Entrepreneurship: Chapter 5: Franchising
Franchise
An agreement that binds a franchisor with a franchisee
Advantages of franchising from the franchisor's perspective
Expansion with limited capital, multiple sources of capital, controlled expansion, motivated franchisees, and bulk-purchasing discounts
Disadvantages of franchising from the franchisee's perspective
Fees and profit sharing, restrictions of freedom, overdependence or unsatisfied expectations, risk of fraud or misunderstanding, termination of the agreement, and performance of other franchisees
Disclosure statements provide information on the following 20 items
Franchisor, Business experience of the franchisor, Litigation, Bankruptcy, Initial Fee, Other Fees, Franchisee's Initial Investment, Obligation of Franchisee to Purchase or Lease from Designated Source, Obligations of Franchisee to Purchase or Lease in Accordance with Specifications or from Approved Suppliers, Financing Arrangements, Obligations of the Franchisor: Other Supervision, Assistance, or Service, Exclusive Area or Territory, Trademarks, Trade Names, and Service Marks, Patent and Copyrights, Obligation of Franchisee to Participate in the Actual Operations of the Franchise, Restrictions on Goods and Services Offered by Developer/Franchise, Renewal, Termination, Repurchase, Modification, and Assignment of the Franchise Agreement and Related Information , Arrangements with Public Figures, Statement of per-Franchise Average Gross Sales and Ranges of Gross Sales for the Year Ended Month, Day, Year, Other Franchises of the Franchisor, Financial Statements, Contracts, Exhibit A: Franchise Agreement, Exhibit B: Area Development Agreement, Exhibit C: Preliminary Agreement, Exhibit D: Royalty Incentive Rider, Exhibit E: Disclosure Acknowledgment Statement, Exhibit F: List of Franchisees as of Month, Day, Year, Exhibit G: List of Franchisees who have ceased doing business in the one-year period immediately preceding month, day, year, and Exhibit H: Financial Statements of the Franchisor
Advantages of franchising from the franchisee's perspective
Proven product or service, marketing expertise, financial assistance, technical and managerial assistance, opportunity to learn business, quality control standards, efficiency, and opportunity for growth
Franchisors are required by...
The Federal Trade Commission (FTC) to provide disclosure statements to prospective or actual franchisees
Franchise Agreement
The legal contract that binds both parties involved in the franchise
Franchise Fee
The one-time payment made to become a franchise
Royalty Fees
The ongoing payments that franchises pay to franchisors- usually a percentage of gross sales
Due diligence
The process of thoroughly investigating the accuracy of information before signing a franchise (or any other) agreement
Franchisor
A parent company of the product, service, or method
Franchisee
A small business that pays fees and royalties for exclusive rights to local distribution of the product or service
Business-format franchising
A type of franchising in which the franchisee adopts the franchisor's entire method of operation
Product-distribution franchising
A type of franchising in which the franchisee agrees to purchase the products of the franchisor or to use the franchisor's name
Disclosure statements
Information that franchisors are required to provide to potential franchisees
Disadvantages of franchising from the franchisor's perspective
Loss of control, sharing profit with franchisees, and potential for disputes with franchisees
