0 ratings 0% found this document useful (0 votes) 19 views 53 pages Slide 2
The document provides an overview of franchising, including its historical development, definitions, types, and key components such as the roles of franchisors and franchisees. It explains the two main types of franchising: product distribution and business format, along with various franchise arrangements like single-unit and multi-unit franchises. Additionally, it touches on alternatives to franchising, such as distributorships and licensing, and discusses the importance of franchise agreements and territory determination.
AI-enhanced title and description
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content,
claim it here .
Available Formats
Download as PDF or read online on Scribd
Go to previous items Go to next items
Ives:
¢ eAt the end of the lesson, the student should be
able to:
1. Learn about the historical development of
Franchising.
2. Learn an operational definition of Franchising.
3. Be able to distinguish between various types
Franchises. eo
¢ ° Franchising
*is a business relationship in which the franchisor (the
owner of the business providing the product or
service) assigns to independent people (the
franchisees) the right to market and distribute the
franchisor's goods or service, and to use the
business name for a fixed period of time. es
@ ° Franchising defined
* refers to the method of practicing and using
another's perfected business concept. In a franchise
relationship, the franchisee is granted the right to
market a product or a service under a marketing plan
or a system that uses the trademark, name, logo and
advertising owned by the franchisor. o° Franchising defined
* Arrangement where one party (the franchiser)
grants another party (the franchisee) the right to
use its trademark or trade-name as well as
certain business systems and processes, to
produce and market a good or service according
to certain specifications. e The franchisee usually pays a one-time franchise fee plus a
percentage of sales revenue as royalty, and gains
(1) immediate name recognition
(2) tried and tested products,
(3) standard building design and decor,
(4) detailed techniques in running and promoting the
business,
(5) training of employees, and
(6) ongoing help in promoting and upgradin;
products. eo
0 e
Franchising is a long-term cooperative
relationship between two entities—a franchisor
and one or more franchisees — that is based on
an agreement in which the franchisor provides a
licensed privilege to the franchisee to do business. ¢ ° What is a Franchise?
*A privilege or right officially granted to offer specific
products or services under explicit guidelines at a
certain location for a declared period of time. « WHAT IS A FRANCHISE?
A franchise is the agreement or license between two legally independent parties which gives:
* a ppersan or group of people (franchisee) the right to market a product or service using the
trademark or trade name of another business (franchisor)
+ the franchisee the right to market a product or service
using the operating methods of the franchisor
+ the franchisee the obligation to pay the franchisor fees
for these rights
+ the franchisor the obligation to provide rights and
support to franchisees es
e
© “ with franchisor's support
* advertising & marketing :
* training
Receives fees es
@ ° History of Franchising
* Franchising developed over time as an efficient way
to do business and there were versions of franchising
employed in Europe centuries ago.
*The origin of the word franchise goes back to Anglo-
French, meaning freedom, liberty, and from Middle
French, franchir, to free, and earlier from Old Fren
franc, free. ay
@ ° History of Franchising
* In the middle ages the local titled land owner would
grant rights to the peasants or serfs, probably for a
consideration, to hunt, hold markets or fairs, or
otherwise conduct business on his domain. With the
rights came rules and these rules became part of
European Common Law. » History of Franchising
* Franchising was employed on a limited basis after the
success of Singer’s sewing machine distribution method.
+ Business format franchising (the licensing of the brand
name/trademarks and of the entire business concept),
which is the dominant mode of franchising today, came
onto the economic scene after World War II and the
subsequent baby boom.
* There was an overwhelming need for all types of prod
and services, and franchising provided a way to
grow businesses. SD |...::, of Franchising
e
@. twas Ray Kroc (1902-1984), a milk shake mixer salesman who
discovered the McDonald brothers' small San Bernardino, California
hamburger stand in 1954, who is credited with unleashing the wave of
franchising we know today.
* He found that many are buying of his mixers because they had
developed a high-volume production system which enabled them to
provide fast service with consistent results and low cost.
* Kroc became their licensing agent and recruited franchisees, starting i
the Chicago area. In 1961 he bought out the McDonald brothers’
interest and took the title of senior chairman.
