• Advantages • Limitations
– Probability of – Franchise costs
success
• Initial franchise fee
• Proven line of
business • Investment costs
• Pre-qualification of • Royalty payments
franchisee
• Advertising costs
– Training
• Franchisor-provided – Restrictions on Business
– Financial assistance Operations
• Franchisor assistance – Loss of independence
– Operating benefits
• Franchisor-aided
Restricting of sales territory
Requiring site approval and
imposing requirement on the
outlet’s appearance
Restricting the goods/
services that can be sold
Restricting the resale of the
franchise without their permission
Restricting advertising and hours of
operation
Locating a Franchise Opportunity
Investigating the Potential Franchise
Information sources
Independent, third-party sources
Franchisors themselves
Existing and previous franchisees
Franchise fee Insurance, Licences
First and Last and Permits
Month’s Rent Training
Leasehold Initial Inventory
Improvements Working Capital
Equipment Royalty
Furniture and
Fixtures
Signage
Historically, many Canadian franchisors
have expanded into the United States.
Canadian franchising enterprises are now
expanding into countries beyond North
America.
Three sources of information:
◦ independent third party sources
◦ franchisors
◦ existing and previous franchisee
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
…continued
Drawbacks associated with franchising
from the franchisor’s perspective.
1. Reduction in control
2. Sharing of profits
3. Increase in operating support
Key Factors for Successful Franchisors
• Entrepreneur spirit
• Prototype store or unit
• Transferable prototype unit
• Patience and skill to teach
• Competitive products
• Meeting the distance test
• Differential products
• Catching up with continous changing market
• The competitors
• Realistic growth planning
• Needed skills
• Monitoring programs
3. Criteria for a Good and Successful Franchisors
3.1. Franchisee Selection Process
When establishing franchisee relationships, franchisors should:
Investigate franchisees as if they were hired as employees.
Make sure that franchisees financially, intellectually, and emotionally
qualified to run the business.
To increase revenue, franchisors could:
Increase revenue streams from franchisees through sales of goods or
services to the franchisees, such as required inventory and equipment
purchases.
Receive rebates or commissions from other suppliers which the
franchisees are required or encouraged to use.
Increase rental income by leasing site locations to franchisees.
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3. Criteria for a Good and Successful Franchisors
3.2. On-going Services
Successful franchisors offer more to their franchisees than
just a trademark and a business model.
Franchisors should offer other services such as:
Location selection and development services;
Complete initial and on-going training;
Complete specs and systems communicated in a clear manner;
Procurement programs for equipment, supplies, inventory and
services;
Advertising assistance;
Research and development.
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3. Criteria for a Good and Successful Franchisors
3.3. Maintaining System-Wide Uniformity
Maintenance of high and uniform standards throughout the franchise
network is of significant value to the franchisor and each of the
franchisees.
It is important to the value of the system, that a customer receives high
quality and consistent experience in dealing with each franchise
location.
A franchisor must implement policies and procedures
that help maintain standards by rewarding compliance and
enforcing system standards by means of inspections and
audits where positive motivation has not proven effective.
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3. Criteria for a Good and Successful Franchisors
3.4. Franchisee Relations
Although a franchise relationship is governed by contract, the
franchisor develop a relationship of mutual trust and respect with
each franchisee.
To build a strong franchise relation, franchisors should:
Create regular and open communication with franchisees.
Truly committed to help franchisees to achieve success.
Listen seriously to franchisees' suggestions and concerns.
Establish quick and flexible dispute resolution procedures and always
attempt to resolve disputes amicably.
Allow some degree of creativity and innovation by the franchisees.
Establish an association of franchisees or a franchisee advisory council.
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3. Criteria for a Good and Successful Franchisors
3.5. Smart Expansion
The franchisor must determine which markets can be successfully
established. These potential markets usually meet several of the
following criteria:
Good locations are available at affordable prices;
Both population and demand for the products or services are expanding;
Suppliers can effectively and economically deliver essential products,
equipment, inventory and supplies to franchisees;
It is not already saturated with competitors;
The franchisor's trademark is already recognized and has value;
Franchisees can be successfully monitored and supported.
