Transcript Document

4
Franchising
PowerPoint Presentation by
Ian Anderson, Algonquin College
Chapter 4
Copyright © 2010 by Nelson Education Ltd.
Looking Ahead
After studying this chapter, you should be able to:
1. Describe the significance of franchising in Canada.
2. Identify the major advantages and limitations of franchising
3. Discuss the process for evaluating a franchise opportunity.
4. Evaluate franchising from the franchisor’s perspective.
5. Describe the critical franchisor/franchisee relationship.
6. Understand issues related to franchise regulation in Canada and
know the warning signs of franchise fraud
Chapter 4
Copyright © 2010 by Nelson Education Ltd.
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Franchising Terms
• Franchising
 A marketing system revolving around a two-party legal
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
…continued
Chapter 4
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Franchising Terms
• 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
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Types of Franchises
• Product and Trade Name Franchise
 Grants the right to use a widely recognized product or name
(i.e. gas stations)
• Business-Format Franchise
 Provides an entire marketing system and ongoing guidance
from the franchisor (i.e. fast-food)
• Piggyback Franchising
 The operation of a retail franchise within the physical facilities
of a host store (i.e. complementary food service in a fast food
store)
…continued
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Types of Franchises
• 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
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The Pros and Cons of Franchising
Pluses
Minuses
Formalized training
Franchise fees
Financial assistance
Royalties
Proven marketing
methods
Restrictions on growth
Less independence in
operations
Managerial assistance
Franchisor may be sole
supplier of some
supplies
Quicker startup time
Overall lower failure
rates
Termination/renewal
clauses
Exhibit 4-2
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Copyright © 2010 by Nelson Education Ltd.
Pros and Cons of Franchising
• Advantages
• Limitations
– Probability of success
• Proven line of business
• Pre-qualification of
franchisee
– Training
• Franchisor-provided
– Financial Assistance
• Franchisor assistance
– Operating assistance
• Franchisor-aided
Chapter 4
– Franchise costs
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•
•
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Initial franchise fee
Investment costs
Royalty payments
Advertising costs
– Restrictions on
Business Operations
– Loss of independence
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4-8
The Advantages of Franchising
• Proven marketing concept and customer base
– The use of an established, nation-wide brand.
• Training
– May help alleviate managerial weaknesses.
• Financial assistance
– Start-up business costs are normally high and thus by teaming up with a
franchise organization, the individual can increase her/his chance of
receiving financial help.
• Operating assistance
– The franchisor provides a range of operating services including site
selection, bulk purchasing of equipment, and inventory.
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Limitations of Franchising:
Restriction of Business Operations
• Franchise costs
• Restrictions
– Sales territory
– Site approval required
– Outlet appearance
– Goods/services to be sold
– Resale of franchise
– Advertising and hours of operation
• Loss of independence
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Evaluating Franchise Opportunities
• Locating a Franchise Opportunity
• Investigating the Potential Franchise
Information sources
• Independent, third-party sources
• Franchisors themselves
• Existing and previous franchisees
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Explanation of Costs
• Franchise fee
• First and Last Month’s
Rent
• Leasehold Improvements
• Equipment
• Furniture and Fixtures
• Signage
Chapter 4
• Insurance, Licences and
Permits
• Training
• Initial Inventory
• Working Capital
• Royalty
Copyright © 2010 by Nelson Education Ltd.
Global Franchising Opportunities
• Historically, many Canadian franchisors have
expanded into the United States.
• Canadian franchising enterprises are now
expanding into countries beyond North America.
– Yogen Fruz – 1,580 stores in 30 countries
• Attractive growth prospects:
– Industrializing countries with large populations
– Countries with an expanding middle class and higher
disposable income
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Investigating the Franchise Candidate
• Three sources of information:
– independent third party sources
– franchisors
– existing and previous franchisee
This is a 2-way effort
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Franchisor as a
Source of Information
• Disclosure document
– a detailed statement of information such as the
franchisor’s finances, experience, size, and
involvement in litigation
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Selling a Franchise
•
Why would a businessperson wish to become a
franchisor? Three benefits can be identified:
1.
2.
3.
•
Reduction of capital requirements
Increase in management motivation
Speed of expansion
Drawbacks associated with franchising from the
franchisor’s perspective:
1.
2.
3.
Reduction in control
Sharing of profits
Increase in operating support
…continued
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Franchise Relationship
• Elements to look for in a franchise relationship:
•
•
•
•
•
•
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•
Chapter 4
Responsiveness
Empathy
Communication
Dependability
Accessibility
Give and take
Anticipation
Structure
Open-mindedness
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Franchising Frauds
• The Rented Rolls Royce Syndrome
• Don’t you want to be like me?
• The Hustle
• Territories are going fast…
• The Cash-Only Transaction
• The Boast
• We never met an exaggeration we didn’t like
• The Big-Money Claim
• Earn $10,000/month in your spare time
• The Disclosure Dance
• Umm, we’re not a public corporation
Chapter 4
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