Franchising & Social Franchising

1. ABDM4233 ENTREPRENEURSHIP
Franchising &
Social Franchising
by
Stephen Ong
Principal Lecturer (Specialist)
Visiting Professor, Shenzhen
University

2. Is “Doing Good” a franchise?

3. The Franchising Boom
 More than 3,000 franchisors operate
more than 909,000 outlets in the
United States.
 Each year, franchises produce goods
and services that are worth $881
billion, 4.4% of the U.S. GDP.
 Franchises employ one in every 12
workers in the U.S. in more than 230
major industries.

4. The Franchising Boom
 Economic impact of franchising
on the U.S. economy: $2.3 trillion.
 A new franchise opens
somewhere in the world
every 8 minutes.

5. Introduction to Franchising
 Introduction
 Franchising is growing in popularity.
 In 2007 (the most recent year statistics are available),
nearly 766,000 franchise outlets were operating in the
U.S.
 History
 The word “franchise” comes from an old dialect of
French and means privilege or freedom.
 Many of the most popular franchises, including KFC
(1952), McDonald’s (1955), and H&R Block (1958)
started as early as the 1950s.
15-5

6. What is Franchising?
 Franchising
 Franchising is a form of business organization in which
a firm that already has a successful product or service
(franchisor) licenses its trademark and method of doing
business to another business or individual (franchisee)
in exchange for a franchise fee and an ongoing royalty
payment.
 Some franchisors are established firms (like
McDonald’s) while others are first-time enterprises
being launched by entrepreneurs.
15-6

7. Franchising
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.

8. The Franchising Relationship
Element The Franchisor The Franchisee
Site Selection Oversees and approves; may choose site Chooses site with franchisor’s approval
Design Provides prototype design Pays for and implements design
Employees Makes general recommendations and Hires, manages, and fires
training suggestions employees
Products and Services Determines product or service line Modifies only with franchisor’s approval
Prices Can only recommend prices Sets final prices
Purchasing Establishes quality standards and suppliers Must meet quality standards and purchase
only from approved suppliers
Advertising Develops and coordinates national ad Pays for national ad campaign; complies with
campaign; may require minimum level of local advertising requirements; gets franchisor
spending on local advertising approval on local ads
Quality Control Sets quality standards and enforces them Maintains quality standards; trains employees
with inspections; trains franchisees to implement quality systems
Support Provides support through an established Operates business on a day-to-day basis with
business system franchisor’s support
FIGURE 6.1
Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association,
National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5.
6-8

9. Franchising Basics
 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?”

11. Greenstar : Social Franchise
in Healthcare (Pakistan)
 Less than 100 Employees
 Served 3.0 million patients, with high
quality affordable services to more
poor patients than government clinics
 8,000 in Facilities Network
 24,000 health professionals trained
in reproductive and family health
issues;
 1.3 million people contacted
regarding reproductive health
awareness;
 19 family health care products
through 80,000 retail outlets
 2nd largest provider of family planning
services, over 26% of all
contraceptives

12. Vitaloc : Social Enterprise Franchise
http://www.youtube.com/watch?feature=player_embedded&v=GpfLAzk_DOo#!
 Live Music Station to provide
services for pain relief and
healthy lifestyle
 Employment of at least 1/3
of staff from disadvantaged
groups, such as middle-aged
unemployed, single mom
 To provide small business
for early retirees and laid-off
workers to rebuild their
confidence

13. Types of Franchising
 Tradename
 Product distribution
 Pure (Business format)

14. Two Types of Franchise Systems
1 of 2
 Product and Trademark Franchise
 An arrangement under which the franchisor grants to
the franchisee the right to buy its products and use its
trade name.
 This approach typically connects a single manufacturer
with a network of dealers or distributors.
 For example, General Motors has established a network of
dealers that sell GM cars and use the GM trademark in their
advertising and promotions.
 Other examples of product and trademark franchisors include
agricultural machinery dealers, soft drink bottlers, and beer
distributorships.
15-14

