Chapter Five Franchising

Chapter Focus Establish what a franchise is and how it operates. Articulate the difference between product (or trade name) franchises and business-format franchises. Compare the advantages and disadvantages of franchising. Appreciate the relationship between franchisor and franchisee. Explain how to evaluate a potential franchise. Explore franchising in the international marketplace.

Franchise Generated Revenue Franchises 40.9% of total U.S. retail sales $803.2 Billion in 1992 Fig. 5-1

Business Format Franchise Sales by Business Category (1 of 2) Fig. 5-2a $ in Billions Total Sales 1989$ Billion 1990$ Billion 1991$ Billion

Business Format Franchise Sales by Business Category (2 of 2) Fig. 5-2b Construction, Home Improve. Miscellaneous Rental Equipment $ in Billions Total Sales 1989$ Billion 1990$ Billion 1991$ Billion

Types of Franchises Product/Trade Name Franchises Business Format Franchises 31% ($249 Billion sales in 1992) 69% ($554.2 Billion sales in 1992) Fig. 5-3

The Advantages and Disadvantages of Franchising FRANCHISEE’S PERSPECTIVE Table 5-1 FRANCHISOR’S PERSPECTIVE Advantages 1. proven product or service 2. marketing expertise 3. technical and managerial assistance 4. opportunity to learn business 5. quality control standards 6. ease of entry 7. opportunity for growth Disadvantages 1. fees and profit sharing 2. restrictions of freedom 3. overdependence 4. unsatisfied expectations 5. termination of the agreement 6. performance of other franchisees Advantages 1. expansion with limited capital 2. multiple sources of capital 3. controlled expansion 4. motivated franchisees Disadvantages 1. maintaining control 2. sharing profit with franchisees 3. potential for disputes with franchisees

Getting In FRANCHISE FEE Gingiss Formalwear Maaco Auto Painting Meineke Discount Mufflers Jazzercise, Inc. Cost Cutters Family Hair Care Signs first Big Apple Bagels Rocky Mountain Chocolate Factory KFC Mrs. Fields Cookies Dunkin’ Donuts Burger King Baskin-Robbins Taco John’s Subway Godfather’s Pizza Super 8 Motels START-UP COSTSROYALTY to $15K $30K $22.5K $650 $19.5K $15K $18.5K $19.5K $25K $40K to $15K $19.5K $10K $7.5K - $15K $20K+ $103K - 200K $155K $93K $1.3K - $16.8K $48K - $93K $50K $150K - $180K $94K - $194K $125K $151K - $215K $181K - $255K $247K - $1.3M $42K - $370K $273 - $551K $55.7K - $141K $64K - $276K $300K - $2.5M 0.5% - 6% 8% 7% to 20% 6% 5% 4% 6% 4.9% 3.5% % 4% 8% 5% 4% page 129

Evaluate Your Needs How much equity capital will you need to purchase the franchise and operate it until your income equals your expenses? Where are your going to get it? Are you prepared to give up some independence of action to secure the advantages offered by the franchise? Do you really believe you have the innate ability, training, and experience to work smoothly and profitable with the franchisor, your employees, and your customers? Are you ready to make a long-term commitment to working with this franchisor, offering its product or service to your public? page 133

The Franchise Agreement Franchise, Royalty, and Advertising Fees. Termination of the Franchise Agreement. Terms and Renewal of Agreement. Exclusive Territory. Get Professional Advice. page 144

International Franchising United Kingdom 2,843 Continental Europe 4,975 Africa 641 Near East 339 Caribbean 792 South America 521 Central America 179 Franchising companies...approx. 4,500 Number of franchising outlets...approx. 560,000 Asia 2,897 Australia 2,858 New Zealand 420 Japan 8.975