Franchising - Small Business Management - Lecture Slides, Slides for Business Management and Analysis. Jaypee University of Engineering & Technology
imran.mani26 January 2013

Franchising - Small Business Management - Lecture Slides, Slides for Business Management and Analysis. Jaypee University of Engineering & Technology

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These are the lecture slides of Small Business Management. Key important points are: Franchising, Franchisor, Franchisee, Larger Chain, Rights to Franchisees, Product or Service, Background, Franchising Today, Constant ...
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Chapter 5

Chapter 5 Franchising

Early Decisions

About Franchising

• Franchise – Contractual license to operate an individually owned

business as part of a larger chain

• Franchisor – Parent firm that develops a product or business process

and sells the rights to franchisees

• Franchisee – Small business person who purchases the franchise in

order to sell the product or service of the franchisor


• Background – In existence since the early 1800s

• Agents selling reapers and sewing machines

– Evolved past exclusive use of agents – Constant growth since the 1950s

• Franchising Today – Represented in almost every

industry – Growing interest in international


Franchising Systems

Product-Distribution Franchising Business-Format Franchising

Types of Franchising Systems

Franchising Systems

• One More – Manufacturing/processing

Figure 5.1: Not All Franchises Sell French Fries

SOURCE: International Franchise Association Educational Foundation series, “The Profile of Franchising: 2006,” August 3, 2006,

Franchising Systems

• Product-Distribution Franchising – Allows the franchisee (dealer) to buy products from the

franchisor (supplier) or to license the use of its trade name – Connects a single manufacturer with many dealers to

make products available to consumers in a specific geographic region through exclusive dealers

• Soft-drink bottlers, gasoline stations, and car dealerships

Franchising Systems (cont’d)

• Business-Format Franchising – Is a turnkey approach

• Franchisee purchases the franchisor’s product to sell, along with the franchisor’s entire way of doing business—operation procedures, marketing packages, physical building and equipment, and full business services

– Used in quick-service restaurants, lodging, retail food, and table/full-service restaurants

• Hotel and motel chains, McDonald’s

Table 5.1: The Advantages and Disadvantages of Franchising

Selecting a Franchise

• Evaluate Your Needs – How much equity capital is required to purchase and

operate the franchise until income equals expenses? – Where will the equity capital come from? – Are you prepared to give up some independence of action

for the advantages offered by the franchise? – Do you have the ability, training, and experience to work

with the franchisor, employees, and customers? – Are you ready to make a long-term commitment to

working with the franchisor, offering its product or service to your public?

Selecting a Franchise (cont’d)

• Do Your Research – General Business Periodicals

Inc., Fortune Small Business, The Wall Street Journal, Success, and Entrepreneur

– Specialized Journals & Magazines • Franchise, Franchising Opportunities World, and Quarterly

Franchising World – Trade Associations

• International Franchise Association (IFA) • Canadian Franchise Association (CFA)

Selecting a Franchise (cont’d)

• Do Your Research (cont’d) – Other Information Sources

• American Franchise Association (AFA) • American Association of Franchisees and Dealers (AAFD) • Online information—FranNet, Franchise Handbook Online, ABI-

INFORM, etc. • Better Business Bureau • Institute of Management and Administration

Selecting a Franchise (cont’d)

• Do Your Research (cont’d) – Ask questions; assume nothing – Personally analyze the potential market for the franchise – Review the disclosure statements carefully

• The franchisor wrote the contract and most of the contract conditions are weighted in its favor.

• NEVER sign a franchise agreement without getting a lawyer’s opinion.

• MAKE SURE that an attorney and accountant have experience with franchising.

Disclosure Statement Items

1. The franchisor 2. Business experience of franchisor 3. Litigation 4. Bankruptcy 5. Initial fee 6. Other fees 7. Estimate of total investment 8. Purchase obligations 9. Financial assistance available 10. Product or service restrictions 11. Exclusive territory

12. Renewal, termination, or assignment of franchise agreement

13. Training provided 14. Public figure arrangements 15. Site selection 16. information about franchisees 17. Franchisor financial statements 18. Personal participation of franchisees 19. Earning capacity 20. Use of intellectual property

Disclosure statement items required by the Uniform Franchise Offering Circular (UFOC) issued by the Federal Trade Commission

Figure 5.2: Franchise Disclosure Statement

SOURCES: Entrepreneur Franchise 500 issue, January 2007, 164–259,;; individual company web pages.

Selecting a Franchise (cont’d)

• The Franchise Agreement – The legal contract that binds both parties involved in the

franchise and that spells out the rights and obligations of both parties.

– Franchise fee • A one-time payment to become a franchisee

– Royalty fee • Ongoing payments to the franchisor; usually a percentage

of sales. – Advertising fees

• Fess paid to the franchisor for advertising

Selecting a Franchise (cont’d)

• Other Important Franchise Agreement Terms and Conditions – Termination of the franchise

agreement – Terms and renewal of the agreement – Exclusive territory

• Get Professional Advice – Consult a lawyer and CPA before

signing any franchise agreement. – Do not assume that the disclosure

statement tells you everything you need to know about the franchise.

International Franchising

• International Franchising Is Growing – Overseas franchising is more attractive as domestic

competition increases in saturated local markets. – 95% of the world’s consumers live outside the U.S. – Foreign consumers already know U.S. products. – Foreign governments are enacting disclosure laws.

Small Business Globalization by the Numbers

Source: Magazine/Going Global, U.S. Department of Commerce, and SBA Office of Advocacy.

Table 5.2: Getting In

20 Source: Hatten, Small Business Managment, 4th Edition

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