* By 1988, McDonald’s had opened its ten thousandth ré
today there are over 30,000+ McDonald’s restaur. aay History of Franchising
@ eras the number of franchised businesses grew, the need for
legislation and consumer protections followed. The International
Franchise Association (IFA) was founded in 1960 as a membership
organization of franchisors, franchisees and suppliers with the
purpose of providing help and guidance to the entire industry.
* They adopted a Code of Ethics to establish a framework for the
implementation of best practices in the franchise relationships of
IFA members. The Code represents the ideals to which all IFA
members agree to subscribe in their franchise relationships.
* The IFA works closely with the US Congress and the Federal Trad.
Commission on improving how the industry relates to thi
franchisees and has been integral to the expansi
around the world. aay History of Franchising
* If 1978 the Federal Trade Commission (FTC) enacted a law requiring all
franchisors to submit to all potential franchisees a document called the
Franchise Disclosure Document (FDD) prior to receiving money.
* The FDD provides detailed information on the franchise company,
including its history, the officers, any litigation history, estimated
investment, an overview of the business concept, and a copy of the
franchise agreement.
* Acurrent list of franchise owners’ names and telephone numbers is a
required component, allowing prospective franchisees the opportunity
research the franchisor’s claims.
* The purpose of the FDD is to provide sufficient information ona
company to help the prospective franchisee to make a
decision. /
oc What are the different types of franchising?
Franchised businesses fall into two different types of
franchisor/franchisee relationships:
1. Product Distribution
2. Business Format
There are two main types of franchises:
product distribution J
( e Product Distribution
* Product or trade name franchising involves more of a
distribution arrangement (car dealership) than a
business format franchise.
* The franchisee obtains the right to distribute a
product manufactured by the franchisor.
*In this type of relationship the distributor may
sometimes offer other products besides those of t!
franchisor. ¢ « Product Distribution
* Product distribution franchising, also known as
trade name franchising, is that type of franchising
wherein a manufacturer grants a franchisee the right
to sell its products, but with no method of doing
business.
Examples of this type of franchising are car
dealerships and service stations. Product distribution franchises simply sell the franchisor's products and are supplier-dealer relation-
ships. In product distribution franchising, the franchisor licenses its trademark and logo to the franchisees
but typically does not provide them with an entire system for running their business. The industries where
you most often find this type of franchising are soft drink distributors, automobile dealers and gas stations.
me familiar product distribution franchises incl
v Pepsi
v Exxon
v Ford Motor Company
Although product distribution franchising represents the largest percentage of total retail sales, most
franchises available today are business format opportunities. @ ° Business Format
* In business format franchising the franchisee is usually provided with
a complete range of goods and/or services, including product, trade
names and operating procedures.
* The franchisor often assists with almost everything needed to start
the business, including the location of the business, the size and
build-out, furnishings, initial and on-going training, inventory and
marketing.
* This complete package is often referred to as a Turnkey operation.
Both retail product (fast food, print and copy) and service franchi;
(house cleaning, lawn maintenance) can be business fort
franchises. Coad Business Format
@. Business format franchising is the most common form of
franchising. When people think of a franchise, whether it is a food,
retail, service or home based franchise, just about any brand name
that is recognized is a business format franchise.
* Also identified as a name and process franchise, features a broader
and ongoing relationship between the franchisor and the
franchisee, wherein aside from granting the right to use the name
and market the products and services of the franchisor, the
franchisee is also provided a complete plan for managing and
operating the business — a transfer of the proven way of doi
business that has been developed by the franchis. aD Business Format
e° . .
Business format franchises, on the other hand,
not only use a franchisor’s product, service and
trademark, but also the complete method to conduct
the business itself, such as the marketing plan and
Operations manuals. Coad Business Format
0 e
10 most popular franchising opportunities are in
these industries:
@ fast food retail
@ service @ automotive
@ restaurants @ maintenance
@ building and construction @ retail—food
@ business services @ lodging AS Franchise Arrangements
* A franchisor may sell single units and/or multiple locations.
* Ifa franchisee wishes to become a multiple unit operator, they
follow the franchisors process in investigating whether this is a
viable option for them.
* Franchisors typically want franchisees to meet minimum standards
and then actively encourage expansion with those who own
successful operations.
