RECOGNIZING

FRANCHISING
OPPORTUNITIES –
Part3

Lecture 2B - Franchising
Is my Firm Ready to Franchise?
• A FSOR guides and assists a network of independently
owned and operated businesses that produce the products
or services authorized in the franchise agreement.
• The principal work of the FSOR is the effective operation
and growth of a franchise system.
• Three (3) other issues crucial to the development and
maintenance of the franchise system are:
» Trademark
» Sufficiency of capital for the FSOR, and
» The amount to charge for the franchise
license.
 A. Does my franchise business have a
protectable trademark?
 A trademark is a symbol of a product or service and the
level of quality provided by the owner of the mark
(franchisor) and its licensee (franchisee).
 The trademark identifies the franchisor as responsible to
control the quality of the licensees’ (franchisees’)
products and services offered to the public.
 Licensed trademarks constitute the identity of the
franchise system.
THREE KINDS OF TRADEMARKS:

 Coined Trademarks can be a recognizable word or set

of letters unrelated to the products or services it
identifies. Ex: Mobil, Visa, Kodak, and Xerox
 Suggestive Trademarks identify the characteristic or
feature of the franchisor’s goods or services. Ex: 7-
Eleven, Cyclone (wire fencing), Business Week
(magazine), The Rak (ties and accessories), Snap-on
(mechanics tools), Quik-N-EZ (convenience and gas
store), and Mustang (car).
THREE KINDS OF TRADEMARKS:

 Descriptive Trademarks are considered to be the

weakest type of legal trademark and can be difficult to
protect. A descriptive mark describes the product or
service that is sold. Also, surnames or geographic
locations are considered inappropriate descriptive
trademarking. The difference between a suggestive
mark is imprecise and may be no more than a judgement
call. Ex: Holiday Inn (motel chain), Vision Center
(eyeglass and optical clinic), Outback Stakehouse
(restaurant chain), and Milwaukee’s Best (beer).
 B. Do I have enough capital to develop and
implement the franchise program?
 A business entering into franchising will incur substantial
expenses before the first franchisee is signed up.
 These may include consulting, legal, accounting, or
reporting services, hiring and training of management
and field personnel, developing of marketing program for
the franchise system and a sales promotion program for
the franchisees’ products and services, meet compliance
regulations with regard to franchise sales, and guide and
assist the newly minted franchisees along their way
toward success as franchised business owners.
B. Do I have enough capital to develop and implement the franchise program?

 If a FSOR sets the initial franchise fee or royalty rate on

franchisee product and service sales too low, then the
franchise headquarters may not be able to acquire
sufficient financial resources to effectively monitor and
support the franchise system.
 This situation raises the final question for the prospective
franchisor…
 C. What amount should I charge for my
franchise?
 The FSOR must earn enough income to offset the costs
of developing and maintaining a franchise system.
 However, the FSOR must also look at the bottom line for
the franchisee.
 The amount should be both appropriate for the
franchisee and sufficient for the franchisor to run the
businesses independent but cooperatively.
 To determine what to charge for a Franchise:
 How much initial investment should be required upfront?
 How much of the initial investment must be in cash?
 Could a FSEE be allowed to finance a portion of the
initial investment? If so, how much?
 How much inventory will need to be carried?
 How often will inventory turnover in a week/month/year?
 Is spoilage a factor? If so, what is the rate of spoilage?
 Does the franchisee need a storefront?
 To determine what to charge for a Franchise:
 Does the franchisee need to build a building to franchisor
specifications?
 Should the FSOR have the right of refusal on site
selection?
 Does the FSOR want to own the land and/or building of
the franchised business?
 Do the advantages outweigh the costs?
 How long should it take a new franchised location to
breakeven?
 Should the franchise system consider using master
franchising or co-branding licensing?
 Best Situations in Which to Franchise Your
Business:
 Most restaurant concepts can be franchised, but those
that need chefs rather than cooks or have an intricate
menu are more difficult.
 Firms that have broad product and/or service appeal and
consumer acceptance are a natural for franchising as
long as the market trends support long-term viability and
growth.
 Best Situations in Which to Franchise Your
Business:
 Firms whose operating margins allow for franchisee fees
to be charged and still leave an adequate ROI for both
the FSOR and FSEE are generally suitable for
franchising.
 Firms in fragmented industries (where most of the
businesses are small and/or independent) that would
benefit from brand consolidation are candidates for
franchising. Ex: hair salons, water refilling stations
 Best Situations in Which to Franchise Your
Business:
 Firms in a stable or growing industry, where the industry
itself is unburdened by significant regulations, are
franchisable.
 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 time are franchisable as
well.