LESSON 04

ENTREPRENEURIAL
OPTIONS
Start-up, Buy-out,
or Franchising?

THC 10
Entrepreneurship in Tourism and Hospitality
 LEARNING OBJECTIVES

At the end of the lesson, you should able to:

1. Interpret the entrepreneurial process and options of
setting up business;
2. Identify the process of buying an existing business;
3. Analyse the concept of franchising;
4. Illustrate franchising and how this form of business
ownership works;
5. Describe steps entrepreneurs can take to establish a
franchise system; and
6. Describe actions and issues associated with the
decision to buy a franchise.
 FRANCHISING
• Franchising is a marketing system based on legal
agreement wherein one party (franchisee or franchiser) is
given the right to handle the business as an independent
owner but it is required to abide by the terms and condition
specified by other party (franchisor).

• 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.
 FRANCHISE
FRANCHISE CONTRACT
it refers to the legal
it is an agreement document involving two
whereby an independent parties (franchisor and
person is given exclusive franchisee) specifying the
rights to sell a specified obligations, primarily of
good or service. franchisee and the
condition under which the
latter will conduct the
business.

FRANCHISOR
refers to an entity that owns
the franchise name and
distinctive elements (such
as patent, trademark, signs
and symbols) which grant
others the right to sell its
product.
FRANCHISEE
it is the entity that buys
to operate the business
using the name, product,
trademark, service
mark, product and
business format of the
franchisor under the
terms and conditions of
the franchise contracts.
 TYPES
OF
FRANCHISING
1. PRODUCT or TRADEMARK FRANCHISING
1. Is an arrangement under which the franchisor grants to the
franchisee the right to buy its products and use its trade name.

 Franchising involves an arrangement wherein franchisee is given the right

to manufacture and/or distribute a widely recognized brand or product.
There are three types: (1) Manufacturer-Retailer Franchise, (2)
Manufacturer-Wholesaler Franchise, (3) Wholesaler-Retailers Franchise.
• Manufacturer-Retailer Franchise is a franchise in
which the franchisee buys from the manufacturer
(franchisor) and then directly sells it to the end
consumer.
• Manufacturer-Wholesaler Franchise is a franchise in
which the manufacturer (franchisor) sells to the
franchisee partially completed products.
• Wholesalers-Retailer Franchise is a type of franchising
in which the wholesaler is the franchisor that grants the
retailer (franchisee) the right to retail the product but
use the wholesaler’s name, trademark, logo or other
identifying marks.
2. BUSINESS FORMAT FRANCHISING
• An arrangement under which the franchisor provides a formula for
doing business to the franchisee along with training, advertising,
and other forms of assistance.
• Is a relationship wherein the franchisee is granted the right to use
the franchisors entire marketing system along with the continuing
assistance and guidance.
 TYPES
OF
FRANCHISE
AGREEMENT
1. Individual Franchise Agreement
• Involves the sale of a single franchise for a specific
location.

Franchisor Franchisee
2. Area Franchise Agreement
• Allows a franchisee to own and operate a specific
number of franchises in a particular geographic area.

Franchisor

Franchisee Franchisee Franchisee

3. Mater Franchise Agreement
• Allows a franchisee to own and operate a specific number of
franchises in a particular geographic area and provides the
franchisee the right to sell to others (subfranchisees) who find
and manage their own franchises.

Franchisor

Franchisee Franchisee Subfranchisee

Franchisee Franchisee Franchisee

ADVANTAGES OF FRANCHISING
1. Possibility of failure is lessened.
2. Increase in new market location through urbanization of local areas.
3. Customer tends to patronize a specific franchised service or product.
4. Customer loyalty and preference for a successful brand name
5. Better management through training provided by franchisor.
6. Technical and other assistance is easily accessed from the franchisor.
7. It is easier and faster to build good reputation and gain recognition.
8. A better assurance that the business will be profitable.
9. Obtain greater purchasing power.
10. High performance standards.
11. Advertising cost is less.
DISADVANTAGES OF FRANCHISING
1. High cost of Franchise
2. Operation is controlled by the Franchisor
3. Presence of fierce competition
4. Pressure to continuously make the product
acceptable to the market
5. Problems associated with the expiration of the
franchise
What does a
FRANCHISE
provide?
1. TRADEMARK
• Franchisee will have his own corporate
name as Incorporation or individual
business owner but the franchised
business operates under the Trademark
of the Franchisor.

2. MARKET STUDIES
• Franchisors should know where franchised
businesses should be opened, which locations
are good for a Franchisee and which not,
which may be determined generally by
location, most important with food
franchises or other aspects, like purchase
power of a certain area, etc.
Ø SYSTEMS STANDARDS
• Sensible and complete specifications,
standards and operating procedures, the
so-called system standards, effectively
c o mmu ni c a t e d t o F r a n c h i s e e s a n d
readily understandable.

