1 Ch. Outline-Franchising 1.The terminology and structure of financing 2.The pros and cons of franchising 3.Evaluating franchising opportunities 4.Legal considerations in franchising

2 1. Franchising Terms (Suggestion: the terminology of franchising is confusing to many students, so emphasize correct usage of the terms below.) ► Franchising: a marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to terms specified by the franchisor ► Franchisee: the party in a franchise contract who is granted selling and other privileges whose power is limited by the franchising organization ► Franchisor: the party in a franchise contract who specifies the methods to be followed by the franchisee ► Franchise contract: the legal agreement between franchisor and franchisee ► Franchise: the privileges in a franchise contract ► Product and trade name franchising: a franchise relationship granting the right to use a widely recognized product name ► Business format franchising: the franchisee obtains an entire marketing system and ongoing guidance from the franchisor ► Master licensee: firm or individual acting as a sales agent with the responsibility for finding new franchisees within a specified territory ► Multiple-unit ownership: a situation in which a franchisee owns more than one franchise from the same company ► Area developers: individuals or firms that obtain the legal right to open several outlets in a given area ► Piggyback franchising: the operation of a retail franchise within the physical facilities of a host store

3 Industry Associations (example: IFA) Business/Consulting Firms (example: Franchise Connections) Federal/State Agencies (example: FTC) Franchise Facilitators Franchisee- Owned Operating Units Franchisor Company- Owned Stores Franchise Parties Master Licensee/ Area Developers Fig. 6-1 The Structure of Franchising

4 Alternative Franchising Systems System A Franchisor is a producer or creator System B Franchisor is a wholesaler System C Franchisor is a producer or creator Franchisee is a wholesaler, such as a soft drink bottler Franchisee is a retail establishment, such as a hardware store Franchisee is a retail establishment, such as a fast- food restaurant

5 The Pros and Cons of Franchising Advantages –Probability of success Proven line of business Pre-qualification of franchisee –Training Franchisor-provided –Financial assistance Franchisor assistance –Operating benefits Franchisor-aided Limitations –Franchise costs Initial franchise fee Investment costs Royalty payments Advertising costs –Restrictions on Business Operations –Loss of independence

6 Limitations of Franchising (Franchisees Perspective) 1.Franchise Costs 2.Restrictions on Business Operations 3.Loss of Independence

7 Evaluating Franchise Opportunities Locating a Franchise Opportunity Investigating the Potential Franchise –Information sources Independent, third-party sources Franchisors themselves Existing and previous franchisees

8 Franchising from the Franchisor’s Perspective Benefits –Reduction of capital requirements –Increase in management motivation –Speed of expansion Drawbacks –Reduction in control –Sharing of profits –Increase in operational support costs

9 Franchise Disclosure Requirements A.Basic Requirement: Franchisors must furnish potential franchisees with written disclosures providing important information about the franchisor, the franchised business and the franchise relationship, and give them at least ten business days to review it before investing. B.Disclosure Option: Franchisors may make the required disclosures by following either the Rule’s disclosure format or the Uniform Franchise Offering Circular Guidelines prepared by state franchise law officials. C.Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures. D.No Filing: The Rule requires disclosure only. Unlike state disclosure laws, no registration, filing, review or approval of any disclosures, advertising or agreements by the FTC is required. E.Remedies: The Rule is a trade regulation rule with the full force and effect of federal law. The courts have held it may only be enforced by the FTC, not private parties. The FTC may seek injunctions, civil penalties and consumer redress for violations.