* The primary determination of the number of units a franchisee is
allowed to operate is financial — a combination of liquid capital
net worth. Some popular business format franchises include:
Restaurants Health & Beauty Maintenance/Cleaning _Real Estate
KFC Merle Norman Costmetic Jani-King International Century 21
McDonald's Studios The ServiceMaster RE/MAX International
Pizza Hut Supercuts Company Coldwell Banker
Taco Bell Jenny Craig International Merry Maids Residential Affiliates
Cost Cutters Family Hair
Ret: Care Automotive Service
Blockbuster Video Meineke Discount
Radio Shack Business Services Mufflers FamilyMart
The Athlete's Foot Mail Boxes Etc. AAMCO Transmissions
GNC Franchising H & R Block Midas International
ACE America Cash Precision Auto Care
Lodging Express
Choice Hotels Kwik Kopy Education/Training
Bass Hotels/Holiday inn ale Carnegie Training
Mariott Hotels Barbizon School of
Modeling
Berlitz International
Sylvan Learning Systems
\ Types of Franchise Arrangements
Because so many franchisors, industries and range of investments are possible, there
are different types of franchise arrangements available to a business owner.
Two types of franchising arrangements:
V single-unit (direct-unit) franchise
V multi-unit franchise:
* area development
+ master franchise (sub-franchising) | A single-unit (direct-unit) franchise is an agreement where the franchisor grants a franchisee the rights
to open and operate ONE franchise unit. This is the simplest and most common type of franchise. It is
possible, however, for a franchisee to purchase additional single-unit franchises once the original fran-
Chise unit begins to prosper. This is then considered a multiple, single-unit relationship.
A multi-unit franchise |s an agreement where the franchisor grants a franchisee the rights
to open and operate MORE THAN ONE unit.
There are two ways a multi-unit franchise can be achieved:
* v anarea evelopment franchise or
V amasier franchise, e *Area Developer Franchisee — Franchisee owns a large
territory with the objective of subdividing and developing
individual franchise locations. The franchisor will sometimes
require the franchisee to open a certain number of units
within a specified time frame.
Under an area development franchise, a franchisee has the right to open more than one
unit during a specific time, within a specified area. For example, afranchisee may agree
to open 5 units over a five year period in a specified territory. es
@ ° «Master Region or Master Franchisee — owns the right toa
large area with the intention of developing a number of
units, also usually within a certain time frame.
A master franchise agreement gives the franchisee more rights than an area development agreement.
In addition to having the right and obligation to open and operate a certain number of units in a defined
area, the master franchisee also has the right to sel franchises to other people within the territory, Known
as sub-franchises. Therefore, the master franchisee takes over many of the tasks, duties and benefits of
the franchisor, such as providing support and training, as well as receiving fees and royalties.
a eo
0 e
The difference between an Area Developer
and a Master Franchisee is that the Master
Franchisee also has the right, and in some
instances the obligation, to sell franchises
within the territory to other people. i WHAT ARE THE ALTERNATIVES TO FRANCHISING?
In addition to franchising, there are two other popular methods by which businesses expand their
market and distribution channels:
Vv distributorships
v licensing
ci. le ple lk
rimeowcen) mga) ri! eae rags)
INDEPENDENT
EMPLOYEE purer Licensee FRANCHISEE.
customers C |
= \ aay Distributorship
© — Ina distributorship, the distributor usually:
* has a contractual relationship with the supplier
« buys from the supplier in bulk and sells in smaller quantities
¢ is familiar with local markets and customers
¢ may do business with many companies, more than just the
supplier/producer
* may not receive contractual support and training from the,
supplier/producer like a franchisee Coad Distributorship
@ ° Some distribution arrangements are similar to franchises,
and vice versa. A franchisee with a great deal of leeway in how
to run the business may look like an independent distributor. A
distributor may be subject to many controls by the
supplier/producer and begin to resemble a franchise.
What are example of
distributorship? Coad Licensing
e° Licensing, on the other hand, allows a licensee to pay for
the rights to use a particular trademark. Unlike franchises, in
which the franchisor exerts significant control over the
franchisee’s operations, licensors are mainly interested in
collecting royalties and supervising the use of the license rather
than influencing the operations of the business. Check out
www.licensing.org.