15. Two Types of Franchise Systems
2 of 2
 Business Format Franchise
 An arrangement under which the franchisor provides a
formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
 Fast-food restaurants, convenience stores, and motels
are well-known examples of business format franchises.
 Business format franchises are by far the most popular form of
franchising, particularly for entrepreneurial firms.
15-15

16. Top 10 Business Lines in Which Business
Format Franchises Operate
1. Automotive
2. Commercial and residential services
3. Quick service restaurants
4. Table/Full-service restaurants
5. Retail food
6. Lodging
7. Real Estate
8. Retail products and services
9. Business services
10. Personal services
15-16

17. Types of Franchise Agreements
1 of 3
Individual Franchise Agreement
15-17

18. Types of Franchise Agreements
2 of 3
Area Franchise Agreement
15-18

19. Types of Franchise Agreements
3 of 3
Master Franchise Agreement
15-19

20. When to Franchise?
From the Franchisor’s Point of View
1 of 2
 Approach Franchising With Caution and Care
 Establishing a franchise system should be approached
carefully and deliberately.
 Franchising is a complicated business endeavor, and an
entrepreneur must look closely at all its aspects before
deciding to franchise.
 Regulations
 An entrepreneur should also be aware that over the years
a number of fraudulent franchise organizations have
come and gone and have left financially ruined franchise
owners behind.
15-20

21. When to Franchise?
2 of 2
 When Is Franchising Most Appropriate?
 Franchising is most appropriate when a firm has a strong
or potentially strong trademark, a well-designed business
method, and a desire to grow.
 A franchise system will ultimately fail if the franchisee’s
brand doesn’t add value for customers and its business
method is flawed or poorly developed.
15-21

22. Nine Steps in Setting Up a Franchise
System
15-22

23. Qualities to Look for in Prospective
Franchisees
• Good work ethic
• Ability to follow instructions
• Ability to operate with minimal supervision
• Team oriented
• Experience in the industry in which the franchise competes
• Adequate financial resources and good credit history
• Ability to make suggestions without becoming confrontational
or upset if the suggestions are not adopted
• Represents the franchisor in a positive manner
15-23

24. Ways Franchisors Can Develop the
Potential of Their Franchisees
• Provide mentoring that supersedes routine training.
• Keep operating manuals up-to-date.
• Keep products, services, and business systems up to date.
• Solicit input from franchisees to reinforce their importance in
the larger system.
• Encourage franchisees to develop a franchise association.
• Maintain the franchise system’s integrity.
15-24

25. Advantages and Disadvantages of Franchising as
a Method of Business Expansion
Advantages Disadvantages
• Rapid, low-cost market expansion • Profit sharing
• Income from franchise fees and • Loss of control
royalties
• Friction with franchisees
• Franchisee motivation
• Managing growth
• Access to ideas and suggestions
• Differences in required business skills
• Cost savings
• Legal expenses
• Increased buying power
15-25

26. Buying a Franchise
From the Franchisee’s Point of View
1 of 3
 Buying a Franchise
 Purchasing a franchise is an important business
decision involving a substantial financial commitment.
 Potential franchise owners should strive to be as well
informed as possible before purchasing a franchise and
should be aware that it is often legally and financially
difficult to exit a franchise relationship.
15-26

27. Benefits of Franchising
 A business system
 Management training and support
 Start-up
 Ongoing
 Brand name appeal
 “Cloning”
 Standardized quality of goods and
services

28. Benefits of Franchising
 National advertising programs
 Franchisees contribute 1% to 5% of
sales
 Financial assistance
 Only 20% of franchisors offer direct
financial assistance to franchisees.
 SBA – Franchise Registry
 Proven products and
business formats

29. FIGURE 6.3 Franchisor Financial Assistance
Source: The Profile of Franchising 2006, International Franchise Association (Washington, DC: 2007), p. 70.

