New Value Creation: CH 15

Top 10 Business Lines in Which Business Format Franchises Operate

1. Automotive 2. Commercial and residential services 3. Quick service restaurants 4. Table/Full-service restaurants 5. Retail food 6. Lodging 7. Real Estate 8. Retail products and services 9. Business services 10. Personal services

Disadvantages of Buying a Franchise

Cost of the franchise Restrictions on creativity Duration and nature of the commitment Risk of fraud, misunderstandings, or lack of franchisor commitment Problems of termination or transfer Poor performance on the part of other franchisees Potential for failure

Her Notes on International Franchising

Different legal requirements in different countries - severe ramifications for non-compliance: non-resident withholding taxes, foreign exchange controls, import duties, government approvals, protection of intellectual property rights, filings with competition and intellectual property authorities, central-banks clearances, appearance of franchise and so forth

Other Fees

Other fees may be charged for various activities, including: - Training additional staff - Providing management expertise when needed - Providing computer assistance -Providing a host of other items or support services

When Is Franchising Most Appropriate?

____________ is most appropriate when a firm has a strong or potentially strong trademark, a well-designed business method, and a desire to grow. A franchise system will ultimately fail if the franchisee's brand doesn't add value for customers and its business method is flawed or poorly developed.

Her Notes on Answering the following questions will help determine if franchising is right for you

A business' gross profit is its sales revenue minus the cost of goods sold. The gross profit comes from the markup or profit margin on the products you sell. For example, if your business sold $500,000 worth of products and those products cost $200,000, the business generated a gross profit of $300,000. If a company has more expenses than gross profit, the result is a net business loss.

Advantages of Buying a Franchise

A proven product or service within an established market An established trademark or business system Franchisor's training, technical expertise, and managerial expertise An established marketing network Franchisor ongoing support Availability of financing Potential for business growth

Area Franchise Agreement

Allows a franchisee to own and operate a specific number of franchises in a particular geographic area.

Master Franchise Agreement

Allows a franchisee to own and operate a specific number of franchises in a particular geographic area. Plus: Provides the franchisee the right to sell to others (subfranchisees), who find and manage their own franchises

Product and Trademark Franchise

An arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. This approach typically connects a single manufacturer with a network of dealers or distributors. For example, General Motors has established a network of dealers that sell GM cars and use the GM trademark in their advertising and promotions. Other examples of product and trademark franchisors include agricultural machinery dealers, soft drink bottlers, and beer distributorships.

Business Format Franchise

An arrangement under which the franchisor provides a formula for doing business to the franchisee along with training, advertising, and other forms of assistance. Fast-food restaurants, convenience stores, and motels are well-known examples of business format franchises. Business format franchises are by far the most popular form of franchising, particularly for entrepreneurial firms.

Regulations

An entrepreneur should also be aware that over the years a number of fraudulent franchise organizations have come and gone and have left financially ruined franchise owners behind.

Answering the following questions will help determine if franchising is right for you

Are you willing to take orders? Franchises are typically very particular about how outlets operate. Are you willing to be part of a franchise "system" rather than be an independent businessperson? How will you react if you make a suggestion to your franchisor and your suggestion is rejected? What are you looking for in a business? How hard do you want to work? How willing are you to put your money at risk? How will you feel if your business is operating at a net loss but you will have to pay royalties on your gross income?

Her Notes on Advantages and Disadvantages of Franchising as a Method of Business Expansion

Disadvantage - Lawyers for the city of Seattle will be in federal court Tuesday to defend the city's new $15-an-hour minimum wage law. Franchise owners have sued, arguing the law improperly treats them as big businesses rather than as locally owned businesses that operate on a license from a larger national company. The new city law phases in the $15 wage over a period of years, beginning April 1. Small businesses have longer to reach $15 than big businesses, and franchisees say that puts them at a disadvantage to other small businesses in the city

Approach Franchising With Caution and Care

Establishing a franchise system should be approached carefully and deliberately. Franchising is a complicated business endeavor, and an entrepreneur must look closely at all its aspects before deciding to franchise.

Advertising Fees

Franchisees are often required to pay into a national or regional advertising fund.

Her Notes on Franchise Ethics

Franchises start out at a huge disadvantage.... Failure rate not much different from a regulr start-up. 30-40% fail within 5-7 years.

Chapter 15

Franchising

Franchising

Franchising is a form of business organization in which a firm that already has a successful product or service (franchisor) licenses its trademark and method of doing business to another business or individual (franchisee) in exchange for a franchise fee and an ongoing royalty payment. Some franchisors are established firms (like McDonald's) while others are first-time enterprises being launched by entrepreneurs.

Common Misconceptions About Franchising

Franchising is a safe investment. A strong industry ensures franchise success. A franchise is a "proven" business system. There is no need to hire a franchise attorney or an accountant. The best systems grow rapidly and it is best to be part of a rapid-growth system. I can operate my franchise outlet for less than the franchisor predicts. The franchisor is a nice person—he'll help me out if I need it.

