Franchising

1
Franchising

• The selling of a proven system

2
Franchising

• One of the most effective and efficient methods
  of market expansion
• Definition of franchising A system of marketing
  -- the leasing of a name and idea to investors in
  specified geographic regions
• Types of franchises
• Spin-off a manager (or others) within the
  company is offered a branch office -- often the
  branch is less profitable -- in order to acquire
  equity financing (the branch continues to operate
  under the parent companys name)
• Distribution (traditional) a retailer enters
  into an agreement with a franchisor to sell
  products within a specified territory, using the
  franchisors name and/or trademark
• Identical operation (system - non-traditional)
  MMMuffins, McDonalds, the right to operate an
  identical outlet under the originals name

3
What the Franchisor sells

• The Franchisor sells a package -- a way of
  participating in a business that has a track
  record of success
• The disclosure statement -- designed to attract
  potential franchisees to consider the purchase --
  it includes
• The franchise fee -- can be set at any amount --
  one time expense
• A statement of required investment -- equipment,
  building costs, furniture, fixtures, supplies,
  advance rent, permits, working capital
• The royalty-- 3-6 of sales
• What the franchisor offers the franchisees --
  training, technical information, operating
  manuals, trademarks, real estate, continued
  support, purchasing, territorial support,
  financial assistance (in some cases)

4
Franchisor Advantages and Disadvantages

• Pros
• Greatly reduced capital requirements for
  expansion
• Minimal staffing responsibility
• The ability to expand rapidly
• Control
• Cons
• Risk of losing image and credibility -- this is
  in the hands of the franchisees
• The larger the number of franchises -- the more
  difficult it becomes to coordinate the operation

5
Franchisee Advantages and Disadvantages

• Pros
• The ability to enter an industry without previous
  experience
• Opportunity to open a business with limited
  capital
• Greater chance for initial success (70)
• The franchisors experience
• Continuous market research and product/service
  support
• Standardization of prices, products etc.
• Cons
• Not suited for individuals who are independent
• Services and products can sometimes be purchased
  elsewhere cheaper
• Franchisor could over structure or over saturate
  the market
• Corrupt Franchisors
• Trademarks and symbols may not bring in as much
  business as anticipated

6
Starting a Franchise Franchisor

• The owner (potential Franchisor) following
  consider the following
• The business concept will this business have a
  long life-cycle
• i.e. will franchises be profitable
• Transferability can this business operate on a
  multiple scale or is it best suited to a single
  location
• Resources are management and financial resources
  available to pursue a franchising strategy
• i.e. provide training needs, accounting, market
  research, financial support etc.

7
Evaluating a franchise operation Franchisee

• The investor (potential Franchisee) must evaluate
  the following
• The success of the operation -- is the track
  record sufficient to determine with relative
  certainty that the business will be profitable
• Franchisor experience -- does the franchisor
  offer adequate training and support
• Time span of the opportunity -- is this a
  business that will be around for a long time
• Contract -- do the fees and royalties allow for
  an adequate return on investment (e.g. are
  supplies sold to the franchise at the market
  price?)

8
Franchising A track record of Success

• Ownership, even with limited decision-making
  power, provides a strong motivation for
  franchisees
• Franchises penetrate the local market effectively
  -- especially when they can employ local
  strategies -- Local franchises know the local
  market
• Franchises have a simple organizational structure
  -- streamlining the decision-making process
• The franchisor--franchisee relation is more
  conducive to communication that the traditional
  superior -- subordinate relationship
• Franchises in general have lower overhead that
  corporate structures