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MANA 3325 T- Th 7-8:30 Professor Lee Thurburn. Ch. 6: Franchising. Definition: A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark,

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slide1

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Definition:
  • A system in which
  • semi-independent business owners (franchisees)
  • pay fees and royalties to a
  • parent company (franchiser) in return for the
  • right to become identified with its trademark,
  • to sell its products or services, and often
  • to use its business format and system.

What are the three types of Franchising?

slide2

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Types of Franchising:
  • Trade-name
  • Product distribution
  • Pure (Business format)

Define Trade-name Franchising and give an example.

slide3

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Trade-name Franchising:
  • Franchisee purchases right to use the Franchisor’s Tradename without distributing particular products exclusively under the Franchisor’s name.
  • Ex: True Value, Western Auto

Define Product Franchising and give an example.

slide4

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Product Distribution Franchising:
  • Franchisee purchases right to sell specific products under the Franchisor’s Brand Name and Trademark thru a selective, limited distribution network.
  • Ex: Lexus, Ford, Pepsi, Chevron, etc.

Define Pure / Business Format Franchising and give an example.

slide5

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Pure (Business format) Franchising:

Franchisee purchases a complete business system including license for trade name use, products or services to be sold or resold, operations methods, marketing plan, quality control process, business support services, etc.

Ex: Quiznos, B2B CFO, Stanley Steamer, Motel 6, etc.

What are some of the reasons that people purchase a Franchise?

slide6

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Why Buy a Franchise?

Franchisee gets the right to use all of the elements of a fully integrated business operation.

Essence of what franchisees purchase from the franchisors: Experience.

Key Question: “What can a franchise do for me that I cannot do for myself?”

What are some Benefits of Franchising?

slide7

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Benefits of Franchising:
  • Business Systems
  • - Point of Sale
  • - Employee Training Manuals
  • Management training and support
  • - Start-up
  • - Ongoing
  • Brand name appeal - “Cloning”
  • Standardized quality of goods and services
slide8

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Benefits of Franchising:

  • National advertising programs
    • Franchisees contribute 1% to 5% of sales.
  • Financial assistance
    • About 20% of franchisors offer direct financial assistance to franchisees.
    • SBA – Franchise Registry
  • Proven products and business formats
slide9

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Benefits of Franchising:
  • Centralized buying power
  • Site selection and territorial protection
    • Important issue: Territorial encroachment
  • Greater chance for success

What are some Drawbacks of Franchising?

slide10

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Drawbacks of Franchising:
  • Franchise fees and ongoing royalties
    • Average upfront franchise fee = $25,147
    • Royalties range from 1% to 11% of franchisees’ sales
    • Average royalty = 6.7% of sales
  • Strict adherence to standardized operations
  • Restrictions on purchasing from Approved suppliers only
slide11

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Drawbacks of Franchising:
  • Limited product line
  • Contract terms and renewal
    • Average term = 10.3 years
  • Unsatisfactory training programs
  • Market saturation
  • Less freedom –
    • “No independence”
    • “Happy prisoners”
slide12

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

slide13

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Ten Myths of Franchising:

Franchising is the safest way to go into business.

Cost Estimates are high. Actual costs are lower.

Bigger Franchises are more successful.

I can modify the Franchisor’s System as I see fit.

All Franchises are the same.

slide14

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Ten Myths of Franchising:

I can turn over management to someone else.

Anyone can do it.

Low cost way to get into business.

Franchisor will solve problems that come up.

After I open I can do as I want.

What is a Franchise Disclosure Document and why do they exist?

slide15

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

  • Franchise Disclosure Document (FDD)
    • Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC)
    • Requires franchisors to disclose to potential franchisees information on 23 important topics
    • Objective: To give franchisees the information they need to protect themselves from dishonest franchisees and to make good investment decisions
slide16

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

The RIGHT way to buy a Franchise:

Evaluate yourself - What do you like and dislike?

Research your market.

Consider your franchise options.

Get a copy of the Franchisor’s FDD – and read it!

Talk to existing franchisees.

Ask the franchiser some tough questions.

Make your choice.

slide17

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Factors that make a Franchise Appealing:

Unique concept or marketing approach

Profitability

Registered trademark

Business system that works

Solid training program

Affordability

Positive relationship with franchisees

slide18

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

BEWARE of these Franchisors:

Claims that the contract is “standard; no need to read it.”

Failure to provide a copy of the required disclosure documents.

Marginally successful prototype or no prototype.

Poorly prepared operations manual.

Promises of future earnings with no documentation.

High franchisee turnover or termination rate.

Unusual amount of litigation by franchisees.

slide19

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

BEWARE of these Franchisors:

Attempts to discourage your attorney from evaluating the contract before signing it.

No written documentation.

A high pressure sale.

Claims to be exempt from federal disclosure laws.

“Get rich quick” schemes, promising huge profits with minimal effort.

Reluctance to provide a list of existing franchisees.

Evasive, vague answers to your questions.

slide20

MANA 3325 T-Th 7-8:30

Professor Lee Thurburn

Ch. 6: Franchising

Licensing vs Franchising:

As the Franchisor your cost to set up a Franchise program will start at $50,000 and can go up to $500,000.

As a Licensor your cost to set up a Licensing Program is the cost of a Good Attorney preparing a Good ‘Master Licensing’ document.

The difference between a License and a Franchise is the degree to which you are willing to negotiate the individual elements of the License vs requiring that everyone agree to a standard license agreement (“Franchise”).

As a Licensor you can do the same thing as a Franchisor… for less $$$ but the trick is to individually negotiate each license and not to sell too many of them.