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7 Franchising and the Entrepreneur Section 2: The Entrepreneurial Journey Begins 7 Franchising and the Entrepreneur Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Learning Objectives Describe the three types of franchising: trade name, product distribution, and pure. Explain the benefits of buying a franchise. Explain the drawbacks of buying a franchise. Understand the laws covering franchise purchases. Discuss the right way to buy a franchise. Outline the major trends shaping franchising. Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. The Franchising Boom About 3,000 franchisors operate more than 770,000 outlets in the United States. Franchises generate more than $800 billion in annual sales and account for 4.1% of the U.S. GDP. Franchises employ 8.1 million workers in the United States in more than 300 major industries. Copyright © 2016 Pearson Education, Inc.

Number of Franchised Outlets in the United States Copyright © 2016 Pearson Education, Inc.

Franchised Outlets by Industry Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Franchising Franchising: A system in which 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. Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Franchising Basics Franchisee gets the right to use all of the elements of a fully integrated business operation. Essence of what franchisees purchase from the franchisors: Experience. Key Question: “What can a franchise do for me that I cannot do for myself?” Copyright © 2016 Pearson Education, Inc.

The Franchising Relationship Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Types of Franchising Trade-name: A franchisee purchases the right to use the franchisor’s trade name without distributing particular products exclusively under the franchisor’s name. Product distribution: A franchisor licenses a franchisee to sell its products under the franchisor’s brand name and trademark through a selective, limited distribution network. Pure: A franchisor sells a franchisee a complete business format and system. Copyright © 2016 Pearson Education, Inc.

Franchise Business Index Copyright © 2016 Pearson Education, Inc.

Benefits of Franchising A business system Management training and support Start-up Ongoing Brand name appeal “Cloning” Standardized quality of goods and services Copyright © 2016 Pearson Education, Inc.

Benefits of Franchising (continued) National advertising programs Franchisees contribute 1% to 5% of sales. Financial assistance About 20% of franchisors offer direct financial assistance to franchisees. SBA – Franchise Registry Copyright © 2016 Pearson Education, Inc.

The Franchise Lending Gap Copyright © 2016 Pearson Education, Inc.

Benefits of Franchising (continued from 7-13) Proven products and business formats Centralized buying power Site selection and territorial protection Important issue: Territorial encroachment Greater chance for success Copyright © 2016 Pearson Education, Inc.

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 Copyright © 2016 Pearson Education, Inc.

Planned Sources of Financing for Prospective Franchisees Copyright © 2016 Pearson Education, Inc.

Drawbacks of Franchising (continued from 7-16) Strict adherence to standardized operations Restrictions on purchasing Approved suppliers only Limited product line Contract terms and renewal Average term = 10.3 years Copyright © 2016 Pearson Education, Inc.

Drawbacks of Franchising (continued) Unsatisfactory training programs Market saturation Less freedom “No independence” “Happy prisoners” Copyright © 2016 Pearson Education, Inc.

Ten Myths of Franchising Franchising is the safest way to go into business because franchises never fail. I’ll be able to open my franchise for less money than the franchiser estimates. The bigger the franchise organization, the more successful I’ll be. I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting my experience and know-how. All franchises are the same. Copyright © 2016 Pearson Education, Inc.

Ten Myths of Franchising (continued) I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful. Anyone can be a satisfied, successful franchise owner. Franchising is the cheapest way to get into business for yourself. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee. Once I open my franchise, I’ll be able to run things the way I want to. Copyright © 2016 Pearson Education, Inc.

Franchising and the Law Franchise Disclosure Document (FDD) Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC) Requires franchisors to disclose to potential franchisees information on 23 important topics Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions. Copyright © 2016 Pearson Education, Inc.

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! Copyright © 2016 Pearson Education, Inc.

Soliciting Information Before Selecting a Franchise Number of Franchisees from which Prospective Franchisees Solicit Information Before Selecting a Franchise Copyright © 2016 Pearson Education, Inc.

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 Copyright © 2016 Pearson Education, Inc.

The Right Way to Buy a Franchise (continued from 7-23) 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. Copyright © 2016 Pearson Education, Inc.

Trends Shaping Franchising Changing face of franchisees Minorities own 20.5% of all franchises compared to 14.2% of independent businesses. International opportunities Many franchises are focusing on international markets as a source of growth. Yum! earns 75% of its revenues from international franchises. McDonald’s earns 70% of its sales internationally. Copyright © 2016 Pearson Education, Inc.

Trends Shaping Franchising (continued) Smaller, nontraditional locations Intercept marketing: putting a franchise’s products or services directly in the paths of potential consumers, wherever they may be. Conversion franchising Owners of independent businesses become franchisees to gain the advantage of name recognition. 72% of North American franchisors use it as a growth strategy. Copyright © 2016 Pearson Education, Inc.

Trends Shaping Franchising (continued) Refranchising Franchisors sell their company-owned outlets to franchisees. Multi-unit franchising IFA: 20% of franchise owners are multiple-unit owners. Typical multiple-unit franchises own five outlets. Copyright © 2016 Pearson Education, Inc.

Trends Shaping Franchising (continued) Area development and master franchising Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time. Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees. Copyright © 2016 Pearson Education, Inc.

Trends Shaping Franchising (continued) Co-branding Aka piggyback or combination franchising: Two or more franchises team up to sell complementary products or services under one roof. Copyright © 2016 Pearson Education, Inc.

Copyright © 2016 Pearson Education, Inc. Conclusion Franchising: Is a key part of the small business sector Increases the chance of business success for the entrepreneur Growth continues Copyright © 2016 Pearson Education, Inc.