Chapter 2: Recognizing

Franchising Opportunities

Course: Business Franchising

Contents
Joint Venture Relationship

Success of Franchising Business

Advantages & Disadvantages

Criteria of a Good Franchise

Investing in a Franchise

Financial Requirements
Joint Venture Relationships
 2 Primary reasons why
franchising is a successful
means of operating a business
 The preparation of franchisee undertakes
before opening a license franchise outlet.

- typically, franchisee is taught how to

initiate, run, and control all the ownership
and operating function of the business.
 The degree of
personal involvement
brought to the
business activities by
both franchisee and
franchisor.
 Advantages to the franchisee

 Established Product or services

 Technical and Managerial
assistance
 Quality control standards
 Less operating capital
 Opportunities for growth
 Advantages to the franchisee

 Established Product or services

 Advantages to the franchisee

 Technical and Managerial

assistance
 Advantages to the franchisee

 Quality control standards

 Advantages to the franchisee

 Less operating capital

 Advantages to the franchisee

 Opportunities for growth

Disadvantage to the Franchisee
 Failed expectations
 Service cost
 Over-dependence
 Restrictions of freedom and ownership
 Termination of agreement
 Performance of other frachisees
 Disadvantage to the Franchisee
 Failed expectations
 Disadvantage to the Franchisee
 Service cost
Disadvantage to the Franchisee
 Over-dependence
 Disadvantage to the Franchisee
 Restrictions of freedom and ownership
 Disadvantage to the Franchisee
 Termination of agreement
 Disadvantage to the Franchisee
 Performance of other franchisees
 Advantages to the franchisor

 Expansion

 Motivation

 Operation of non-union business

 Bulk purchasing
 Advantages to the franchisor

 Expansion
 Advantages to the franchisor

 Motivation
 Advantages to the franchisor

 Operation of non-union business

 Advantages to the franchisor

 Bulk purchasing
 Disadvantages to Franchisor
 Company owned Versus
Franchised units
 Disadvantages to Franchisor
 Potential Problems

Lost of
Recruitment Communication
Freedom
 Disadvantages to Franchisor
 Potential Problems

Recruitment
 Disadvantages to Franchisor
 Potential Problems

Communication
 Disadvantages to Franchisor
 Potential Problems

t of
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FRANCHISING YOUR
BUSINESS
 Consider the criteria for a Good
Franchise
Do I have a prototype store or operating
unit?
 Consider the criteria for a Good
Franchise
Can I replicate my prototype unit(s)?
 Consider the criteria for a Good
Franchise
 Can I teach my system for operating this
business to others- prospective
franchisees and their staff?
 Consider the criteria for a Good
Franchise
 In a critical and dispassionate view, are
the products or services I have any good?
 Consider the criteria for a Good
Franchise
 Can your product or service meet the test
of distance?
 Consider the criteria for a Good
Franchise
 Does your product or service provide you
with a differential advantage over the
competition?
 Consider the criteria for a Good
Franchise
 What have you done to make sure
consumers will want your product or
service tomorrow?
 Consider the criteria for a Good
Franchise
 Do you know who your competitor is?
 Consider the criteria for a Good
Franchise
 Are your growth plans realistic and
fantasy?
 Consider the criteria for a Good
Franchise
 What skills will be needed by a franchisee
to run my kind of business effectively?
 Consider the criteria for a Good
Franchise
 What type and how much support can I
provide to my franchisees?
Is my firm ready to franchise?
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
 Most restaurant concepts can be
franchised. But, those that need chefs
rather than cooks or have an intricate
menu are more difficult.
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
 Firms that have broad and/or service
appeal and consumer acceptance are a
natural for franchising as long as the
market trends support long-term viability
and growth.
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
 Firms whose operating margins allow for
franchise fees to be charged and still leave
an adequate ROI for both the franchisor
and franchisee are generally suitable for
franchising.
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
 Firms in fragmented industries (where
most of the businesses are small and/or
independent) that would benefit from
brand consolidation are candidates for
franchising.
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
 Firms in stable or growing industry,
where he industry itself is unburdened by
significant regulation, are franchisable.
WHAT KINDS OF BUSINESSES
SEEM TO BE APPROPRIATE
TO BECOME FRANCHISED?
 
 Firms that have internal systems that are
simple to execute, that can draw from a
large labor pool of qualified candidates, or
that can train franchisees to use the
technology in a reasonable period of time
will work as a franchise.
 Investing in Franchising
 Investigation
 Financial Requirements
• Capital requirements for industrial research,
prototype development, marketing research and
blue print development.
• Capital requirement for franchise package including
all disclosure statements. Franchisee recruitment,
promotions, product/service development costs, and
operations development costs.
Franchisor • Working capital requirement involving the initial
advertising and franchisee recruitment expenditures.
• Reserve and legal capital requirements, including
money for registering the firm to do business within
a state and for meeting the state’s licensing or
disclosure requirements. In many states, a certain
amount of capital is required to be maintained – as a
reserve – in order to do business in that state.
 Financial Requirements

• Franchising Fee
• Real estate or rental
costs, including building
costs
Franchisee
• Equipment costs
• Startup expensed and
inventory
• Working capital
 Typical Elements covered in
Franchising Agreement
 Franchising Fee
 Quality control
 Advertising
 Products and/or services available
 Royalties
 Equipment
 Location requirements
 Facilities
 Typical Elements covered in
Franchising Agreement
 Signs
 Business Hours
 Décor
 Reporting
 Bookkeeping
 Supplies
 Personnel (appearance and training)
 Franchisor-franchisee relationships
 Others
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