Chapter 2: Recognizing Franchising Opportunities, Slides of Marketing

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Chapter 2

Chapter 2

Recognizing

Franchising

Opportunities

Recognizing

Franchising

Opportunities

KEY POINTS:

2. Technical and Managerial Assistance

This type of advantage is provided by the franchisor. The new

franchisee will receive technical assistance which often includes

location and site selection, store layout and design, store

remodeling (if the franchisee is converting an existing site),

inventory purchase and control methods, equipment and fixture

purchasing or leasing and assistance with the grand opening of

the new franchise business

3. Quality Control Standards

This third type of advantage is again provided by the

franchisor. By setting and maintaining high standards, a franchisor

does the franchisee a genuine service. Properly administered and

controlled, such standards help the franchise to achieve positive

results by ensuring product service uniformity throughout the

franchise system.

5. Opportunity for Growth

This fifth potential advantage concerns growth opportunities

for operating a territorial franchise. A territorial franchise

guaranties no competition from the same franchisor within a

specified geographic boundary. It may later be in a position to

sub franchise or license other persons to operate stores

belonging to the territorial franchisee. If a new franchised

company is enjoying successful growth, its franchisees could

have more opportunity for financial gain as territorial

franchisees.

B. The potential disadvantages of

franchising to the franchisee

• (^) Overdependence

This type of disadvantage again

points to the franchisor-franchisee

relationship.

A franchisee can become too

dependent on the advice of the

franchisor to address operations,

crises, changing market conditions,

pricing strategy or promotions and

so may fail to apply common sense

and knowledge of local customers

and market conditions.

• (^) Restrictions of Freedom

Ownership

The franchising contract may

contain restrictions or requirements

that an independent business person

would not have to satisfy. For

example, territorial restrictions

imposed by the franchisor may limit

the potential customer contacts a

franchisee might see or territories

may overlap or be inequitably

determined by a franchisor.

B. The potential disadvantages of

franchising to the franchisee

B. The potential disadvantages of

franchising to the franchisee

• Termination of Agreement

This concerns the franchisees

decision to terminate the

franchising relationship as a result

of perceived or real differences

with the franchisor.

Lack of cooperation from the

franchisor can make it difficult to

sell the business to a prospective

buyer or to simply dissolve the

business entirely.

• (^) Performance of Other

Franchisees

 This is the least-considered potential

disadvantage to the franchisee. If the

franchisor becomes lax in managing the

franchise system or does not enforce the

quality standards imposed throughout the

network, poor performance by some in the

franchise network can affect the sales of

others.

 Usually, a customer of a multiunit

franchised company will tend to blame the

entire franchise and nit the single operating

unit for poor service or low quality.

C. Advantages to the Franchisor C. Advantages to the Franchisor

• Expansion

 Most businesses grow through expansion

of their distribution system. Yet the

average business owner wishing to

broaden distribution of a product or

service may not have the same options to

consider as Sloan.

 In fact, franchising may be the only viable

option for growth, unless that owner

would choose to become part of a larger

existing company as a captive producer or

a franchisee, or choose to expand at a slow

pace by saving profits earned from the

principal business.

• (^) Motivation

 Another advantage to the franchisor

is that the franchisee is usually more

motivated that the company-

employed manager.

 When a franchised unit is operated by

an owner as opposed to a company-

employed manager, that unit will

usually benefit from the owners

motivation, self-direction and

personal interest in the success of the

operation.

C. Advantages to the Franchisor

C. Advantages to the Franchisor

• (^) Operation of Non-union

Business

 In the decision whether to franchise, a

business owner should also give

consideration to the area of employee and

labor relations.

 There is greater likelihood that company-

owned units would be more attractive to

union organizers than franchised units,

largely because a single franchised

operating unit is less likely to be unionized

and to develop labor relations appropriate

to the local supply-and-demand conditions

of the labor pool.

• Bulk Pricing

 An advantage exists for franchisors in

business that require inventory of

parts, completed units for sale and

supplies or packaging associated with

the production or sale of the product.

 Economy of scale in purchasing can

be achieved more rapidly by a

company choosing franchising

compared with a company that

expands through company-owned

units.

D. Disadvantages to the Franchisor

Potential Problems

RECRUITMENT

The recruitment problem

concerns the difficulty of finding

promising franchisees. Although

many seek franchising as a means

to enter business, most

prospective franchisee candidates

lack the experience, motivation,

or the proper capital backing

needed to become successful

franchises.

COMMUNICATION

• (^) As in any business relationships,

communication problems can arise. In

franchising, a franchisee may develop

a sense of independence and no

longer feel a need to rely on the

franchisor for the successful operation

of the business; he or she may

conclude that the business would run

just as smoothly without the

franchisors advice and seek to

discontinue the relationship.

LOSS OF FREEDOM

• (^) Independent business persons

can easily make decisions and

change policies within their

organizations; but once a

franchise system is developed,

the franchisor or parent

company must get permission

from franchisees to introduce

new products, to add or

eliminate services, or to

change operating policies.

Thus the franchisor stands to

lose a substantial amount of

control as a franchises system

increases its size. It can become

difficult for the franchisor to

modify product or process in

order to meet the ever-changing

needs of customers, particularly if

the franchise system increases its

size.

D. Disadvantages to the Franchisor

Potential Problems

E. 7 Steps for franchise protection before

investing in a franchise

1. Protect yourself by self-evaluation
2. Protect yourself by self-evaluation
3. Protect yourself by investing the franchise
4. Protect yourself by investing the franchise
5. Protect yourself by studying the disclosure document.
6. Protect yourself by studying the disclosure document.
7. Protect yourself by checking out the disclosures
8. Protect yourself by checking out the disclosures
9. Protect yourself by questioning earnings claims
10. Protect yourself by questioning earnings claims
11. Protect yourself by obtaining professional advice
12. Protect yourself by obtaining professional advice
13. Protect yourself by knowing your legal rights
14. Protect yourself by knowing your legal rights

. The typical

elements

included in a

franchising

agreement

. The typical

elements

included in a

franchising

agreement