RESTAURANT FRANCHISING Mahmood A Khan, PhD RESTAURANT FRANCHISING FRANCHISING RESTAURANTRESTAURANT FRANCHISING Mahmood A Khan, PhD Mahmood A Khan, PhD Mahmood A Khan, PhD Concepts, Regulations, and Practices This book is the only up-to-date book of its kind that provides a complete and thorough introduction to franchising, its pros and cons, and other important aspects It is the only guide to franchising written exclusively for foodservice professionals, Concepts, Regulations, and Practices and it will be an indispensable resource for anyone wishing to break into one of Regulations, today's most dynamic industries Concepts, and service Practices Concepts, Regulations, This book is theand onlyPractices up-to-date book of its kind that provides a complete and thorough introduction Since the late 1800s when idea was firstimportant conceived, thekind restaurant franchise has This book is the the up-to-date ofaspects its provides a complete and athorough introduction to franchising, itsbook 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isfranchises a classic book covering one of the most vibrant and vital • Unconventional • Unconventional franchises sectors of the US economy The is an excellent introduction, much more and thanstudents a This practical first-hand information willbook be extremely useful to hospitality academicians general academic treatment of the topic On behalf of the International Franchise This practical first-hand information will be extremely useful to hospitality academicians and students as well to franchisors and to entrepreneurs considering entering the world of franchising This practical first-hand information will be extremely useful for to hospitality academicians andastudents Association, we are grateful to Dr.and Khan revising and bringing entering out new edition offranchising this as well to franchisors to entrepreneurs considering the world of as well to franchisors to revised entrepreneurs considering entering the covering world of franchising “The and newly 3rd edition is abook, classic book one textbook, of the most vibrant and vital classic book It is a multi-purpose serving as classroom reference book, and “The newly revised 3rd edition is a classic book covering one of the most vibrant and vital sectors of the US economy The book is an excellent introduction, much more than a business guidebook We are delighted to recommend it on the menu for anyone who wants “The newly revised 3rd edition is a classic book covering one of the most vibrant and vital of the introduction, book isofanthe excellent introduction, much more than a general academic treatment of economy the topic The Onand behalf International to learn more this fascinating, fast-paced, dynamic industry.” sectors of the US economy sectors about The book isUS an excellent much more than a Franchise general academic treatment theInternational topic .bringing OnFranchise behalf the edition International Association, we grateful Dr Khan and out aofnew of thisFranchise —Steve Caldeira, CFE, President and CEO,for International Franchise Association general academic treatment of are the topic .to On behalf ofofrevising the Association, werevising are grateful to Dr as Khan revising andofbringing out a new edition of this book Itto isDr a multi-purpose book, classroom textbook, reference book, and Association, weclassic are grateful Khan for andserving bringing outfor a new edition this classic book It is a multi-purpose book, serving as classroom textbook, reference book, and business guidebook We are delighted to recommend it on the menu for anyone who wants ABOUT THE AUTHOR classic book It is a multi-purpose book, serving as classroom textbook, reference book, and business guidebook We are delighted to recommend it on the menu for anyone who wants to learn more about this fascinating, fast-paced, and dynamic industry.” business guidebook We are delighted toisrecommend it on the menu forofanyone who wants Mahmood A to Khan, PhD, aabout Professor in the Department Hospitality and Tourism learn more this fascinating, fast-paced, and dynamic industry.” —Steve Caldeira, CFE, President andand CEO, International Franchise Association to learn more about this fascinating, fast-paced, dynamic industry.” Management, Pamplin College ofCFE, Business at Virginia Tech’sInternational National Capital Region campus He —Steve Caldeira, President andAssociation CEO, Franchise Association —Steve Caldeira, CFE, President and CEO, International Franchise has served in teaching, research, and administrative positions for past 35 years, working at major ABOUT THE AUTHOR U.S universities Dr Khan is the author of several books and has traveled extensively for teaching ABOUT THE AUTHOR ABOUT THE AUTHOR Mahmood A Khan, PhD, is a Professor the Department of Hospitality and many Tourism and consulting on management issues andinfranchising Dr Khan has received distinguished Mahmood Khan, PhD, isatof aVirginia Professor inand theNational Department of Hospitality and Tourism Management, Pamplin of Business Tech’s Capital Region campus He awards for his andCollege he has served in many important roles in several professional associations Mahmood A Khan, PhD, is awork, Professor inA.the Department Hospitality Tourism Management, Pamplin College of Business at Virginia Tech’s National Capital Region campus He has served in teaching, research, and administrative positions for past 35 years, working at major Management, Pamplin College of Business at Virginia Tech’s National Capital Region campus He has served in research, administrative positions for past for 35 teaching years, working at major U.S universities Dr Khan is teaching, the author of several books