978-0134741086 Chapter 8 Part 1

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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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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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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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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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