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Franchising

Franchising. Franchising A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchisee An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor

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Franchising

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  1. Franchising • Franchising • A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor • 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

  2. Franchising Arrangements THREE KINDS OF FRANCHISES • Trade Name Franchise • Grants the right to use a widely recognized name within a particular territory • True Value Hardware, Associated Grocers Inc (AGI), Century 21 • Product Distribution Franchise (…Dealership) • Allows you to sell a specific, brand-name product in a specified territory • Snap-On Tools, Toyota • Business Format Franchise • Provides an entire business plan, marketing, and operating system • Guidance from the franchisor is ongoing; supervision & monitoring are continuous • Subway, McDonalds * * * * * * * * * * * * * * * * * * • Single Franchise Owner • Owns the franchise rights to operate in just one business location or territory • Multiple-Unit Owner/Master Franchisee • Has the right to open several franchised outlets in a given area or territory • Piggyback Franchise • A retail franchise operation within the physical facilities of a host store …a Subway inside WalMart

  3. The Pros and Cons of Franchising • Advantages • Probability of success • Proven line of business • Pre-qualification of franchisee • Overall lower failure rates • Training • Franchisor-provided • Financial assistance • Loans & loan guarantees • Operating benefits • Location feasibility study • Marketing assistance • Quick start-up time • Limitations • Franchise costs • Initial franchise fee • Investment costs • Royalty payments • Advertising costs • Restrictions on business operations • Products sold • Hours of operation • Restrictions on expansion/growth • Franchisor only source of supplies • Loss of independence • Lack of franchisor support • Termination/renewal clauses

  4. Franchisor Controls on Franchisees • Restricted sales territory • Requires site approval and imposes requirements on the outlet’s appearance • Restricts the goods/services that can be sold • Requires specific operating hours • Controls advertising

  5. An Attractive Franchise Opportunity Includes: - 1 • Registered trademarks • Successful prototype stores with a track record of profitability and a positive reputation • A business that can be systematized so that it can be easily replicated. • A product or service that can be successful in many different geographic regions.

  6. An Attractive Franchise Opportunity Includes: - 2 • An operations manual that specifies all the functions of the business and their associated policies • A training and support system • Site selection criteria and architectural standards • A detailed prospectus that spells out the franchisee’s rights, responsibilities, and risks. The Federal Trade Commission requires disclosure...Uniform Franchise Offering Circular [UFOC]

  7. Before Buying a Franchise ASK QUESTIONS

  8. Questions to Ask Before Buying a Franchise • Does the franchisor have an excellent reputation in the industry? • Is the franchisor in partnership or any other legal relationship with another franchisor? If so, how will the franchisee be protected should that relationship fail? • Is the franchisee required to do anything that appears questionable from a legal or ethical perspective? • Under what circumstances can the franchisee or franchisor terminate the franchise agreement and what are the consequences to either party? • Will the franchisor grant an exclusive territory? Is that area subject to reduction or modification? If so, under what conditions?

  9. Questions to Ask Before Buying a Franchise - 3 • What is the track record of the franchise? • Has the franchisor conducted an in-depth investigation of the franchisee to assure that he or she has the necessary skills and financial requirements to operate the business successfully? • How much capital will be required to start and operate the business to a positive cash flow? Does the initial fee include an opening inventory of products and supplies? What do royalties pay for and how are they calculated?

  10. Where to Find out about Franchises • www.franchise1.com • www.franchising.com • www.en.wikipedia.org/wiki/franchising • www.entrepreneur.com/franchiseopportunities/index.html • www.franchiseinfosite.com Getty Images

  11. Buying an Existing Business? Acquisition of Ongoing Operations and Relationships Reduction of Uncertainties A Quick Start A Bargain Price

  12. Good Reasons to Purchase an Existing Business • It is less risky than starting from scratch, because facilities, employees, and customers are likely to be in place. • To acquire a business with ongoing operations and established relationships with loyal customers and reliable suppliers • The business has established trade credit, which is crucial because relationships with suppliers and others take a long time to develop. • It is an easier route to owning a business if the entrepreneur has limited business experience, especially if the owner stays on for a time to help with the transition. • To begin a businessmore quickly than starting from scratch • To obtain an established business at a price below what a new business or franchise would cost

  13. Pros and Cons of Buying an Existing Business • Pros • Higher chance of success • Less planning • Existing customers/ suppliers • Necessary equipment • Bargain price • Experienced employees • Existing business records • Cons • Existing problems • Poor quality of current employees • Poor business image • Modernization required • Purchase price based on inaccurate data • Poor business location

  14. Where to Find Business Opportunities • Attorneys • Accountants • Bankers • The Wall Street Journal • Liquidation auctions • Business brokers • The internet

  15. What to Look For in a Business • A business that had a broad scope that would insulate it from market downturns. • A business with existing customers and vendors • A low-tech business but with high growth • A market that was not so large so as to encourage major players but not so small that the company couldn’t grow. • Available float from suppliers; in other words, leeway in having to pay vendors. • Manageable seasonality • Cost cutting potential

  16. Do Your RESEARCH! • Develop a set of criteria for judging the business based on the entrepreneur’s needs and goals. • Understand the industry and the market niche in which the business will operate • Examine the records of the business Getty Images

  17. More Ways to RESEARCH! • Talk to employees, suppliers, and customers • Examine equipment and facilities to make certain they are current and in good working order • Examine all contracts • Verify the value of the business based on industry statistics and perhaps the advice of a professional business appraiser. Getty Images

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