chapter 6

although franchise contracts cover everything from initial fees and continuing payments to training programs and territorial protection, three terms are responsible for most franchisor-franchisee disputes

termination of the contract, contract renewal, and transfer and buyback provisions.

number one threat to franchisees

territorial encroachment

Under what circumstances would a typical franchiser have the right to cancel a franchise contract?

the franchisor declares bankrupt

particular items in the FDD that entrepreneurs should focus on include:

the franchisor's experience, the current and past litigation against the franchisor, and fees and total investment, and the franchisee turnover rate for the previous three years

intercept marketing

the idea is to put a franchise's products or services directly in the paths of potential customers, wherever that may be

conversion franchising

the owners of independent businesses become franchisees to gain the advantage of name recognition

Franchise disclosure document (FDD)

the purpose of the regulation is to assist potential franchisees' investigations of a franchise deal and to introduce consistency into the franchisor's disclosure statements.

franchisee turnover rate

the rate at which franchisees leave the system. It is the most revealing items in the FDD

refranchising

to put outlets into the hands of operators, who tend to run their franchises more efficiently than the franchisor can.

List the three types of systems of franchising

trade-name franchising, product distribution franchising, and pure franchising.

to create a successful franchise operation a business must meet the criteria outlined:

unique concept, replicable, expansion plan, due diligence, legal guidance, support for franchisees

Territorial protection in franchising:

varies according to industry

franchising has experienced three major growth waves since its beginning:

1st wave occurred in the 1970's (fast food restaurants) 2nd wave occurred in mid-1980's (shifting to service sector) 3rd wave occurred in the 1990s and now (low-cost franchises)

according to the International Franchise Association ___ of franchisees are multiple-unit owners, a number that is expected to continue to grow over the next several years

20 percent

Experts estimate that ___ of new franchisees are people who have experienced a layoff of some type of job displacement

35-40 percent

In fact ___ of franchisors require their franchisees to invest in local advertising/ __ % of sales.

41%/2

If the turnover rate is less than __ the franchise probably is sound; however, a rate approaching __ is a sign of serious underlying problems in a franchise

5%; 20%

One study reports that ___ of franchisors require franchisees to contribute to a national advertising fund

79 percent

According to a recent study by the International Franchise Association, more than ___ of franchisors say that limited access to credit has slowed their ability to expand.

80 %

Franchise Registry

Created by the International Franchise Association and the Consumer Bankers Association. A program that is designed to increase franchise lending by providing bank financing and loan guarantees to franchisees through the Small Business Administration (SBA)

benefits of buying a franchise

a business system, management training and support, brand-name appeal, standardized quality of goods and services, national advertising programs, financial assistance, proven products and business formats centralized buying power, site selection and territorial protection, increased chance for success

area development

a franchisee earns the exclusive right to open multiple outlets in a specific area within a specified time

multiple-unit franchising

a franchisee opens more than one unit in a broad territory with a specific time period

When franchise contracts are renewed:

a new contract must be drawn up by the two parties

what to look for when evaluating a franchise opportunity

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

as they venture into foreign markets, franchisors have learned that ___ is on key to success.

adaptation

Federal Trade Commissions (FTC)

adopted similar legislator as the franchise disclosure document at the national leel that established full disclosure guidelines on 20 guidelines on 20 topics for any company selling franchises and was designed to give potential franchisees the information they needed to protect themselves from unscrupulous franchisors

Which of the following is an indication of a dishonest franchiser?

attempt to discourage you from allowing an attorney to evaluate the franchise contract

When it comes to purchasing products, equipment, etc., the franchiser:

can set prices paid for the products etc., but cannot set the retail price the franchisee charges

significant trends in franchising include:

changing face of franchisees, multiple-unit franchising, international opportunities, smaller/nontraditional locations, conversion franchising, refranchising, area development and master franchising, cobranding, and serving dual-career couples and aging baby boomers

Which of the following should make a potential franchisee suspicious about a franchiser's honesty?

claims that the franchise contract is a standard one and that there is no need to read it

Establishing a Mrs. Fields Cookies franchise inside a Hardees fast-food franchise is an example of ________ franchising.

cobranding

cobranding/ combination franchising

combining two or more distinct franchises under one roof

________ is when owners of independent businesses become franchisees to gain the advantage of name recognition.

conversion franchising

When buying a franchise, the potential franchisee should first:

evaluate him/herself as to the fit with the franchise

the drawbacks of buying a franchise include

franchise fees and ongoing royalties, strict adherence to standardized operations, restrictions on purchasing, limited product line, market saturation, limited freedom, no guarantee of success

market saturation

franchisees in fast-growing systems reap the benefits of the franchisor's expanding reach, but they also may encounter the downside of a franchisor's aggressive growth strategy

master franchise / subfranchise

gives a franchisee the right to create a semi-independent operation in a particular territory to recuit, sell, and support other franchisees.

The fastest growth rate in franchises is among:

innovative, nontraditional franchisers with fresh approaches

trade-name franchising

involves being associated with brand name, such as True Value hardware or Western Auto and has the right to become identified with the franchisors trade name without distributing particular products exclusively under the manufacturer's name.

Product distribution franchising

involves licensing the franchisee to sell specific products under the manufacturer's brand name and trademark through a selective, limited distribution network. (market automobiles, gasoline products, soft drinks, etc.)

Pure Franchising/ comprehensive franchising/ business format franchising

involves providing franchisees with a complete business format, including a license for a trade name, products or services to be sold, store or building design, methods of operation, a marketing plan, a quality control process, and a network of business support services. most common and fast-growing

franchise experts consider the three most important factors in franchising to be

location, location, and location

When the franchisee has the right to establish a semi-independent organization in a particular territory to recruit, sell, and support other franchises, it is called a ________ franchise.

master

The most efficient method of franchising, from the franchiser's point-of-view, which has become popular in the 1990s and permits one franchisee to hold several franchises from the same franchise company, is called:

multiple-unit franchising

Another term for cobranding franchising is:

piggybacking

Most gasoline products are sold through the ________ system of franchising.

product distribution

________ franchising involves providing the franchisee with a complete business systemthe established name, the building layout and design, accounting systems, etc.

pure

accounts for nearly 95 percent of all franchised outlets

pure franchising

a recent study of franchises reports that the success rate of franchisees is higher when a franchise system does the following:

requires franchisees to have prior industry experience, requires franchisees to actively manage their stores (no "absentee" owners), has built a strong brand name, offers training programs designed to improve franchisees' knowledge and skills.

The payment the franchisee makes to the franchiser based on gross sales is:

royalty

Typically, the franchiser controls are very tight on what the franchisee:

sells its items of the product or service they offer

franchising

semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchisor) in return to become identified with its trademark, to sell its products or services, and often to use its business format and system.

A master franchise is also called:

sub franchise