Academic year: 2023-2024

Semester Number-Fall

Course Name: Entrepreneurship

• Instructor Name: Dr. Heba Elqasaby

Chapter 3
Franchising and the
Entrepreneur

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 The Franchising Boom

 Shoppers can now buy virtually every product

or service imaginable through franchises
 More than 757,000 franchise outlets in the
United States
Employ almost 8.2 million people
Generate $802 billion in annual economic
output – adding $460 billion to the country’s
GDP

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The Franchising Boom
Franchised Businesses by Product or Service Line

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 The Franchising Boom
 Franchising in Global Markets
International Franchise Association survey:
61% percent of members operate in international
markets
74% plan to accelerate global growth
32% of the units of the 200 largest U.S.
franchisors are located outside the U.S.
Hot markets: Brazil, Russia, India, China, and
nations in the Middle East and North Africa

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 What Is a Franchise?

Franchising:
semi-independent business owners pay fees and royalties to a
parent company in exchange for the right to sell its products and
services under the franchiser’s trade name and often to use its
business format and system.

 Going into business for yourself, but not by yourself

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 Types of Franchising
 Three basic types:
1. Trade-name franchising
2. Product distribution franchising
3. Pure franchising (or comprehensive
franchising or business format franchising

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 The Benefits of
Buying a Franchise
 Primary reason to buy a franchise is the mutual
benefits to the franchisor and franchisee
Franchisees are buying the franchiser’s experience
 Franchisees get a proven business system and avoid
having to learn by trial-and-error
 Before buying, ask: “What can a franchise do for me
that I cannot do for myself?”

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 The Benefits of
Buying a Franchise
The Franchise Relationship

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 The Benefits of
Buying a Franchise
 What do you get when you buy a franchise?
A business system
Management training and support
Brand name appeal
Standardized quality of goods and services
National advertising program
Financial assistance
Proven products and business formats
Centralized buying power
Site selection and territorial protection
Increased chance for success

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 The Benefits of
Buying a Franchise
Franchise Lending Activity

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 The Drawbacks of
Buying a Franchise
 What are the drawbacks of a franchise?
Franchise fees and ongoing royalties
Strict adherence to standardized operations
Restrictions on purchasing
Limited product line
Market saturation
Limited freedom
No guarantee of success

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The Drawbacks of
Buying a Franchise
A Franchise Evaluation Quiz

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Franchising and the Law

 Franchisors are required to file a Franchise

Disclosure Document (FDD)
Key tool for protection
Franchisers must deliver a copy of a FDD
before any offer or sale of a franchise
 The FTC requires that FDDs use ‘plain English’

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Franchising and the Law

 The FDD contains information on 23 topics,

including:
Franchiser’s business experience
Franchise fees and costs
Lawsuits involving the franchiser
Financial assistance available
Territorial protection granted
Restrictions on purchasing

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 The Right Way
to Buy a Franchise
 Preparation, common sense, and patience are vital
ingredients in choosing the right franchise
Evaluate yourself
What do you like and dislike?
Research the market
Consider your franchise options
Get a copy of the FDD and study it

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 The Right Way
to Buy a Franchise
 What should you look for?
A unique concept or marketing approach
A profitable business model
A solid brand name and a registered trademark
A business system that works
A solid training program
Affordability
A positive relationship with franchisees

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 The Right Way
to Buy a Franchise
 Preparation, common sense, and patience are vital
ingredients in choosing the right franchise
Evaluate yourself
What do you like and dislike?
Research the market
Consider your franchise options
Get a copy of the FDD and study it
Franchise turnover rate
Talk to existing franchisees
Ask the franchisor some tough questions
Make your choice

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 Franchise Contracts

 A franchise contract summarizes the details that will

govern the franchisor-franchisee relationship
Outlines the rights and obligations of each party
Often favors the franchisor
FTC requires that franchisees receive a complete
and revised contract at least 5 days before signing it

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 Franchise Contracts
Pros Cons

 Can be new and exciting  Business is not tested or

 Business concept can be fresh established in the market
New and different in the market  Unknown brand and trademark
 Possibility of getting lower  Possibility that the concept is a fad
Franchise fees as a “pioneer” of the with no staying power
concept  Franchiser may lack the experience
 Potential for a high return on to deliver valuable services to
investment franchisees

 Business concept likely is well-  High franchise fees and costs that
known to consumers and market often are non-negotiable
Established for the products or services is  Concept may be on the wane in the
already established market
Franchise  Franchiser has experience in  Franchiser’s brand and trademark
delivering services to may remind customers of an
franchisees outdated concept
 Franchiser has had time to work  Franchiser’s “trade dress” may be
the “bugs” out of the business in need of updating and
system redesigning
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 Franchise Contracts
 Three terms responsible for most disputes:
1. Termination
Franchisees are usually prohibited from terminating
the agreement, but franchisors can terminate ‘with
or without cause’
2. Renewal
Franchisors usually have the right to renew or refuse
contract renewal
3. Transfer and buybacks
Franchisees are usually not free to sell their
business without approval

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 Trends in Franchising

 Three major growth waves since the beginning of

franchising
1. Early 1970s – fast food boom
2. Mid-1980s – shift to the service sector
3. Early 1990s – focus on specific market niches

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 Trends in Franchising

 Changing face of franchisees

Today’s franchisees are:
More diverse
Better educated
More experienced
More financially secure
 Multiple unit franchising
Multiple-unit franchising is more efficient
 International opportunities
Key to success: Adaptation

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 Trends in Franchising
 Smaller, nontraditional locations
Intercept marketing
 Conversion franchising
Conversion franchising offers instant name
recognition
 Refranchising
Refranchising is reducing the number of company-
owned stores

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 Trends in Franchising
 Area development and master franchising
Area development offers exclusive rights to an
area
Master franchises or subfranchises can be a
good option in international markets
 Cobranding
Cobranding or combination franchising involves
teaming up with complementary products or
services

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 Franchising as a Growth
Strategy
 Entrepreneurs can use franchising as a growth
strategy
 To create a successful franchise operation you need:
A unique concept
A replicable concept
An expansion plan
To do due diligence
Legal guidance
Initial cost to launch a franchise business is
$100,000 to $750,000
To provide support for franchisees

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