part 3 Pursuing New Venture Opportunities 6 Franchising

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

Looking Ahead After studying this chapter, you should be able to: 1. Explain franchising terms and the structure of the industry. 2. Identify the major pros and cons of franchising 3. Describe the process for evaluating a franchise opportunity. 4. Discuss certain legal considerations in franchising. Copyright © by South-Western College Publishing. All rights reserved. 2

Franchising Terms • Franchising – 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. 3

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. 4

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. 5

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. 6

The Structure of Franchising Franchise Parties Franchise Facilitators Franchisor Industry Associations (example: IFA) Master Licensee/ Area Developers Franchisee. Owned Operating Units Federal/State Agencies (example: FTC) Company. Owned Stores Business/Consulting Firms (example: Franchise Connections) Fig. 6 -1 Copyright © by South-Western College Publishing. All rights reserved. 7

The Pros and Cons of Franchising • Advantages – Probability of success ØProven line of business ØPre-qualification of franchisee – Training ØFranchisor-provided – Financial assistance ØFranchisor assistance • Limitations – Franchise costs Ø Initial franchise fee Ø Investment costs Ø Royalty payments Ø Advertising costs – Restrictions on Business Operations – Loss of independence – Operating benefits ØFranchisor-aided Copyright © by South-Western College Publishing. All rights reserved. 8

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. 9

The Pros and Cons of Franchising Pluses Minuses Formalized training Franchise fees Financial assistance Royalties Proven marketing methods Restrictions on growth Managerial assistance Quicker startup time Overall lower failure rates 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. 10

Evaluating Franchise Opportunities • Locating a Franchise Opportunity • Investigating the Potential Franchise – Information sources ØIndependent, third-party sources ØFranchisors themselves ØExisting and previous franchisees Copyright © by South-Western College Publishing. All rights reserved. 11

The Nation’s Top Fifteen New Franchises 1. Curves for Women 2. Ace America’s Cash Express 3. Home Instead Senior Care 4. Cash Converters Int’l Franchise Group 5. The Mad Science Group 6. Mister Money—USA Inc. 7. House Doctors 8. Atlanta Bread Company 9. Bennigan’s Grill & Tavern 10. Wetzel’s Pretzels 11. Sport Clips 12. Dealer Specialties 13. Tilden for Brakes Care Centers 14. Milli. Care Environmental Services 15. Talking Book World Source: By permission of Entrepreneur magazine, 2445 Mc. Cabe 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. 12

Franchising from the Franchisor’s Perspective • Benefits – Reduction of capital requirements – Increase in management motivation – Speed of expansion Copyright © by South-Western College Publishing. All rights reserved. • Drawbacks – Reduction in control – Sharing of profits – Increase in operational support costs 13

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. 14

Franchise Disclosure Requirements A. 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. B. 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. C. Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures. D. 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. E. 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. 15

Items Covered in the Uniform Franchise Offering Circular (UFOC) 1. The franchisor, its predecessors and affiliates 2. Business experience 3. Litigation 4. Bankruptcy 5. Initial franchise fee 6. Other fees 7. Initial investment 8. Restrictions on sources of products and services 9. Franchisee’s obligations 10. Financing 11. Franchisor’s obligations 12. Territory Copyright © by South-Western College Publishing. All rights reserved. 13. Trademarks 14. Patents, copyrights, and proprietary information 15. Obligation to participate in the actual operation of the franchise 16. Restrictions on what the franchisee may sell 17. Renewal, termination, transfer, and dispute resolution 18. Public figures 19. Earnings claims 20. List of outlets 21. Financial statements 22. Contracts 23. Receipt Fig. 6 -2 16