What are example of
Licensing? @ © How do Franchisors Determine Territories?
* Territories are usually mapped out by the franchisor,
most often using population density, median income
statistics, and/or statistics relevant to that particular
industry.
* These territories could be delineated by streets, cities,
counties, zip codes, area codes, state or region and will
often be determined by a combination of factors.
* The goal is for each territory to contain an optimal
number of potential customers as determined b'
experience of the franchisor. . ‘ “7 Fees (and other payments beyond
@ ° initial investment)
* Franchising, based on its framework and structure,
has the franchisor providing certain elements that
are paid for by fees assessed on the franchisee.
* Understanding the franchise fees and other related
financial considerations is important, as franchise
ownership may require the payment of a number of
different fees. a are the most common types
e ° of fees assessed by the franchisor:
1. Advertising Fees / Marketing 6. Royalty Fee
Fund
. Audit Fee
. Franchise Fees
7. Territory Fees
8. Training Fees
9. Transfer Fee
. Product Fees
wWOPRWnN
. Renewal Fee 7 : Advertising Fees / Marketing Fund
* Some franchised businesses require franchisees to make payments into
an advertising or marketing fund.
* Payment amounts can be a percentage of sales or a flat fee, paid
weekly, biweekly or monthly.
* This fund could be for national or local advertising and some companies
may require contributions to both.
* Advertising money may be spent on TV, radio, print media or printed
materials, depending on the franchise, the age of the system, the
penetration of the franchise in a market or other considerations.
* The franchisee may have input to where or how funds are spe!
decisions may be driven completely by the franchisor. a eed
¢ ° Audit Fee
* If the franchisor requires financial audits of the franchise
location, the franchisee may have to pay for the cost,
especially if any irregularities are found. Audit fees are
common to most franchise agreements. . ee Fees
* The franchise fee is the initial fee paid to the franchisor to
obtain the rights to the operating system of the franchise.
* This fee typically covers such items as site selection
assistance, training, marketing materials and operations
manuals.
* This is usually a one-time fee payable upon signing of the
contract and is typically based on the number of units or,
territories purchased or the size of the territory. : Product Fees
* Some franchisors require that franchisees purchase
proprietary or general products from them.
* The primary reason franchisors require specific
product/equipment purchases are to insure quality
control and uniformity across the system.
* All the details of required product/equipment purchases
are explained in the Franchise Disclosure Document (FD!
and/or the franchise agreement. Serer...
@ ° — +Franchise agreements most often have limited terms (5 or
10 years), and typically do not automatically renew.
* When it is time to renew the franchise agreement, the
franchisor may require a fee be paid in order to renew the
agreement.
* Sometimes the renewal fee can be paid in the form of
remodeling or upgrades to the physical location of the
franchise, but at minimum most franchisors require tye
franchisee to be in full compliance with the operati
system to qualify for renewal. aay Royalty Fee
@ ° This is a fee paid by franchisee to franchisor on a routine
basis for the duration of the contract agreement.
* Often calculated as a percentage of gross sales, royalty fees
can also be fixed amounts or may be based on other factors.
* These royalties are paid in exchange for the ongoing right to
use the franchisor’s brand/trademark and system.
* These fees enable the franchisor to offer such benefits as.
ongoing support and training, research and developme,
and building of the brand. oa
o° Territory Fees
* When a franchisor allows a franchisee to purchase an
additional or non-standard territory, they may require a
one-time fee for these rights.
* This fee is similar to the initial franchise fee paid for the
initial territory. oy
@ ° Training Fees
* Most franchisors include initial training in the franchise
fee.
* Additional training, for franchisee or staff, may also be
available and fees may apply. : Product Fees
* Some franchisors require that franchisees purchase
proprietary or general products from them.
* The primary reason franchisors require specific
product/equipment purchases are to insure quality
control and uniformity across the system.
* All the details of required product/equipment purchases
are explained in the Franchise Disclosure Document (FD!
and/or the franchise agreement. a eel
¢ ° Transfer Fee
* When a franchisee sells his franchise, the franchisor may
require the payment of a transfer fee as a condition for
transferring the franchise agreement to the new owner
(franchisee). Questions?
al
