Franchising Opportunities part 3 Pursuing New Venture Opportunities 6 Franchising Opportunities PowerPoint Presentation by Charlie Cook 12e Copyright © 2003 South-Western College Publishing. All rights reserved.

Looking Ahead After studying this chapter, you should be able to: Explain franchising terms and the structure of the industry. Identify the major pros and cons of franchising Describe the process for evaluating a franchise opportunity. Discuss certain legal considerations in franchising. Copyright © by South-Western College Publishing. All rights reserved.

Franchising Terms Franchising Franchise contract Franchise A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchise contract The legal agreement between franchisor and franchisee Franchise The privileges conveyed in the franchise contract Copyright © by South-Western College Publishing. All rights reserved.

Franchising Terms (cont’d) Franchisee An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party Copyright © by South-Western College Publishing. All rights reserved.

Types of Franchises Product and Trade Name Franchise Grants the right to use a widely recognized product or name Business Format Franchise Provides an entire marketing system and ongoing guidance from the franchisor Piggyback Franchising The operation of a retail franchise within the physical facilities of a host store Copyright © by South-Western College Publishing. All rights reserved.

Types of Franchises (cont’d) Master Licensee An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory Multiple-Unit Ownership Holding by a single franchisee of more than one franchise from the same company Area Developers Individuals or firms that obtain the legal right to open several franchised outlets in a given area Copyright © by South-Western College Publishing. All rights reserved.

The Structure of Franchising Franchisee- Owned Operating Units Franchisor Company- Owned Stores Franchise Parties Master Licensee/ Area Developers Industry Associations (example: IFA) Business/Consulting Firms (example: Franchise Connections) Federal/State Agencies (example: FTC) Franchise Facilitators Fig. 6-1 Copyright © by South-Western College Publishing. All rights reserved.

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 Copyright © by South-Western College Publishing. All rights reserved.

Franchisor Controls on Franchisees Restricting of sales territory Requiring site approval and imposing requirement on the outlet’s appearance Restricting the goods/ services that can be sold Requiring specific operating hours Controlling advertising Copyright © by South-Western College Publishing. All rights reserved.

The Pros and Cons of Franchising Pluses Minuses Formalized training Financial assistance Proven marketing methods Managerial assistance Quicker startup time Overall lower failure rates Franchise fees Royalties Restrictions on growth Less independence in operations Franchisor may be sole supplier of some supplies Termination/renewal clauses Fig. 6-2 Copyright © by South-Western College Publishing. All rights reserved.

Evaluating Franchise Opportunities Locating a Franchise Opportunity Investigating the Potential Franchise Information sources Independent, third-party sources Franchisors themselves Existing and previous franchisees Copyright © by South-Western College Publishing. All rights reserved.

The Nation’s Top Fifteen New Franchises Curves for Women Ace America’s Cash Express Home Instead Senior Care Cash Converters Int’l Franchise Group The Mad Science Group Mister Money—USA Inc. House Doctors Atlanta Bread Company Bennigan’s Grill & Tavern Wetzel’s Pretzels Sport Clips Dealer Specialties Tilden for Brakes Car Care Centers MilliCare Environmental Services Talking Book World Source: By permission of Entrepreneur magazine, 2445 McCabe Way, Irvine, California 92614. For subscription information call 1-800-421-6229. #8788 Reprinted by Reprint Management Services, (717) 399-1900, http://www.rmsreprints.com—sales@rmsreprints.com. Copyright © by South-Western College Publishing. All rights reserved.

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 Copyright © by South-Western College Publishing. All rights reserved.

Legal Considerations in Franchising The Franchising Contract Signed with legal counsel present Contains a termination and transfer provision Contains statement of rights to renew contract Copyright © by South-Western College Publishing. All rights reserved.

Franchise Disclosure Requirements 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. 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. Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures. 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. 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. Fig. 6-3 Copyright © by South-Western College Publishing. All rights reserved.

Items Covered in the Uniform Franchise Offering Circular (UFOC) The franchisor, its predecessors and affiliates Business experience Litigation Bankruptcy Initial franchise fee Other fees Initial investment Restrictions on sources of products and services Franchisee’s obligations Financing Franchisor’s obligations Territory Trademarks Patents, copyrights, and proprietary information Obligation to participate in the actual operation of the franchise Restrictions on what the franchisee may sell Renewal, termination, transfer, and dispute resolution Public figures Earnings claims List of outlets Financial statements Contracts Receipt Fig. 6-2 Copyright © by South-Western College Publishing. All rights reserved.