hasworking traveled has served in teaching, research, and administrative positions forand past 35and years, atextensively major universities Dr Khan is the author ofDr several and hasmany traveled extensively for teaching consulting on management issues and franchising Khanbooks has for received distinguished U.S universities.and Dr Khan is theU.S author of several books and has traveled extensively teaching and consulting on management issues and franchising Dr Khan has received many distinguished awards for his work, and he has served in many important roles in several professional associations and consulting on management issues and franchising Dr Khan has received many distinguished awards work, and he roles has served in many important roles in several professional associations awards for his work, and he has servedfor in his many important in several professional associations Khan 781926 895697 000 www.appleacademicpress.com 781926 895697 781926 895697 781926 895697 RESTAURANT FRANCHISING ISBN: 978-1-926895-69-7 90000 ISBN: 978-1-926895-69-7 ISBN: 978-1-926895-69-7 90000 Concepts, Regulations, and Practices 90000 Concepts, Regulations, and Practices Concepts, Regulations, and Practices RESTAURANT FRANCHISING Concepts, Regulations, and Practices ISBN: 978-1-926895-69-7 RESTAURANT FRANCHISING RESTAURANT FRANCHISING KhanKhan Khan Third Edition Revised and Updated RESTAURANT RESTAURANT FRANCHISING RESTAURANT RESTAURANT Revised and Updated Third and Updated Revised and Updated Revised Third Edition Third Edition Edition FRANCHISING FRANCHISING FRANCHISING Concepts, Regulations, and Practices Concepts, Regulations, and Practices Concepts, Regulations, and Practices Concepts, Regulations, and Practices RESTAURANT FRANCHISING FM.indd i 12/08/14 2:55 pm FM.indd ii 12/08/14 2:55 pm RESTAURANT FRANCHISING CONCEPTS, REGULATIONS, AND PRACTICES Third Edition, Revised and Updated Mahmood A Khan, PhD FM.indd iii 12/08/14 2:55 pm CRC Press Taylor & Francis Group 6000 Broken Sound Parkway NW, Suite 300 Boca Raton, FL 33487-2742 Apple Academic Press, Inc 3333 Mistwell Crescent Oakville, ON L6L 0A2 Canada © 2015 by Apple Academic Press, Inc Exclusive worldwide distribution by CRC Press an imprint of Taylor & Francis Group, an Informa business No claim to original U.S Government works Version Date: 20140924 International Standard Book Number-13: 978-1-4822-2349-1 (eBook - PDF) This book contains information obtained from authentic and highly regarded sources Reasonable efforts have been made to publish reliable data and information, but the author and publisher cannot assume responsibility for the validity of all materials or the consequences of their use The authors and publishers have attempted to trace the copyright holders of all material reproduced in this publication and apologize to copyright holders if permission to publish in this form has not been obtained If any copyright material has not been acknowledged please write and let us know so we may rectify in any future reprint Except as permitted under U.S Copyright Law, no part of this book may be reprinted, reproduced, transmitted, or utilized in any form by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying, microfilming, and recording, or in any information storage or retrieval system, without written permission from the publishers For permission to photocopy or use material electronically from this work, please access www.copyright.com (http://www.copyright.com/) or contact the Copyright Clearance Center, Inc (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400 CCC is a not-for-profit organization that provides licenses and registration for a variety of users For organizations that have been granted a photocopy license by the CCC, a separate system of payment has been arranged Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Visit the Taylor & Francis Web site at http://www.taylorandfrancis.com and the CRC Press Web site at http://www.crcpress.com For information about Apple Academic Press product http://www.appleacademicpress.com To my family Maryam, Samala, Safdar, Zaki, Layth, Feras, and Nufayl for their affection, patience, and support FM.indd v 12/08/14 2:55 pm FM.indd vi 12/08/14 2:55 pm ABOUT THE AUTHOR Mahmood A Khan, PhD, RD, FAND, FMP Professor, Pamplin College of Business Virginia Tech’s Northern Virginia Center 7054 Haycock Road, Falls Church, VA 22043-0362 Phone (703) 538-8486 Fax (703) 538-8415 E-mail: mahmood@vt.edu Dr Mahmood A Khan is the Professor in the department of Hospitality and Tourism Management, Pamplin College of Business at Virginia Tech’s National Capital Region campus He has served in teaching, research, and administrative positions for past 40 years, working at major U.S universities Dr Khan is the author of seven books and has traveled extensively for teaching and consulting on management issues and franchising He has been invited by national and international corporations to serve as a speaker, keynote speaker, and seminar presenter on different topics related to franchising and services management Dr Khan has received Steven Fletcher Award for his outstanding contribution to hospitality education and research He is also a recipient of the John Wiley & Sons Award for lifetime contribution to outstanding research and scholarship; the Donald K Tressler Award for scholarship; and the Cesar Ritz Award for scholarly contribution He received the Outstanding Doctoral Faculty Award from Pamplin College of Business He has served on the Board of Governors of the Educational Foundation of the International Franchise Association, on the Board of Directors of the Virginia Hospitality and Tourism Association, as a Trustee of the International College