Chapter 6: Franchising
BEWARE of these Franchisors
"Get rich quick" schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions.
Why Buy a Franchise?
Key Question: "What can a franchise do for me that I cannot do for myself?"
Drawbacks of Franchising:
Less freedom - "No independence" "Happy prisoners"
Drawbacks of Franchising:
Limited product line
Benefits of Franchising:
Management training and support - Start-up - Ongoing
Drawbacks of Franchising:
Market saturation
Franchise Disclosure Document (FDD)
Requires franchisors to disclose to potential franchisees information on 23 important topics
Drawbacks of Franchising:
Restrictions on purchasing from Approved suppliers only
Benefits of Franchising:
Site selection and territorial protection Important issue: Territorial encroachment
Factors that make a Franchise Appealing:
Unique concept or marketing approach Profitability Registered trademark Business system that works Solid training program Affordability Positive relationship with franchisees
Drawbacks of Franchising:
Unsatisfactory training programs
Benefits of Franchising:
Financial assistance About 20% of franchisors offer direct financial assistance to franchisees. SBA - Franchise Registry
Licensing vs Franchising:
As a Licensor you can do the same thing as a Franchisor... for less $$$ but the trick is to individually negotiate each license and not to sell too many of them.
Licensing vs Franchising:
As a Licensor your cost to set up a Licensing Program is the cost of a Good Attorney preparing a Good 'Master Licensing' document.
Licensing vs Franchising:
As the Franchisor your cost to set up a Franchise program will start at $50,000 and can go up to $500,000.
BEWARE of these Franchisors
Attempts to discourage your attorney from evaluating the contract before signing it. No written documentation. A high pressure sale. Claims to be exempt from federal disclosure laws.
Benefits of Franchising:
Brand name appeal - "Cloning"
Benefits of Franchising:
Business Systems - Point of Sale - Employee Training Manuals
Benefits of Franchising:
Centralized buying power
BEWARE of these Franchisors
Claims that the contract is "standard; no need to read it." Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Poorly prepared operations manual.
Drawbacks of Franchising:
Contract terms and renewal Average term = 10.3 years
Why Buy a Franchise?
Essence of what franchisees purchase from the franchisors: Experience.
Franchise Disclosure Document (FDD)
Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC)
The RIGHT way to buy a Franchise:
Evaluate yourself - What do you like and dislike? Research your market. Consider your franchise options. Get a copy of the Franchisor's FDD - and read it! Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice.
Drawbacks of Franchising: :
Franchise fees and ongoing royalties Average upfront franchise fee = $25,147 Royalties range from 1% to 11% of franchisees' sales Average royalty = 6.7% of sales
Why Buy a Franchise?
Franchisee gets the right to use all of the elements of a fully integrated business operation.
Pure (Business format) Franchising:
Franchisee purchases a complete business system including license for trade name use, products or services to be sold or resold, operations methods, marketing plan, quality control process, business support services, etc. Ex: Quiznos, B2B CFO, Stanley Steamer, Motel 6, etc.
Product Distribution Franchising:
Franchisee purchases right to sell specific products under the Franchiser Brand Name and Trademark thru a selective, limited distribution network. Ex: Lexus, Ford, Pepsi, Chevron, etc.
Trade-name Franchising:
Franchisee purchases right to use the Franchisor's Tradename without distributing particular products exclusively under the Franchisor's name. Ex: True Value, Western Auto
Myths of Franchising:
Franchising is the safest way to go into business. Cost Estimates are high. Actual costs are lower. Bigger Franchises are more successful. I can modify the Franchisor's System as I see fit. All Franchises are the same.
Benefits of Franchising:
Greater chance for success
Ten Myths of Franchising
I can turn over management to someone else. Anyone can do it. Low cost way to get into business. Franchisor will solve problems that come up. After I open I can do as I want
Benefits of Franchising:
National advertising programs Franchisees contribute 1% to 5% of sales.
Franchise Disclosure Document (FDD)
Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions
BEWARE of these Franchisors
Promises of future earnings with no documentation. High franchisee turnover or termination rate. Unusual amount of litigation by franchisees
Benefits of Franchising:
Proven products and business formats
Benefits of Franchising:
Standardized quality of goods and services
Drawbacks of Franchising:
Strict adherence to standardized operations
Licensing vs Franchising:
The difference between a License and a Franchise is the degree to which you are willing to negotiate the individual elements of the License vs requiring that everyone agree to a standard license agreement ("Franchise").
Types of Franchising:
Trade-name Product distribution Pure (Business format)
Definition of Franchising
semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system
