Definition: 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. MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising What are the three types of Franchising?

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Types of Franchising: 1.Trade-name 2. Product distribution 3. Pure (Business format) Define Trade-name Franchising and give an example.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising 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 Define Product Franchising and give an example.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Product Distribution Franchising: Franchisee purchases right to sell specific products under the Franchisor’s Brand Name and Trademark thru a selective, limited distribution network. Ex: Lexus, Ford, Pepsi, Chevron, etc. Define Pure / Business Format Franchising and give an example.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising 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. What are some of the reasons that people purchase a Franchise?

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Why Buy a Franchise? 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?” What are some Benefits of Franchising?

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Benefits of Franchising: Business Systems - Point of Sale - Employee Training Manuals Management training and support - Start-up - Ongoing Brand name appeal - “Cloning” Standardized quality of goods and services

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Benefits of Franchising: 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 Proven products and business formats

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Benefits of Franchising: Centralized buying power Site selection and territorial protection Important issue: Territorial encroachment Greater chance for success What are some Drawbacks of Franchising?

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising 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 Strict adherence to standardized operations Restrictions on purchasing from Approved suppliers only

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Drawbacks of Franchising: Limited product line Contract terms and renewal Average term = 10.3 years Unsatisfactory training programs Market saturation Less freedom – “No independence” “Happy prisoners”

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Ten Myths of Franchising: 1.Franchising is the safest way to go into business. 2.Cost Estimates are high. Actual costs are lower. 3.Bigger Franchises are more successful. 4.I can modify the Franchisor’s System as I see fit. 5.All Franchises are the same.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Ten Myths of Franchising: 6.I can turn over management to someone else. 7.Anyone can do it. 8.Low cost way to get into business. 9.Franchisor will solve problems that come up. 10.After I open I can do as I want. What is a Franchise Disclosure Document and why do they exist?

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising 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

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising The RIGHT way to buy a Franchise: 1.Evaluate yourself - What do you like and dislike? 2.Research your market. 3.Consider your franchise options. 4.Get a copy of the Franchisor’s FDD – and read it! 5.Talk to existing franchisees. 6.Ask the franchiser some tough questions. 7.Make your choice.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising Factors that make a Franchise Appealing: 1.Unique concept or marketing approach 2.Profitability 3.Registered trademark 4.Business system that works 5.Solid training program 6.Affordability 7.Positive relationship with franchisees

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising BEWARE of these Franchisors: 1.Claims that the contract is “standard; no need to read it.” 2.Failure to provide a copy of the required disclosure documents. 3.Marginally successful prototype or no prototype. 4.Poorly prepared operations manual. 5.Promises of future earnings with no documentation. 6.High franchisee turnover or termination rate. 7.Unusual amount of litigation by franchisees.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising BEWARE of these Franchisors: 8.Attempts to discourage your attorney from evaluating the contract before signing it. 9.No written documentation. 10.A high pressure sale. 11.Claims to be exempt from federal disclosure laws. 12.“Get rich quick” schemes, promising huge profits with minimal effort. 13.Reluctance to provide a list of existing franchisees. 14.Evasive, vague answers to your questions.

MANA 3325 T-Th 7-8:30 Professor Lee Thurburn Ch. 6: Franchising 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. As a Licensor your cost to set up a Licensing Program is the cost of a Good Attorney preparing a Good ‘Master Licensing’ document. 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”). 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.