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CHAPTER 8. FRANCHISING AND THE ENTREPRENEUR
Part 1: Learning Objectives
1. Describe the three types of franchising: trade name, product distribution, and pure.
2-A. Explain the benefits of buying a franchise.
2-B. Explain the drawbacks of buying a franchise.
3. Understand the laws covering franchise purchases.
4. Explain the right way to buy a franchise.
5. Describe the major trends shaping franchising.
Part 2: Class Instruction
Introduction
Franchises play a significant role in the U.S. and world business economy. Refer to
Prices
Purchasing
Advertising
Quality control
Support
Types of Franchising LO 1
There are three types of franchising systems:
1. Trade-name franchising: a system of franchising in which a franchisee purchases
2. Product distribution franchising: a system of franchising in which a franchisor
3. Pure franchising: a system of franchising in which a franchisor sells a franchisee a
complete business format and system. This type of business format franchising is
the most common and fastest growing of the three types. Examples include quick
service restaurants, hotels, etc.
Franchises are subject to changes in the economy just as are non-franchised businesses.
Access to a business model with a proven track record may be the safest way to own a
business. Benefits of franchising include:
Business System.
Management Training and Support.
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Chapter 8, Page 123
Proven Products, Processes, and Business Formats.
Centralized Buying Power.
Site Selection and Territorial Protection.
Greater Chance for Success.
The Drawbacks of Buying a Franchise LO 2B
Limited Product Line.
Contract Terms and Renewal.
Unsatisfactory Training Programs.
Market Saturation.
Less Freedom.
The 10 myths regarding franchising as described in Table 8.1, 10 Myths of Franchising
include:
1. Franchises will be safer and will not fail
2. Franchises will be economical
3. Franchises will be more successful based on its size
4. Franchises will be able to improve the business
5. Franchises are basically fiall the same”
6. Franchises will enable the owner to be removed from day-to-day management
7. Franchises will be a business anyone can do
Ask the Franchiser Some Tough Questions.
Make Your Choice. Refer to Appendix A. A Franchise Evaluation Checklist.
Trends Shaping Franchising LO 5
Franchising has experienced three major growth waves since its beginning with fast-food
activity in the 1970s, service businesses in the 1980s, and in the 1990s featuring low-cost
International Opportunities. Franchising is becoming a major U.S. export industry for
the United States, as the domestic market has become saturated. As they venture into
foreign markets, franchisors have learned that adaptation is one key to success. For
example, fast-food chains in other countries often must make adjustments to their menus
to please locals’ palates, and changes to their marketing to adjust to the culture of a
of potential customers wherever they may be.
Conversion Franchising. Conversion franchising is a franchising trend in which owners
of independent businesses become franchisees to gain the advantage of name recognition.
Refranchising. Refranchising is a technique in which franchisors sell their company-
owned outlet to franchisees. The goal is to put outlets into the hands of operators, who
Area Development and Master Franchising: A franchisee is given the right to create a
semi-independent organization in a particular territory to recruit, sell, and support other
franchisees. Under area development the franchisee earns the exclusive right to open
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Chapter 8, Page 126
multiple units in a specific territory within a specified time. A master franchise is a
method that gives a franchisee the right to create a semi-independent organization in a
particular territory to recruit, sell, and support other franchises.
Cobranding (or Piggyback or Combination). Cobranding (or piggyback or
combination) is a method of franchising in which two or more franchises team up to sell
complementary product or service under one roof. Cobranded outlets save their owners
money because they lower both real estate and operating costs. The same employees sell
both brands. The franchisors share advertising, maintenance, and other costs.
Consider using You Be the Consultant: fiFranchising in Emerging Markets” at this point.
Conclusion
You Be the Consultant: fiWould You Buy This
Franchise?”
1. What are the advantages and the disadvantages of purchasing an outlet from a
small franchisor? (LO 2A and LO 2B) (AACSB: Reflective thinking)
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Chapter 8, Page 127
2. Suppose that one of your friends is considering purchasing a BurgerFi franchise
and asks your opinion. What advice would you offer him or her? (LO 2A and LO
2B) (AACSB: Application of knowledge)
3. Develop a list of questions that a prospective franchisee should ask the
franchisor and existing franchisees before deciding to invest in a franchise. (LO 2A
and LO 2B) (AACSB: Reflective thinking)
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Chapter 8, Page 128
You Be the Consultant: fiAfter the Cheering Stops”
1. What benefits does franchising offer professional athletes such as those described
here? (LO 2A) (AACSB: Reflective thinking)
2. Do you agree with Michael Stone that franchising is a good fit for athletes?
Explain. (LO 2A) (AACSB: Reflective thinking)
2. What steps should prospective franchisees, whether they are athletes or not, take
to ensure that franchising is the right path to business ownership for them and that
You Be the Consultant: fiFranchising in Emerging
Markets”
3. What steps should U.S.-based franchisors take when establishing outlets in