Ø OPERATIONAL MANUAL
• The “How To” documentation
of the business operation and
the implementation of the
system.
 Ø WISDOM OF FRANCHISOR
• The Franchisor went through the “labor
pain” of opening the business by himself
some time ago. For a new Franchisee that
trial and error period is eliminated.

Ø TRAINING
• Effective initial training is critical to
achieve positive Franchisee attitudes
regarding system standards, the
operation, the Franchisor and the value of
the franchise and depending on the
business can take from 5 days up to 6
month.
 Ø SITE SELECTION ASSISTANCE
• Franchisors in the Philippine usually do not provide locations
and prospective Franchisees have to find them by themselves.
However, Franchisors will know where a franchised business
shall be located within a certain area and will inspect the site
prior to the start of construction or operation, if the location
is suitable for the franchised business.

Ø STORE LAYOUT
• Franchisors will provide lay out assistance
and supervise the construction of a new
franchised store. The entire construction
cost is at the expense of the Franchisee,
and has to be paid as due to either the
Contractor or Franchisor, depending on the
arrangement.
Ø EXCLUSIVE TERRITORY
• Most Franchisor will award new franchises with an
exclusive Territory, which depends on the kind of
business can be a certain radius in meters or a floor
in a mall, a whole City or a whole province or City or
several of them as Area franchise or even a whole
Country as Master franchise.

Ø PROCUREMENT PROGRAMS
• Franchisor will provide a listing
of authorized suppliers for
equipment’s, goods, materials
and services.
Ø OPENING ASSISTANCE
• Franchisor assistance in hiring personnel for the
Franchisee by giving the guidelines for needed
staffing and training them, and set-up of the
franchised outlet. Franchisor’s management and
staff assist new Franchisee upon opening of the
franchised outlet to operate it smoothly from day
one onwards.
Ø MARKETING STRATEGIES
• Franchisee may have to contribute to a
National Advertisement Fund, a Co-op
Advertisement and spend some amount
for the initial Opening Advertisement
and the ongoing Local Store Marketing
activities.
Ø EFFECTIVE FIELD SERVICE
• Operational support is needed by Franchisees for
occasional questions and problems. Knowledgeable and
well-trained personnel with positive attitudes and a
willingness to help Franchisees are provided by
Franchisors. Franchisors shall also be available to
Franchisee via phone, email, fax or text for urgent
problems arising from the operation of the franchised
business.
Ø RESEARCH AND DEVELOPMENT
• Businesses face tough competition and new
products are constantly to be tested and
introduced in the market. The job is with the
Franchisor in development of new products
and service, improvements of equipment’s,
formats, operating efficiency and trying to
beat competitor.
Nine Steps in
putting up a
FRANCHISE
SYSTEM
Qualities to look for in Possible FRANCHISES
1. Good work ethic.
2. Ability to follow instructions.
3. Ability to operate with minimal supervision.
4. Team oriented.
5. Experience in the industry in which the franchise
competes.
6. Adequate financial resources and good credit history.
7. Ability to make suggestions without becoming
confrontational or upset if the suggestions are not
adopted.
8. Represents the franchisor in a positive manner.
Choosing a Franchise
1. Earning depends on the effort
2. Opportunities for unlimited income
3. Personal satisfaction
4. Tax benefits
5. Freedom to pursue the job you want
6. Assurance of continuous employment
7. Eliminated difficulties in starting up
8. Ease in operationalizing business plan
9. Benefits of having a established system
10. Benefits from quality research and development
11. Quicker start-up
12. Probability of success is high
Considerations
in selecting a
FRANCHISE
The prospective franchisee should
take the initiative to investigate the
franchise. The entrepreneur must
study the franchise well before
buying. In evaluating franchise to
acquire, the following points are
important to consider:
1. COST OF INVESTMENT
• Initial Franchise Fee – the initial fees 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.
• Royalties – this is the amount paid to the franchisor periodically. Usually,
royalties are per year basis at 5% to 15% of monthly gross income.
• Advertising Fee - Franchisees are often required to pay into a national or
regional advertising fund.
• Other Fees
• Other fees may be charged for various activities, including:
1. Training additional staff.
2. Providing management expertise when needed.
3. Providing computer assistance.
4. Providing a host of other items or support services.
1. COST OF INVESTMENT

• Franchisee’s preference and interest

• Location of the franchise
• Reputation of the franchise organization
• Franchise support and assistance
• Possibility of obtaining a master franchise
 STEPS in
PURCHASING a
FRANCHISE
Thank You!