of Hospitality Management, and as a Trustee on the Foundation of the Hospitality Sales and Marketing Association’s International Association He is also a member of several professional associations, and is a Fellow of the Academy of Nutrition and Dietetics (FAND) FM.indd vii vii 12/08/14 2:55 pm FM.indd viii 12/08/14 2:55 pm CONTENTS List of Tables xi Foreword xv Preface xvii Acknowledgments xix Chapter Introduction to Franchising Case Study: McDonald’s: Menu Glocalization 27 Chapter Impact of Hospitality Franchising on the U.S Economy 35 Case Study: Taco Bell: Beef Controversy 62 Chapter Pros and Cons of Franchising 69 Case Study: Panera Bread: Customer Loyalty Programs 90 Chapter Franchising Agreements and Legal Documentation 95 Case Study: Quiznos: Franchisees and Legal Battles 144 Chapter Franchise Application and Franchise Package 151 Case Study: Subway: Franchise Historical and Operational Aspects 176 Chapter Franchisee/Franchisor/Franchise Selection 185 Case Study: Chick fil A: A Different Type of Franchise 207 Chapter Standard Franchisor Services 213 Case Study: Pizza Hut: Menu and Service Innovations 235 ix FM.indd ix 12/08/14 2:55 pm Glossary 563 Ergonomics or human engineering is a multidisciplinary field incorporating contributions from anthropometry, psychology, engineering, biomechanics, industrial engineering, and industrial design and used for designing equipment and devices that fit the human body and its cognitive abilities Federal Trade Commission (FTC) is an agency of the U.S government, established in 1914 by the Federal Trade Commission Act Its primary mission is to promote consumer protection and eliminate and promote anticompetitive business practices Federal Trade Commissionʼs Franchise Rule (FTC Rule) (or the Rule) requires disclosure of certain information that is material to making informed decision concerning the purchase of a franchise by the franchisee This includes points that potential franchisees should consider prior to signing the franchise agreement Field support manual The field support manual is a listing and description of field support services provided by the franchisor Filtering is the deliberate manipulation of communicated information to please the receiver(s) Fixed assets are those assets that are of a permanent nature and that cannot be converted to cash while the business is in operation Examples of fixed assets include furniture and land Fixed liabilities are equipment contracts payable or notes payable on a longterm basis They are not payable within one year of the balance sheet date Food cost percentage is the food cost expressed as the percentage of food sales and can be calculated as: Food Cost (%) = Food Costs/Food Sales Food cost percentage is used as a budgeting tool and for comparative evaluations of financial statements The food cost percentage varies with the type of foodservice operation It indicates the amount spent for food out of the total food sales Franchise The term franchise has its origin in the French word meaning “free from servitude.” Roughly translated, that would mean that a businessman is free to run his own business It also means a right or privilege granted to an individual or a group It is used as a noun as Glossary.indd 563 17/07/14 12:35 pm 564 Restaurant Franchising well as a verb As a noun, it has two primary meanings: 1) It is a business method that involves the licensing of trademarks and methods of doing business wherein the right or license granted by a company to an individual or group to market its products or services in a specific territory; 2) the store, restaurant, or other business operating under such a license As a verb, to franchise means to grant (an individual, company, etc.) a franchise Franchise disclosure document (FDD) is a format for disclosing franchisor information to prospective franchisees The purpose of the FDD is to protect the public and potential franchisees by providing information about the franchise company Franchise fee This is the initial fee, also referred to as the license fee, which is charged by the franchisor to the franchisee and can range from few hundred dollars to several thousand Franchise laws are separate well-defined laws and regulations that protect franchisees within the system Particularly in the United States there are definite franchise laws that provide a major advantage to franchisees U.S franchise laws include disclosure requirements, which require franchisors to fully and legally disclose certain facts about the franchisors business These laws regulate important information related to the offer, conduct, and termination of franchisees Franchise management training programs (FTMP) These are comprehensive training programs that involve intensive training for the franchisees All functions of the restaurant’s operation and management are included in this training Formal training sites and methods are used for this type of training Franchise seller is any individual, group, association, limited or general partnership, corporation, or any other entity that offers for sale, sells, or arranges for the sale of a franchise It includes the franchisor and the franchisor’s employees, representatives, agents, sub-franchisors, and third-party brokers who are involved in franchise sales activities Franchise termination refers the franchisor’s power to terminate, to decline to renew, or to deny the franchisee the right to sell or transfer a franchise Franchisee is any individual, group, association, limited or general partnership, corporation, or any other entity that is granted a franchise Glossary.indd 564 17/07/14 12:35 pm Glossary 565 Franchisee advisory committees or franchisee advisory councils (FACs) are formed by some franchisors to obtain input from the franchisees Considering the fragile nature of the relationship, many franchisors set up such councils Council members are selected or elected groups of franchisees, who are in touch with the ongoing business Members of the councils meet with various individuals as and when necessary Franchising relationship regulations There is no federal law governing franchising relationships or practices, such as termination regulations, renewal regulations, or transfer regulations State franchise laws are inconsistent with each other, and they may or may not apply to franchising relationships directly Legislative and regulatory efforts tend to reflect the concerns of franchisees or potential franchisees in two circumstances: (1) problems that arise prior to entering into a franchise relationship, such as deception or impropriety in the presentation, solicitation, or sale of franchise opportunity, and (2) problems arising within ongoing franchising relationships, such as contact, performance, and termination or renewal of franchise agreements While disclosure requirements and procedures both at the federal and state levels address the former situation to a much greater extent, franchising regulations pertaining to the latter set of problems are covered by different regulations Franchisor is any individual, group, association, limited or general partnership, corporation, or any other entity that grants a franchise and participates in the franchise relationship Unless otherwise stated, it includes subfranchisors Franchisorʼs obligation Franchisors are obligated to provide service, such as supervision, quality control, and supervision Frozen storage areas are required for food storage at temperatures of –10º to –20ºF (–23º to –28ºC) and are mainly suitable for storing frozen food items GAAP or generally accepted accounting principles refers to the common set of accounting principles, standards, and procedures that companies use to compile their financial statements Glocalization is a term that is a combination of “globalization” and “localization.” It refers to adaptations undertaken to meet the demands of local markets in international business Glossary.indd 565 17/07/14 12:35 pm 566 Restaurant Franchising Gross margin represents the total sales revenue of a company minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage is the gross margin, which can be calculated as: Gross Margin (%) = (Revenue – Cost of Goods Sold) ÷ Revenue OR Gross Margin (%) = Gross profit ÷ Sales Gross profit is the amount after the cost of food and beverages is deducted from sales This gives the total gross profit for the restaurant operation Hands-on training programs are designed to provide practical experience in the day-to-day operation of the franchise The trainees go through the operational manual and follow its sequence Usually this training can best be provided in a restaurant in operation The primary objective of hands-on training is to provide a rotation in each of the operational aspects of the restaurant This training is usually supervised by a senior employee within the franchise operation Health Insurance Portability and Accountability Act (HIPPA) deals with health care information privacy by setting standards for health information that is collected electronically These rules apply to companies that provide or collect health insurance usage information HTML is the abbreviation for hypertext markup language, which is the standard markup language used to create web pages ICANN or Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit organization that coordinates the Internet’s global domain name system It also handles the dispute resolution process to address domain registrants not located in the United States, as well as domain names registered under certain country-code top level domains that have agreed to abide by the Uniform Domain Name Dispute Resolution Policy (UDRP) Information overload occurs if the information exceeds the parameters of processing capacity of the receiver, or the difficulty a person may experience in making decisions or in understanding that can be caused by the presence of too much information It is generally thought that information technology may be a primary reason for information overload due to its ability to produce more information more quickly and to disseminate this information to a wider audience than ever before Glossary.indd 566 17/07/14 12:35 pm Glossary 567 Initial franchise fee is the fee required by the franchisor and is based on the duration of term for which the franchise agreement is signed, which may be from five to twenty years This fee does not include any development fee or any other fess that may be required to be paid in advance Initial opening training program is designed to provide assistance during the opening period of the restaurant Internet can simply be visualized as a network of computers connected with each other There are several information and service units distributed to networks on the Internet Several million users can have access to the information provided over the Internet The Internet can be used to contact customers or other related individuals Internet Corporation for Assigned Names and Numbers (ICANN) dispute resolution process is global in perspective and can be invoked to address domain registrants not located in the United States, as well as domain names registered under certain country-code top level domains that have agreed to abide by the UDRP Interorganizational relationship refers to external relationships between organizations, such as between members in a channel of distribution For example, a franchisor deals