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

31. 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
 Approved suppliers only

32. Drawbacks of Franchising
(continued)
 Limited product line
 Contract terms and renewal
 Average term = 10.3 years
 Unsatisfactory training programs
 Market saturation
 Less freedom –
 “No independence”
 “Happy prisoners”

33. Buying a Franchise
2 of 3
Answering the following questions will help
determine if franchising is right for you
• Are you willing to take orders? Franchises are typically
very particular about how outlets operate.
• Are you willing to be part of a franchise “system” rather
than be an independent businessperson?
• How will you react if you make a suggestion to your
franchisor and your suggestion is rejected?
• What are you looking for in a business? How hard do you
want to work?
15-33

34. Buying a Franchise
3 of 3
Answering the following questions will help
determine if franchising is right for you
• How willing are you to put your money at risk? How will
you feel if your business is operating at a net loss but you
will have to pay royalties on your gross income?
15-34

35. The Costs Involved With Buying a
Franchise
1 of 3
 Initial Franchise Fee
 The initial fee varies depending on the franchisor.
 Capital Requirements
 The costs vary but may include the cost of buying real
estate, the cost of putting up a building, the purchase of
inventory, and the cost of obtaining a business license.
 Continuing Royalty Payment
 Is usually around 5% of monthly gross income.
15-35

36. The Costs Involved With Buying a
Franchise
2 of 3
 Advertising Fees
 Franchisees are often required to pay into a national or
regional advertising fund.
 Other Fees
 Other fees may be charged for various activities,
including:
 Training additional staff
 Providing management expertise when needed
 Providing computer assistance
 Providing a host of other items or support services
15-36

37. The Costs Involved With Buying a Franchise
3 of 3
15-37

38. Advantages and Disadvantages of Buying a
Franchise
Advantages Disadvantages
• A proven product or service within • Cost of the franchise
an established market • Restrictions on creativity
• An established trademark or • Duration and nature of the commitment
business system
• Risk of fraud, misunderstandings, or
• Franchisor’s training, technical
lack of franchisor commitment
expertise, and managerial expertise
• Problems of termination or transfer
• An established marketing network
• Poor performance on the part of other
• Franchisor ongoing support
franchisees
• Availability of financing
• Potential for failure
• Potential for business growth
15-38

39. Seven Steps in Purchasing a Franchise
15-39

40. Watch Out! Common Misconceptions
About Franchising
• Franchising is a safe investment.
• A strong industry ensures franchise success.
• A franchise is a “proven” business system.
• There is no need to hire a franchise attorney or an accountant.
• The best systems grow rapidly and it is best to be part of a rapid-growth
system.
• I can operate my franchise outlet for less than the franchisor predicts.
• The franchisor is a nice person—he’ll help me out if I need it.
15-40

41. Ten Myths of Franchising
1. Franchising is the safest way to go into
business because franchises never fail.
2. I’ll be able to open my franchise for less
money than the franchiser estimates.
3. The bigger the franchise organization, the
more successful I’ll be.
4. I’ll use 80 percent of the franchiser’s
business system, but I’ll improve upon by
substituting my experience and know-how.

42. Ten Myths of Franchising
(continued)
5. All franchises are the same.
6. I don’t have to be a hands-on manager.
I can be an absentee owner and still be very
successful.
3. Anyone can be a satisfied,
successful franchise owner.

43. Ten Myths of Franchising
(continued)
8. Franchising is the cheapest way to get into
business for yourself.
9. The franchiser will solve my business
problems for me; after all, that’s why I pay
an ongoing royalty fee.
10. Once I open my franchise,
I’ll be able to run things
the way I want to.

44. Legal Aspects of the Franchise
Relationship
 Federal Rules and Regulations
 The offer and sale of a franchise are regulated at the
federal level.
 According to Federal Trade Commission (FTC) rule 436,
franchisors must furnish potential franchisees with written
disclosures that provide information about the franchisor, the
franchised business, and the franchise relationship.
 In most cases, the disclosures are made through a lengthy
document referred to as the Franchisor Disclosure Document
(FDD).
 The FDD contains 23 categories of information that give a
prospective franchisee a broad base of information about the
background and financial health of the franchisor.
15-44

45. Franchising and the Law
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

46. 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 Franchise
Disclosure Document (FDD) – and read it!
 Talk to existing franchisees.
 Ask the franchisor some tough questions.
 Make your choice.

