7 - 1 copyright © 2016 pearson education, inc. franchising and the entrepreneur 7 section 2: the...
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7 - 1Copyright © 2016 Pearson Education, Inc.
Franchising and the Entrepreneur
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Section 2: The Entrepreneurial Journey Begins
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About 3,000 franchisors operate more than 770,000 outlets in the United States.
Franchises generate more than $800 billion in annual sales and account for 4.1% of the U.S. GDP.
Franchises employ 8.1 million workers in the United States in more than 300 major industries.
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7 - 3Copyright © 2016 Pearson Education, Inc.
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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.
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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?”
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Trade-name
Product distribution
Pure (Business format)
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A business systemManagement training and support
Start-upOngoing
Brand name appeal“Cloning”
Standardized quality of goods and services
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National advertising programsFranchisees contribute 1% to 5% of sales.
Financial assistanceAbout 20% of franchisors offer direct financial assistance to franchisees.
SBA – Franchise Registry
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Proven products and business formats
Centralized buying power
Site selection and territorial protection
Important issue: Territorial encroachment
Greater chance for success
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Franchise fees and ongoing royaltiesAverage upfront franchise fee =
$25,147Royalties range from 1% to 11% of
franchisees’ salesAverage royalty = 6.7% of sales
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Strict adherence to standardized operations
Restrictions on purchasingApproved suppliers only
Limited product lineContract terms and renewal
Average term = 10.3 years
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Unsatisfactory training programsMarket saturationLess freedom
“No independence”“Happy prisoners”
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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.
5. All franchises are the same.7 - 17Copyright © 2016 Pearson Education, Inc.
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6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very successful.
7. Anyone can be a satisfied, successful franchise owner.
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.
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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.
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Evaluate yourself: What do you like and dislike?
Research your market.Consider your franchise options.Get a copy of the Franchisor’s FDD –
and read it!
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Number of Franchisees from which Prospective Franchisees Solicit Information Before Selecting a Franchise
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Unique concept or marketing approach
Profitability
Registered trademark
Business system that works
Solid training program
Affordability
Positive relationship with franchisees
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Evaluate yourself: What do you like and dislike?
Research your market. Consider your franchise options. Get a copy of the Franchisor’s FDD – and
read it! Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice.
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International opportunitiesMany franchises are focusing on
international markets as a source of growth.Yum! earns 75% of its revenues from
international franchises.McDonald’s earns 70% of its sales
internationally.
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Smaller, nontraditional locationsIntercept marketing: putting a franchise’s
products or services directly in the paths of potential consumers, wherever they may be.
Conversion franchising
Owners of independent businesses become franchisees to gain the advantage of name recognition.
72% of North American franchisors use it as a growth strategy.
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RefranchisingFranchisors sell their company-owned
outlets to franchisees.
Multi-unit franchising
IFA: 20% of franchise owners are multiple-unit owners.
Typical multiple-unit franchises own five outlets.
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Area development and master franchising
Area development: the franchisee earns the exclusive right to open multiple units in a specific territory in a specific time.
Master franchise: franchisee has the right to create a semi-independent organization in a particular territory to recruit, sell, and support other franchisees.
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Co-brandingAka piggyback or combination
franchising:
Two or more franchises team up to sell complementary products or services under one roof.
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Franchising: Is a key part of the small
business sectorIncreases the chance of
business success for the entrepreneur
Growth continues
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