chapter 4copyright © 2010 by nelson education ltd. franchisingfranchising 4 powerpoint presentation...

Chapter 4 Copyright © 2010 by Nelson Education Ltd.

FranchisingFranchisingFranchisingFranchising

44

PowerPoint Presentation by PowerPoint Presentation by

Ian Anderson, Algonquin CollegeIan Anderson, Algonquin College


Looking AheadLooking AheadLooking AheadLooking Ahead

After studying this chapter, you should be able to:

1. Describe the significance of franchising in Canada.

2. Identify the major advantages and limitations of franchising

3. Discuss the process for evaluating a franchise opportunity.

4. Evaluate franchising from the franchisor’s perspective.

5. Describe the critical franchisor/franchisee relationship.

6. Understand issues related to franchise regulation in Canada and know the warning signs of franchise fraud

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Franchising TermsFranchising TermsFranchising TermsFranchising Terms

• FranchisingA marketing system revolving around a two-party legal

agreement, whereby the franchisee conducts business according to the terms specified by the franchisor

• Franchise contractThe legal agreement between franchisor and franchisee

• FranchiseThe privileges conveyed in the franchise contract

…continued

4-3


Franchising TermsFranchising TermsFranchising TermsFranchising Terms

• FranchiseeAn entrepreneur whose power is limited by a

contractual agreement with a franchisor

• FranchisorThe party in the franchise contract that specifies

the methods to be followed and the terms to be met by the other party

4-4


Types of FranchisesTypes of FranchisesTypes of FranchisesTypes of Franchises

• Product and Trade Name Franchise Grants the right to use a widely recognized product or name

(i.e. gas stations)

• Business-Format Franchise Provides an entire marketing system and ongoing guidance

from the franchisor (i.e. fast-food)

• Piggyback Franchising The operation of a retail franchise within the physical facilities

of a host store (i.e. complementary food service in a fast food store)

…continued

4-5


• Master LicenseeAn independent firm or individual acting as a sales agent

with the responsibility for finding new franchises within a specified territory

• Multiple-Unit OwnershipHolding by a single franchisee of more than one

franchise from the same company

• Area Developers Individuals or firms that obtain the legal right to open

several franchised outlets in a given area

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Types of FranchisesTypes of FranchisesTypes of FranchisesTypes of Franchises


Exhibit 4-2

Pluses Minuses

Formalized training

Financial assistance

Proven marketingmethods

Managerial assistance

Quicker startup time

Overall lower failurerates

Franchise fees

Royalties

Restrictions on growth

Less independence inoperations

Franchisor may be solesupplier of somesupplies

Termination/renewalclauses

The Pros and Cons of FranchisingThe Pros and Cons of FranchisingThe Pros and Cons of FranchisingThe Pros and Cons of Franchising


Pros and Cons of FranchisingPros and Cons of FranchisingPros and Cons of FranchisingPros and Cons of Franchising

• AdvantagesAdvantages– Probability of success

• Proven line of business• Pre-qualification of

franchisee– Training

• Franchisor-provided– Financial Assistance

• Franchisor assistance– Operating assistance

• Franchisor-aided

• LimitationsLimitations–Franchise costs

• Initial franchise fee

• Investment costs

• Royalty payments

• Advertising costs

–Restrictions on Business Operations

–Loss of independence

4-8


The Advantages of FranchisingThe Advantages of FranchisingThe Advantages of FranchisingThe Advantages of Franchising

• Proven marketing concept and customer base– The use of an established, nation-wide brand.

• Training – May help alleviate managerial weaknesses.

• Financial assistance– Start-up business costs are normally high and thus by teaming up with a

franchise organization, the individual can increase her/his chance of receiving financial help.

• Operating assistance– The franchisor provides a range of operating services including site

selection, bulk purchasing of equipment, and inventory.

4-9


Limitations of Franchising: Limitations of Franchising: Restriction of Business OperationsRestriction of Business Operations

Limitations of Franchising: Limitations of Franchising: Restriction of Business OperationsRestriction of Business Operations

• Franchise costs• Restrictions

– Sales territory– Site approval required– Outlet appearance– Goods/services to be sold– Resale of franchise– Advertising and hours of operation

• Loss of independence

4-10


Evaluating Franchise OpportunitiesEvaluating Franchise OpportunitiesEvaluating Franchise OpportunitiesEvaluating Franchise Opportunities

• Locating a Franchise Opportunity

• Investigating the Potential FranchiseInformation sources

• Independent, third-party sources

• Franchisors themselves

• Existing and previous franchisees

4-11


Explanation of CostsExplanation of CostsExplanation of CostsExplanation of Costs

• Franchise fee

• First and Last Month’s Rent

• Leasehold Improvements

• Equipment

• Furniture and Fixtures

• Signage

• Insurance, Licences and Permits

• Training

• Initial Inventory

• Working Capital

• Royalty


Global Franchising OpportunitiesGlobal Franchising OpportunitiesGlobal Franchising OpportunitiesGlobal Franchising Opportunities

• Historically, many Canadian franchisors have expanded into the United States.

• Canadian franchising enterprises are now expanding into countries beyond North America.– Yogen Fruz – 1,580 stores in 30 countries

• Attractive growth prospects:– Industrializing countries with large populations

– Countries with an expanding middle class and higher disposable income

4-13


Investigating the Franchise CandidateInvestigating the Franchise CandidateInvestigating the Franchise CandidateInvestigating the Franchise Candidate

• Three sources of information:– independent third party sources– franchisors– existing and previous franchisee

This is a 2-way effort

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Franchisor as a Franchisor as a Source of InformationSource of Information

Franchisor as a Franchisor as a Source of InformationSource of Information

• Disclosure document– a detailed statement of information such as the

franchisor’s finances, experience, size, and involvement in litigation

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Selling a FranchiseSelling a FranchiseSelling a FranchiseSelling a Franchise

• Why would a businessperson wish to become a franchisor? Three benefits can be identified:

1. Reduction of capital requirements

2. Increase in management motivation

3. Speed of expansion

• Drawbacks associated with franchising from the franchisor’s perspective:

1. Reduction in control

2. Sharing of profits

3. Increase in operating support

…continued

4-16


Franchise RelationshipFranchise RelationshipFranchise RelationshipFranchise Relationship

• Elements to look for in a franchise relationship:• Responsiveness

• Empathy

• Communication

• Dependability

• Accessibility

• Give and take

• Anticipation

• Structure

• Open-mindedness

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Franchising FraudsFranchising FraudsFranchising FraudsFranchising Frauds

• The Rented Rolls Royce Syndrome• Don’t you want to be like me?

• The Hustle• Territories are going fast…

• The Cash-Only Transaction

• The Boast• We never met an exaggeration we didn’t like

• The Big-Money Claim• Earn $10,000/month in your spare time

• The Disclosure Dance• Umm, we’re not a public corporation

4-18

chapter 4copyright © 2010 by nelson education ltd. franchisingfranchising 4 powerpoint presentation...

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