1. PowerPoint Presentation by Charlie Cook The University of West Alabama William B. Gartner Marlene G. Bellamy CHAPTER 11 PART THREE: Enterprising Strategies © 2010 South-Western, a part of Cengage Learning All rights reserved. Franchising

2. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–2 KEY CONCEPTS 1.Buying a franchise enables enterprisers to sell brand-name goods and services by entering into a contractual business relationship with a franchisor, the parent business. Franchisees can own one unit or obtain the rights to develop multiple units in a territory. The Federal Trade Commission regulates the offer and sale of franchises, and many states have their own franchise laws. 2.Choosing a franchise requires the same careful due diligence process as other prospective business ventures. Franchising’s benefits include training, help and support, system synergies, financing assistance, and economies of scale. However, the franchisee must comply with the franchisor’s operating restrictions and contractual obligations and pay the franchisor an initial fee as well as ongoing fees and royalties.

3. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–3 KEY CONCEPTS 3.Entrepreneurs with an easily replicated business model, a strong brand or trademark, and a unique concept can use franchising to grow their businesses quickly. Other enterprisers become franchisees and provide talent and capital. While becoming a franchisor can be quite profitable, the franchisor loses some profits to the franchisees and also gives up a degree of operating control. Successful franchisors know what it takes to be a good franchisee, have systems in place to recruit and train franchisees, and work closely with system members.

4. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–4 The Franchise Route to Business Ownership FranchiseFranchise  The rights to offer specific products or services under explicit guidelines at a certain location for a declared period of time. FranchisingFranchising  A type of business ownership where a parent business (the franchisor) provides an investor (the franchisee) with the rights to sell its products or services and use its trademark and operating procedures.

5. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–5 Franchises by Industry Category exhibit 11.1 Source: “The Profile of Franchising,” Franchising World, March 2007,p.58.

6. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–6 Direct Contribution of Franchising to the U.S. Economy exhibit 11.2 Source: Economic Impact of Franchised Businesses, a study conducted by PricewaterhouseCoopers for the IFA Educational Foundation, 2004.

7. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–7 How Franchising Works Franchise FormatsFranchise Formats  Business format franchise  A type of franchise where the franchisee purchases a product and a complete system to operate the business.  Affiliation or conversion franchising  A business format franchise in which an operating business becomes part of a franchise system to take advantage of the brand but has more flexibility with regard to operating format.  The unit name may reflect both the franchisor and the local entity.

8. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–8 How Franchising Works (cont’d) Franchise Formats (cont’d)Franchise Formats (cont’d)  Product and trademark (product distribution) franchise  Franchise arrangement under which manufacturers grant franchisees, or dealers, the right to buy, sell, and advertise the products under the manufacturer’s trademarked name.

9. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–9 How Franchising Works (cont’d) Unit Franchise Area Development Franchise Master Franchise (subfranchising) Franchise Purchase Options

10. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–10 Legal Aspects of Franchising Federal Regulation of Franchise SalesFederal Regulation of Franchise Sales  FTC Rule 436  Federal Trade Commission regulation that governs disclosure requirements for the offer and sale of franchises in all 50 states.  Uniform Franchise Offering Circular (UFOC)  A document prepared by franchisor for prospective franchisees that includes 23 issues that disclose background information and financial condition of the franchisor.

11. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–11 Rule 436 Provisions Basic Requirements Coverage Disclosure Document No Filing Remedies Purpose Rule 436 Provisions

12. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–12 Rule 436 Requirements Basic Disclosures Earnings Claims Advertised Claims Franchise Agreements Refunds Contradictory Claims Rule 436 Requirements

13. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–13 Summary of the Uniform Franchise Disclosure Document (UFDD) exhibit 11.3

14. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–14 Summary of the Uniform Franchise Disclosure Document (cont’d) exhibit 11.3 Section Description

15. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–15 Summary of the Uniform Franchise Disclosure Document (cont’d) exhibit 11.3 Section Description

16. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–16 Summary of the Uniform Franchise Disclosure Document (cont’d) exhibit 11.3 Section Description Source: North American Securities Administrators Association, Inc. 2008 Franchise Registration and Disclosure Guidelines, North American Securities Administrators Association, http://www.nasaa.org (June 14, 2008).

17. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–17 State Regulation of Franchises exhibit 11.4 Source: “State Offices Administering Franchise Disclosure Laws,” Federal Trade Commission, http://www.ftc.gov/bcp/ franchise/netdiscl.htm (February 15, 2007).

18. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–18 Why Buy a Franchise? Proven Business Model Training and Support Brand Name and Recognition Financing System Synergies Economies of Scale Benefits of Franchising

19. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–19 Why Buy a Franchise? Operating Restrictions Interdependence Costs Contractual Obligations Business Risks Missed Expectations Downside of Franchising

20. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–20 Franchise Costs Cost Categories for Business Format FranchisesCost Categories for Business Format Franchises 1. Initial Franchise Fee 2. Capital costs 3. Other start-up costs 4. Royalty payments 5. Advertising fees 6. Other fees 7. Purchase of supplies

21. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–21 Costs to Buy a Franchise exhibit 11.5 Source: Adapted from the “2008 Franchise 500,” Entrepreneur.com, http://www.entrepreneur.com/franchise500/index.html (June 16, 2008).

22. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–22 Costs to Buy a Franchise (cont’d) exhibit 11.5 Source: Adapted from the “2008 Franchise 500,” Entrepreneur.com, http://www.entrepreneur.com/franchise500/index.html (June 16, 2008).

23. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–23 Evaluating a Franchise Opportunity Due Diligence Guidelines for Evaluating the Franchise:Due Diligence Guidelines for Evaluating the Franchise:  Demand  Competition  Brand equity  Franchisor’s background  Training and support  Operating restrictions  Other questions  Site visits

24. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–24 Acquiring a Franchise The Franchise License AgreementThe Franchise License Agreement  Gives the franchisee the right to use the franchisor’s registered brands and trademarks together with a specific business operating system.  Will clearly state that the franchise company retains all ownership rights to the brand, trademarks, and proprietary business operating systems. The Purchase ProcessThe Purchase Process  Sign the agreement only after you and your attorney are comfortable with the terms and conditions of the agreement.

25. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–25 Starting a Franchise System Why Become a Franchisor?Why Become a Franchisor?  Expand the business through the use of other people’s capital and talents.  Shorten the time to bring the business concept to a larger market.  Generate income through fees and royalties from franchisees.  Harness the effort and creativity of motivated owner/managers.  Share costs of advertising and other expenses.  Increase buying power.

26. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–26 Starting a Franchise System (cont’d) Downside to Becoming a FranchisorDownside to Becoming a Franchisor  Lose a portion of profits to franchisees.  Lose some control over operations to franchisees.  Face the difficulty of keeping franchisees happy as the franchise grows and changes over time.  Expend significant time and energy to grow the franchise system.  Incur significant legal costs to develop the franchise system.

27. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–27 When to Franchise Developing a Franchise System Requires:Developing a Franchise System Requires:  A business model that can be replicated in other areas.  A business that will have a strong brand or trademark.  A unique concept.  A business that can be taught easily to others who may not have experience in the industry.  A business that others can manage.

28. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–28 Starting a Franchise System (cont’d) Steps in Franchising a Business:Steps in Franchising a Business: 1. Develop a business plan for the franchise system. 2. Hire a franchise attorney and a franchise development consultant. 3. Identify the intellectual property that serves as the basis for the franchise system. 4. Develop the UFOC and the franchise agreement. 5. Develop all operating manuals and procedures necessary for a potential franchisee to successfully run a franchise unit.

29. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–29 Starting a Franchise System (cont’d) Steps in Franchising a Business (cont’d):Steps in Franchising a Business (cont’d): 6. Identify your franchise development team. 7. Create a process for attracting prospective franchisees. 8. Work closely with franchisees.

30. © 2010 South-Western, a part of Cengage Learning. All rights reserved.11–30 International Franchising International Franchising ConsiderationsInternational Franchising Considerations  Differences in national franchise laws  Lack of familiarity with the concept of franchising  Development of local partnering arrangements  Availability of local resources to support the franchise  Adaptation of the franchise concept to local customs and tastes