47. Factors That Make a
Franchise Appealing
In addition to the text
 Unique concept or marketing approach
 Profitability
 Registered trademark
 Business system that works
 Solid training program
 Affordability
 Positive relationship with franchisees

48. More About Franchising
1 of 2
 Franchise Ethics
 The majority of franchisors and franchisees are highly
ethical.
 There are certain features of franchising, however, that
make it subject to ethical abuse. These features are as
follows:
 The get-rich-quick mentality
 The false assumption that buying a franchise is a guarantee of
business success
 Conflicts of interest between franchisors and franchisees
15-48

49. Detecting Dishonest Franchisers
In addition to the text
 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.

50. Detecting Dishonest Franchisers
(continued)
In addition to the text
 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.

51. More About Franchising
2 of 2
 International Franchising
 International opportunities for franchising are
becoming more prevalent for the following two reasons:
 The markets for certain franchised products in the U.S. have
become saturated (i.e., fast food).
 The trend toward globalization continues.
 Steps to take before buying a franchise overseas:
 Consider the value of the franchisor’s name in the foreign
country.
 Get a good lawyer.
 Determine whether the product or service is saleable in the
foreign country.
 Find out how much training and support you will receive from
the franchisor.
15-51

52. Trends Shaping Franchising
 Changing face of franchisees
 Better educated with more business
acumen
 Multiple-unit franchising
 52% of franchisees operate multiple
outlets (and growing)
 International opportunities
 IFA Survey: 52% of U.S. franchisors
have an international presence
 Master franchising

53. Trends Shaping Franchising
 Smaller, nontraditional locations
 Intercept marketing
 Conversion franchising
 72% of North American franchisors use
as a growth strategy
 Piggybacking (or combination or
multi-branded franchising)
 Serving dual-career couples and
baby boomers

54. Conclusion
Franchising:
 Is a key part of the small business
sector
 Increases the chance of business
success for the entrepreneur
 Growth continues

55. Further Reading
 Scarborough, Norman, M. 2011. Essentials of
Entrepreneurship and Small Business
Management. 6th edition. Pearson.
 Judd, R.J. and Justis, R.T. (2008) Franchising: An
entrepreneur’s guide. 4th ed. Thomson
 Barringer, Bruce R. & Ireland, R. Duane, 2011
Entrepreneurship – Successfully launching new
ventures 4th edition, Pearson.
 Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011.
Entrepreneurship and Small Business. 3rd Asia
Pacific edition. John Wiley.

56. Appendix : A Franchise Checklist - 4P
n Product
n Profitability
n Process
n People

57. 1. Product/Service :
1. Positive reputation
2. Customer need
3. Growing market
4. Safe
5. Patented/guaranteed
6. Self-interest
7. Identified with known personality
8. Future need
9. Strongly desirable

58. 2. Process/ Business Format :
 Marketing  Site selection
 Promotion  Headquarters
control
 Brand
 Service/repairs
recognition
 Financial support
 Management
 Number of
 Training franchisees
 Accounting  Advertising

59. 3. Profitability
 Profits  Franchising fee
 Revenues  Royalty fee (%)
 Cost of goods sold  Advertising fee
 Labour costs  Other fees
 Expenses  Termination costs
 Return on investment  Selling of franchise
 Earnings claim rights
 Forecasted revenues  Renewal rights &
 Start-up costs costs

60. 4. People
 Franchisor Chairman  Advertising &
 Franchisor President promotions
 Franchisor  Finance &
operations executive accounting
 Franchisor sales  Sales & marketing
executive  Site selection
 Other principals or  Personnel & training
directors  Manufacturing &
 Service departments operations
 Field support