Franchising

1
Franchising

• The Selling Of A Proven System

2
Franchising

• One of the most effective and efficient methods
  of market expansion
• Definition of franchising A system of marketing
  -- the leasing of a name idea to investors in
  specified geographic regions

3
Franchising

• Types of franchises
• Spin-off a manager (or others) within the
  company is offered a branch office -- often the
  branch is less profitable -- in order to acquire
  equity financing (the branch continues to operate
  under the parent companys name)
• Distribution (traditional) a retailer enters
  into an agreement with a franchisor to sell
  products within a specified territory, using the
  franchisors name and/or trademark
• Identical operation (system - non-traditional)
  MMMuffins, McDonalds, the right to operate an
  identical outlet under the originals name

4
What The Franchisor Sells

• The franchisor sells a package -- a way of
  participating in a business that has a track
  record of success
• The disclosure statement designed to attract
  potential franchisees to consider the purchase --
  includes
• The franchise fee can be set at any amount (one
  time expense)
• A statement of required investment equipment,
  building costs, furniture, fixtures, supplies,
  advance rent, permits, working capital
• The royalty 3-8 of sales
• What the franchisor offers the franchisees
  training, technical information, operating
  manuals, trademarks, real estate, continued
  support, purchasing, territorial support,
  financial assistance (in some cases)

5
Advantages Disadvantages Of Franchising - for
the Franchisor

• Pros
• Greatly reduced capital requirements for
  expansion
• Minimal staffing responsibility
• The ability to expand rapidly
• Control
• Cons
• Risk of losing image and credibility - this is in
  the hands of the franchisees
• The larger the number of franchises - the more
  difficult it becomes to coordinate the operation

6
Advantages Disadvantages Of Franchising - for
the Franchisee

• Pros
• Greater chance for initial success (70)
• The ability to enter an industry without previous
  experience
• Opportunity to open a business with limited
  capital
• Benefit from the franchisors experience
• Continuous market research and product/service
  support
• Standardization of prices, products etc.

7
Advantages Disadvantages Of Franchising - for
the Franchisee

• Cons.
• Not suited for individuals who are independent
• Services or products can sometimes be purchased
  elsewhere cheaper
• Franchisor could over-structure or over-saturate
  the market
• Corrupt franchisors
• Trademarks and symbols may not bring in as much
  business as anticipated (e.g. KFC in Peru)

8
Starting A Franchise Franchisor

• The following must be assessed
• Business concept will it have a long life-cycle
• Transferability can this business operate on a
  multiple scale or is it best suited to a single
  location
• Resources are management and financial resources
  available to pursue a franchising strategy - in
  light of training needs, accounting, market
  research, and financial support

9
Selecting A Franchise Franchisee

• The following must be assessed
• Success of the operation is the track record
  sufficient to determine with relative certainty
  that the business will be profitable
• Franchisor experience does the franchisor offer
  adequate training and support
• Time span of the opportunity is this a business
  that will be around for a long time
• Contract do the fees and royalties allow for an
  adequate return on investment (e.g. are supplies
  sold to the franchisee at the market price?)

10
Franchising Success

• Ownership, even with limited decision-making
  power, provides a strong motivation for
  franchisees
• Franchises penetrate the local market effectively
  - especially when they can employ local
  strategies (local franchisees know their market)
• Franchises have a simple organizational structure
  ? streamlining the decision-making process
• The franchisor-franchisee relation is more
  conducive to communication than the traditional
  superior-subordinate relationship
• Franchises in general have lower overhead than
  corporate structures