with suppliers and purveyors of different products and services Intranet When the Internet access is restricted to selected computers, it is referred to as an intranet It can be used exclusively for internal communication by an organization or to individuals and franchisee or others who have a connection with the corporation Intraorganizational relationship An intraorganizational relationship refers to a relationship and communication that occurs within an organization, such as between franchisors and franchisees Inventory turnover ratio shows how many times a company’s inventory is sold and replaced over a period It is very important in the case of restaurants where there is rapid turnover of inventory The days in a time period can be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or “inventory turnover days.” It can be calculated in two ways: Inventory Turnover Glossary.indd 567 17/07/14 12:35 pm 568 Restaurant Franchising Ratio = Sales ÷ Inventory; OR Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory Joint ventures In a joint venture, the franchisor joins with a local investor, thereby forming a joint venture restaurant or chain of restaurants In this relationship, the franchisor has more control than in the case of a master franchise Labor cost percentage is the labor costs divided by sales and can be calculated as: Labor Cost (%) = Cost of Labor/Sales License fee is the initial fee, also referred to as the franchise fee, that is charged by the franchisor and can range from few hundred dollars to several thousand Liquidity ratio is the same as the current ratio derived by dividing current assets by current liabilities They measure solvency These ratios are also known as “cash asset ratio,” or “cash ratio.” Loading docks are used for loading or unloading in the receiving areas A loading dock should be planned on the basis of the type of deliveries expected The truck-bed height should allow goods to be transferred efficiently from trucks to storage areas by carts or other mobile equipment Lobbying This involves dealing with governments and legislators to promote views that may influence legislation that may have impact on a franchise system Market development entails developing a market or customer base by a growth strategy that identifies and develops new market segments for current products Market penetration is a growth strategy and occurs when a company penetrates a market in which current or similar products already exist and establishing a presence For restaurants, this can be done by providing discounted pricing or by using ways to develop customer loyalty Marketing manual is the handbook or guidebook that describes the marketing philosophy of the franchisor and outlines the procedures for marketing products and services Glossary.indd 568 17/07/14 12:35 pm Glossary 569 Master franchisee is an individual who is trained to serve as a franchisor and acts as a franchisor in specified location Master franchising is a franchising relationship in which master franchisees act like mini-franchisors in other countries The franchisor enters into a master franchise agreement directly with an individual or business, usually a resident foreign national, who will act as the franchisor in that particular region The master franchisor may develop franchise outlets and/or is responsible for franchising outlets to others in the assigned foreign country or region Mediation is a method of resolving a dispute between two parties with the assistance of a mutually selected neutral third party The third party functions more like a middle person trying to bring both parties to an agreeable solution rather than a judge or an arbitrator Metatags are keywords used by web designer to inform search engines to which sites to link when a user initiates a search request These tags are invisible to the user since they are embedded in the hypertext markup language (HTML) used in websites Thus using metatags allows the website designer to manipulate to a certain extent these keywords, thereby altering the results provided by a search engine in response to a user’s request Negotiation This is the first step that can be used for dispute resolution This is one of the most commonly used methods for franchise dispute resolution Negotiation is dispute resolution among two parties without the intervention of a third party It can be a meeting to bring issues of dispute on the table or the opportunity to justify one’s point of view or just a session to gripe or vent frustrations Net margin is the ratio of net profits to revenues for a company and is expressed as a percentage that shows how much of each dollar earned by the company is translated into profits It measures profitability at the net profit level The figures are available in the income statement It can be calculated as: Net Margins = Net Profit ÷ Revenue; OR Net Margins = Net Profit before Tax ÷ Sales OR Net Profit = Revenue – COGS – Operating Expenses – Interest and Taxes (COGS is the Cost of Goods Sold) Net profit is the total net profit derived after subtracting income taxes This is the total profit after taking into account all costs and expenses Glossary.indd 569 17/07/14 12:35 pm 570 Restaurant Franchising Net worth includes invested capital and earnings retained in the business at the balance sheet date If a restaurant business is operated as a partnership, it is preferable to show each partner’s net worth separately on the balance sheet Nonrenewal means failure to renew a franchise agreement for a franchised outlet upon the expiration of the franchise term For example, a franchisee may operate a franchise for period of 10 years At the conclusion of the 10-year term, the franchisor (or franchisee) may decide not to renew the franchise agreement Nontraditional franchises are those franchises that are not conventional freestanding restaurants They can be double-drive-thrus, dual or multiple concepts, kiosks, stands, and can be in combination with other businesses Nonverbal communication can be in a variety of forms such as body language, facial expressions, signs, visual aids, gestures, pictures, charts, cartoons, symbols, videos, and films Occupational Safety and Health Act (OSHA) is the U.S federal law which governs occupational health and safety in the workplace Its main goal is to ensure that employers provide employees with a safe environment Ongoing training programs are provided on a continual basis to the staff of the franchisee, often on site or at corporate headquarters This training may be provided by the franchisor or by his or her representative Opening costs are costs incurred for the grand opening of the restaurant franchise and are payable by the franchisee Opening inventory value is the value of inventory at the beginning of a specific period of time Operating manuals or operation manuals are instruction books provided by a franchisor that describe in detail all operational aspects of a franchise Operating profit is calculated by subtracting the total controllable expenses from the total income It is also referred to as profit before rent, as it indicates the profits made by the operation before calculating other costs Glossary.indd 570 17/07/14 12:35 pm Glossary 571 Oral communication is spoken form of communication, which is very commonly used in any franchise operations Oral communication is generally regarded as the “natural” or “normal” mode of communication Organization-to-customer In any type of service organization, this relationship is of paramount importance This includes relationships of franchisors with individual or group customers Patent A patent is a formal legal document that gives an inventor the exclusive right to make, use, and sell an invention for a specified period of time Patents are issued by governments Payroll includes all salaries and wages Penetration pricing Penetration pricing calls for setting price levels that are low enough to quickly gain the market share Podcasting The word “podcast” is a combination of “broadcast” and “pod” (from the iPod) Podcast is a type of digital media consisting of episodic series of audio radio, video, PDF, or ePub files subscribed to and downloaded through web syndication or streamed online to a computer or a mobile device Podcasts are often listened to on portable media players Price bundling refers to a grouping of selected menu items offered in one package at one price Primary sources refer to the information collected by the primary or original source, such as from a franchise conducting its own research This may be a very expensive way for information collection Principal business address means the street address of a person’s home office in the United States A principal business address cannot be a post office box or private mail drop Product and trade name franchising is franchising in which a dealer (franchisee) identifies with the supplier (franchisor) through the product line and, to some extent, with its trade name or trademark Franchisees are granted the rights to distribute a franchisor’s products or services within a specified territory or at a specific location, generally with the use of the manufacturer’s identifying name or trademark Glossary.indd 571 17/07/14 12:35 pm 572 Restaurant Franchising Product category competition refers to businesses that are in the same product or service class, but whose products are different in features, benefits, and price This may include restaurants that serve products that have different styles of service, such as home delivery or special dining services Product development strategy involves developing products for a selected market considering consumer preferences Profit before depreciation is calculated by subtracting rent or occupation costs from the profit before rent Profit before income tax is calculated by subtracting the depreciation cost from the profit before depreciation Profit before rent is calculated by subtracting total controllable expenses from the total income It is also referred to as operating profit, as it indicates the profits made by the operation before calculating other costs Prospective franchisee is any person (including any agent, representative, or employee) who approaches or is approached by a franchise seller to discuss the possible establishment of a franchise relationship Prototype unit A prototype restaurant unit is a restaurant that is an experimental site for a new, tested restaurant concept It is conveniently located and portrays the entire restaurant concept in its entirety There can be more than one prototype unit located at various geographical locations based on differences in the selected concepts Public figure is a person whose name or physical appearance is generally known to the public in the geographic area where the franchise will be located Typical public figures include sports stars, actors, musicians, and similar celebrities Public relations Public refers to any group that has an actual or potential interest in or impact on a franchisor’s ability to achieve its objectives These objectives may include developing and maintaining brand image, territorial expansion, and popularity within a community or region Thus public relations include a variety of events and programs to promote or protect a franchise’s image related to products, service, and conduct Glossary.indd 572 17/07/14 12:35 pm Glossary 573 Some of the activities included