Entrepreneurship and Small Business Management Chapter Franchising Ch Performance Objectives Define and describe franchising Identify the positive and negative aspects of franchising Understand the structure of the franchise industry Recognize the legal aspects of franchising Learn how to research franchise opportunities Explore international franchising Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 What Is Franchising? Franchise—a business that markets a product/service developed by a franchisor Franchising—the system of operating a franchise governed by a legal agreement Franchisor—person or company who develops/sells a franchise and specifies the terms and methods of the agreement Franchisee—owner of a franchise unit or territory rights Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Main Types of Franchises Product and trade-name franchising—licensing or production of the product, and use of the franchise trade mark, logo, or identity Business-format franchising— purchase of an entire business model and system, including access to management expertise Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Other Franchise Variations Master franchise—allows individuals and organizations to buy the right to sub-franchise within a defined geographic territory Area franchise or multiple-unit franchise—gives exclusive rights to open franchisee-operated units within specific areas Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Positive and Negative Aspects of Franchising Advantages Start-up assistance Instant recognition Purchasing power Advertising and promotional support Operating guidelines Record of success Entrepreneurship and Small Business Management, 1/e Drawbacks Constraints on creativity and freedom Costs Standards and obligations © 2012 Pearson Education, Upper Saddle River, NJ 07458 Franchise Industry Structure A few large franchisors, with worldwide franchisees, control most of the industry Many smaller franchisors have local and regional franchisees U.S franchises provide over 9.5 million jobs Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Additional Types of Franchises Internet franchise—”virtual” franchise that is not dependent on a physical location Conversion franchising—an existing stand-alone business or local chain becomes part of a franchise operation Piggybacking or co-branding—two franchises share locations and resources Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Legal Aspects of Franchising State and federal regulations govern franchises Federal Trade Commission (FTC)— primary agency involved in oversight Franchise Disclosure Document (FDD) —primary source of data for prospective franchisees regarding franchisors Franchise agreement—legal contract between the parties in a franchise Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Information Included in a FDD Overview and background Fees and costs Contractual obligations Territory Financial performance Data on existing units Financial statements and contracts Termination, renewal, and other policies Entrepreneurship and Small Business Management, 1/e 10 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Information Included in a Franchise Agreement Term of agreement (length of time) Standards of quality and performance Royalties Non-compete, “hold harmless,” and integration clauses; choice of venue Clauses regarding termination, renewal, and transfer of the franchise Territories Entrepreneurship and Small Business Management, 1/e 11 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Steps for Franchise Selection Take time to reflect and engage core supporters Identify potential franchises Do research to narrow the list of options Decide if to use a franchise broker Visit and observe franchise operator(s) Entrepreneurship and Small Business Management, 1/e 12 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Steps for Franchise Selection (continued) 10 Request preliminary information from franchise companies Perform due diligence on a specific franchise Explore financing options Make a decision, engage professional counsel, and negotiate an agreement Make it work! Entrepreneurship and Small Business Management, 1/e 13 © 2012 Pearson Education, Upper Saddle River, NJ 07458 International Franchising Opportunities exist worldwide The decision to go global is more complex than domestic franchising Ethnic, cultural, and religious diversity impact business format and operations Policies must be altered for differences in governing law and custom Entrepreneurship and Small Business Management, 1/e 14 © 2012 Pearson Education, Upper Saddle River, NJ 07458 ... Advertising and promotional support Operating guidelines Record of success Entrepreneurship and Small Business Management, 1/e Drawbacks Constraints on creativity and freedom Costs Standards and. .. existing stand-alone business or local chain becomes part of a franchise operation Piggybacking or co-branding—two franchises share locations and resources Entrepreneurship and Small Business Management, ... Ethnic, cultural, and religious diversity impact business format and operations Policies must be altered for differences in governing law and custom Entrepreneurship and Small Business Management,