Types of Franchise Agreements

Individual Franchise Agreement Area Franchise Agreement Master Franchise Agreement

The Costs Involved With Buying a Franchise

Initial Franchise Fee Capital Requirements Continuing Royalty Payment Advertising Fees Other Fees

International Franchising

International opportunities for franchising are becoming more prevalent for the following two reasons: - The markets for certain franchised products in the U.S. have become saturated (i.e., fast food). - The trend toward globalization continues. Steps to take before buying a franchise overseas: - Consider the value of the franchisor's name in the foreign country. - Get a good lawyer. - Determine whether the product or service is saleable in the foreign country. - Find out how much training and support you will receive from the franchisor.

Individual Franchise Agreement

Involves the sale of a single franchise for a specific location

Continuing Royalty Payment

Is usually around 5% of monthly gross income.

Fraudulent Franchise

Most of them are promoted through telemarketing calls peppered with false promises, where victims are put under pressure to make a quick decision to part with their money. The law, however, forbids them from doing this. A franchise seller must provide what's called a Disclosure Document at least 10 days before you invest. This has to include details like the names and phone numbers of other franchise owners, an audited statement covering financial performance, all of the true costs of running the business and verifiable information about the people behind the franchise program.

Two Types of Franchise Systems

Product and Trademark Franchise Business Format Franchise

Disadvantages of Franchising as a Method of Business Expansion

Profit sharing Loss of control Friction with franchisees Managing growth Differences in required business skills Legal expenses

Buying a Franchise

Purchasing a franchise is an important business decision involving a substantial financial commitment. Potential franchise owners should strive to be as well informed as possible before purchasing a franchise and should be aware that it is often legally and financially difficult to exit a franchise relationship.

Advantages of Franchising as a Method of Business Expansion

Rapid, low-cost market expansion Income from franchise fees and royalties Franchisee motivation Access to ideas and suggestions Cost savings Increased buying power

Her Notes on Buying a Franchise

Revoke - In a harrowing turn of events, a barroom melee quickly turned deadly after scores of so-called 'biker gang' members engaged in fatal combat outside a Dallas-area restaurant franchise. The restaurant, known as Twin Peaks, was immediately and temporarily shut down by the Texas Alcoholic Beverage Commission amid major safety concerns. Not long after, the business's franchisor revoked all franchising rights conferred on the franchisees, and have opted to permanently sever ties with these restaurant investors, presumably due to serious contract violations regarding restaurant safety protocol. According to reports, the Twin Peaks franchisees ignored several warnings from area law enforcement officials familiar with the underlying dynamics of motorcycle gang activity, and allowed the groups to converge on the restaurant on the afternoon of May 18, 2015. Sadly, nine individuals were killed at as a result of the conflict, and close to two dozen more were injured by stray gunfire or other trauma. During the incident, other diners and staff members were forced to huddle in deep freezers for protection, also placing the health and livelihood of these individuals at risk.

Her Notes on Advantages and Disadvantages of Buying a Franchise

Takes 10 - 20 years to get out of the franchise agreement, you basically have to wait until the term runs out. Franchisor, however, can terminate the agreement for a whole slew of reasons. You can transfer the franchise, but the franchisor has to agree.... And the new franchisee has to pay the franchise fee and go through training before the franchisor will approve. THEN, they will make you sign a non-compete lasting 2-3 years.

Capital Requirements

The costs vary but may include the cost of buying real estate, the cost of putting up a building, the purchase of inventory, and the cost of obtaining a business license.

Initial Franchise Fee

The initial fee varies depending on the franchisor.

Franchise Ethics

The majority of franchisors and franchisees are highly ethical. There are certain features of franchising, however, that make it subject to ethical abuse. These features are as follows: - The get-rich-quick mentality - The false assumption that buying a franchise is a guarantee of business success - What is the failure rate of franchises? - Conflicts of interest between franchisors and franchisees

Federal Rules and Regulations

The offer and sale of a franchise are regulated at the federal level. According to Federal Trade Commission (FTC) rule 436, franchisors must furnish potential franchisees with written disclosures that provide information about the franchisor, the franchised business, and the franchise relationship. In most cases, the disclosures are made through a lengthy document referred to as the Franchisor Disclosure Document (FDD). The FDD contains 23 categories of information that give a prospective franchisee a broad base of information about the background and financial health of the franchisor.

Her Notes on When to Franchise?

These two elements aren't independent from each other. A strong consumer brand supports and reinforces a strong network, as it inspires the network members, who race to join it. And a thriving business network supports and reinforces the consumer brand, as the franchise delivers on brand promises. Then there is the "context" - the conditions and circumstances that add a virtuous cycle of growth that makes the franchise great

Her Notes on The Costs Involved With Buying a Franchise

context changes. Today, women do not stay home, at least not as much as in the old days. And on-line sales are rapidly replacing conventional retail sales. Avon - $10 Golfsmith - $30k franchise fee, 330k-400k turnkey package for a store