in public relations include QVSC or Quality, Value, Service, and Cleanliness, also Quality, Value, Service, Convenience Quality control manual is the quality control manual which contains a description of the quality control measures a franchisor requires to maintain standards, technical controls, maintenance services, leftover control, and handling of consumer complaints Quasi-franchise relationship refers to a relationship in which the franchisor provides management of a facility owned by the franchisee Quick assets ratio indicates the short-term liquidity of a company It measures a company’s ability to meet its short-term obligations with its most liquid assets It is also known as the quick ratio It can be calculated in different ways such as: Quick Ratio = (Current Assets – Inventories) ÷ Current Liabilities OR Quick Ratio = (Cash + Accounts Receivable) ÷ Current Liabilities This ratio is also known as the “acid test ratio,” or “quick ratio.” Quick ratio indicates the short-term liquidity of a company It measures a company’s ability to meet its short-term obligations with its most liquid assets For this reason, the ratio excludes inventories from current assets These figures are available from the balance sheet It can be calculated in different ways such as: Quick Ratio = (Current Assets – Inventories) ÷ Current Liabilities OR Quick Ratio = (Cash + Accounts Receivable) ÷ Current Liabilities This ratio is also known as the “acid test ratio,” or “quick assets ratio.” R&D, Research and Development The primary function of R&D is to develop new products or to discover and create new knowledge Ratio analysis is a quantitative analysis of information contained in a company’s financial statements and is a very effective tool used for comparative assessment of finances Reacquisition means the return of a franchise outlet during its term of agreement to the franchisor in exchange for cash or some other consideration, including the forgiveness of a debt For example, during the course of a franchise agreement, a franchisee may wish to terminate its relationship with the franchisor, and the franchisor may agree to buy back the outlet for cash or to forgive overdue royalty payments Glossary.indd 573 17/07/14 12:35 pm 574 Restaurant Franchising Receiverʼs emotions The state of mind of an individual receiving a communication, such as happiness, sadness, denial, etc., may become barriers to effective communication Emotions have an impact on the decoding of messages Receiving area is the area where foods, beverages, and other supplies are received The type and frequency of deliveries play an important role in planning receiving areas Recipe standardization is the creation of a recipe that has been tested and results in a consistent product each time, specifying the ingredients and preparation It includes the adjustment and readjustment of ingredients and their proportions to produce the most acceptable quality Taste tests are conducted several times until expected quality products are assured Most often the recipes are enlarged and tested from smaller quantity recipes Refrigerated storage areas are needed for storing products that have to be stored at temperatures of 35º to 40ºF (1.7º to 4.4ºC) These temperatures are essential for storing fresh meats, fruits, vegetables, dairy products, leftover items, and beverages Regional cooperatives are a group of franchise restaurants in a particular geographic area that serve the purpose of helping franchisees at times when special support is needed These are organized by the franchisor Renewal fee is the fee charged by the franchisor for the renewal of the franchise agreement Normally this occurs when there is a substantial change in the type of restaurant desired by the franchisee Rent or occupation costs include rent, occupation costs, real estate taxes, and insurance Repairs and maintenance expenses include all types of repairs and maintenance expenses Required payment refers to all consideration that the franchisee must pay to the franchisor or an affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing operation of the franchise A required payment does not include payments for the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease Glossary.indd 574 17/07/14 12:35 pm Glossary 575 Restaurant manager training program (RMTP) is a comprehensive training program that involves intensive training for the franchisees All functions of the restaurant’s operation and management are included in this training Formal training sites and methods are used for this type of training Restaurant operator training is training designed for those who will operate the restaurant, who may or may not be franchisees themselves In this training, the emphasis is on the operational aspects of the restaurant franchise Return on assets ratio assesses the company’s net income divided by its average of total assets The return on assets formula looks at the ability of a company to utilize its assets to gain a net profit Return on investment (ROI) is the concept of an investment of some resource yielding a benefit to the investor It is one way of considering profits in relation to capital invested It can be calculated in different ways depending on what is invested It can be calculated by using the formula: Return On Investment (%) = (Net Profit ÷ Investment) X 100 OR Net Profit = Gross Profit – Expenses Royalty fee is the fee payable as royalty to the franchisor on a regular basis for securing rights of franchising Sale of a franchise includes an agreement whereby a person obtains a franchise from a franchise seller for value by purchase, license, or otherwise It does not include extending or renewing an existing