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3. Criteria for a Good and Successful Franchisors
3.6. Franchisee Financing
Successful franchisors realize the importance of assisting
franchisees with their financing through:
Business plan assistance;
Assisting with loan applications;
Establishing working relationships with companies that
specialize in providing franchisee financing;
Guaranteeing the bank loans of their franchisees.
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3. Criteria for a Good and Successful Franchisors
3.7. Systematic Sales Process
The franchisors should have a standardized process (including
application forms, standards, timelines, checklists, etc.) so that
franchise inquiries and sales are handled on a consistent basis.
This is important both in terms of legal compliance and in
terms of sales success.
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3. Criteria for a Good and Successful Franchisors
3.8. Franchise Brokers
Franchise brokers typically work like real estate agents in that
they market your franchise to potential buyers and charge you a
percentage fee for each unit they sell.
Establishing a good working relationship with a franchise
broker can give a new franchisor credibility, and greatly increase
the number of franchise units sold.
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4. The factors for franchisors to avoid possible failure
The main factors for franchisors
Developing franchise concept
Market research
Familiarity with local laws and
regulations
Providing training and support
to franchisees
Providing training and support
to franchisees
Criteria for choosing
franchisees
Control over franchisees
Supply of products/materials
Intellectual property rights to franchisees
issues
E.g. trade mark registration 28
5. Solving struggling process in Franchising system
5 steps process
Step 1 Collecting
Step 2 Determining
Step 3 Fixing the business
Step 4 model
Keeping commitment
Step 5 Reexamining
6. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
6.1. The Financial Requirement of Franchisor
Industrial research
Franchise package
Initial advertising & recruitment
Reserve and legal capital requirement
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6. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
6.2. The Financial Requirement of Franchisee
Franchising fee
Real estate/ retal costs
Personal Living & Travel costs
Equipment cost
Start-up expense & Inventory
Working capital 31
7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.1. The Financial Requirement of Franchise
7.1.1. Franchise Fee
• The franchise fee is a business fee that's unique to those who
want to start a franchise.
• Allowed to become a part of the established enterprise, to use the
name and credit of the business.
=> Can be thought of as a cover charge for becoming part of the
family. The amount of the fee will vary from one franchise
company to another.
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7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.1. The Financial Requirement of Franchise
7.1.2. Royalty Fees
• Similar to a royalty for an author who writes a book.
• A percentage of the gross earnings has to be taken off the top and
given to the franchise license-holder.
=> Many people who expand their original business into a
franchise can give up running their own businesses and just
collect royalty fees if the franchise is successful.
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7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.1. The Financial Requirement of Franchise
7.1.3. Financial Baseline
• A certain amount of liquid assets to start up a business.
• This requirement for the franchise to agree to let you open your
own business.
=> Like many of the other necessary requirements for opening a
franchise unit, the financial baselines are set by the individual
franchise businesses.
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7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.2. The Franchisor-Franchisee Relationship
Product distribution franchise
Business format franchise
Management franchise
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7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.2. The Franchisor-Franchisee Relationship
Product distribution franchise
• Like a supplier-dealer relationship.
• The franchisee merely sells the
franchisor’s products.
=> However, this type of franchise will
also include some form of integration of
the business activities.
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7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.2. The Franchisor-Franchisee Relationship
Business format franchise
• The integration of the business is more
complete.
=> The franchisee not only distributes the
franchisor’s products and services under the
franchisor’s trade mark, but also implements
the franchisor’s format and procedure of
conducting the business.
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7. The Financial Requirement of Franchise - Franchisor-Franchisee
Relationship
7.2. The Franchisor-Franchisee Relationship
Management franchise
• A form of service agreement.
=> The franchisee provides the management
expertise, format and/or procedure for
conducting the business.
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THE END