franchise agreement where there has been no interruption in the franchisee’s operation of the business, unless the new agreement contains terms and conditions that differ materially from the original agreement It also does not include the transfer of a franchise by an existing franchisee where the franchisor has had no significant involvement with the prospective transferee A franchisor’s approval or disapproval of a transfer alone is not deemed to be significant involvement Sales to assets ratio is the ratio of sales to total assets and is included in the financial statement ratio analysis It is calculated as: Sales ÷ Total Assets = Sales to Assets Ratio It is one of the efficiency ratios, since it measures the efficiency of total assets in generating sales Sanitation areas include the dishwashing and pot-and-pan-washing facilities in a restaurant Glossary.indd 575 17/07/14 12:35 pm 576 Restaurant Franchising Secondary source of information is information that is not provided by the original source These sources include published annual reports, patents and trademarks, trade publications, professional journals, suppliers, plant tours, and electronic media Selective perception refers to situations in which people selectively interpret communicated information based on their interests, background, experience, feelings, and attitude Servicescape refers to the designing of features for providing service It is synonymous with landscape, which is used in designing structures and buildings Skimming pricing is a pricing approach in which the seller sets a high price for a new or improved product for a short period of time in order to obtain maximum revenue from the market before substitute or comparable products appear The skimming price originates from the deliberate attempt to reach a market willing to pay a premium price Standardized recipes are recipes that are tested for quality, quantity, procedures, time, temperature, equipment, and yield and which produce the same consistency and quality every time Subfranchising programs are designed to provide growth of a franchise in areas or locations where the original franchisor may not have easy access or where a franchisor may not want to get involved Subfranchisor (also master franchisee) is any individual, group, association, limited or general partnership, corporation, or any other entity that functions as a franchisor by engaging in both pre-sale activities and postsale performance Supportive communication is communication that seeks to preserve a positive relationship between the communicators while still addressing the problem at hand SWOT analysis is a review of strengths, weaknesses, opportunities, and threats of an organization Target segment competition includes those competitors who market products or services that are similar in features and benefits to the same Glossary.indd 576 17/07/14 12:35 pm Glossary 577 customer segments at similar prices They are also referred to as the brand competitors Termination means the franchisor’s ending of a franchise agreement prior to the end of its term without providing any money or other consideration to the franchisee (e.g., forgiveness or assumption of debt) For example, a franchisor may decide to terminate a franchisee for failing to abide by system health and safety standards As a result, the franchisee leaves the system without receiving any payment or other consideration, such as cancellation of a debt owed to the franchisor Total controllable expenses include all controllable expenses and are sometimes used as an indicator of management efficiency This includes salaries and payroll expenses (benefits, etc.), legal and accounting expenses, advertising and marketing expenses, office supplies, utilities, repair and maintenance, and other outside services Trade areas are those areas/sites where business is desired or where the market is suitable for developing a site for a franchised restaurant Trademark A trademark is a distinctive mark, motto, device, or emblem that a manufacturer affixes to a particular product or package to distinguish it from goods produced by other manufacturer Transfer means the acquisition of a controlling interest in a franchised outlet during its term by a person other than the franchisor or an affiliate It covers private sales of an outlet by the existing franchisee-owner to a new franchisee owner and the sale of a controlling interest in the ownership of a franchise Transfer fee is the fee charged by the franchisor when a transfer of ownership is desired This transfer requires prior approval by the franchisor Uniform Domain Name Dispute Resolution Policy (UDRP) is a process established by the Internet Corporation for Assigned Names and Numbers (ICANN) for the resolution of disputes regarding the registration of Internet domain names It can be used in case of a problem associated with domain misuse Under this policy, most types of trademark-based domain name disputes must be resolved by agreement, court action, or arbitration before a registrar will cancel, suspend, or transfer a domain name Glossary.indd 577 17/07/14 12:35 pm .. .RESTAURANT FRANCHISING FM.indd i 12/08/14 2:55 pm FM.indd ii 12/08/14 2:55 pm RESTAURANT FRANCHISING CONCEPTS, REGULATIONS, AND PRACTICES Third Edition, Revised and Updated Mahmood... 12/08/14 2:55 pm xviii Restaurant Franchising This book is suitable for classroom use, and an instructor’s manual to accompany Restaurant Franchising: Concepts, Regulations, and Practices is available... million restaurant industry jobs, and nearly 20 percent of all restaurant establishments Hundreds of wellknown, iconic brands, and new emerging concepts serve tens of millions of customers day in and