Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter Fourteen: Franchising and Purchasing an Existing
Business
Table of Contents
Brief Chapter Outline.................................................................................................. 2
Chapter Outline and Lecture notes.............................................................................3
Key Terms................................................................................................................. 15
Suggested Text
Responses…………………………………………………………………………….. 16
Class Activities and Sample Assignments.................................................................18
Discussion Questions for Online/Hybrid classes.......................................................19
Lecture Links............................................................................................................ 22
Lecture Link 14.1: The International Franchise Association (IFA)..............................22
Lecture Link 14.2: The Small Business Franchise Act (SBFA)....................................23
Lecture Link 14.3: Buying A Business.......................................................................24
Bonus Internet Exercises.......................................................................................... 25
Bonus Internet Exercise 14.1: Discovering the New Franchise Opportunity.............25
Bonus Internet Exercise 14.2: Current Franchise Trends..........................................26
Bonus Internet Exercise 14.3: Links to Franchising..................................................27
Critical Thinking Exercises........................................................................................ 28
Critical Thinking Exercise 14.1: Franchise Questions and Support Criteria..............28
Critical Thinking Exercise 14.2: The Steps to Purchase an Existing Business...........31
Critical Thinking Exercise 14.3: Purchase an Existing Business................................34
Bonus Cases............................................................................................................. 36
Bonus Case 14.1: Entrepreneurship and Business Plan Development......................36
Bonus Case 14.2: Famous Franchise Case Study.....................................................37
Bonus Case 14.3: The American Association of Franchisees & Dealers (AAFD)........38
Endnotes.................................................................................................................. 39
Brief Chapter Outline
I. Learning Objectives (text page 265)
IM 14-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
Describe the elements of franchising.
Explain the process of buying a franchise.
Discuss the process for buying an existing business.
II. The Elements of Franchising (text pages 267 and 268)
Learning Objective 14-1: Describe the elements of franchising.
III. The Process of Buying a Franchise. (text pages 269 through 275)
Learning Objective 14-2: Explain the process of buying a franchise.
IV. The Process of Buying an Existing Business. (text pages 276 through 278)
Learning Objective 14-3: Discuss the process for buying an existing business.
V. For Review (text page 278)
Chapter Outline and Lecture notes
1. Learning Objectives (text page 265)
Describe the elements of franchising.
Explain the process of franchising.
Discuss the process for buying an existing business.
2. The Elements of Franchising (text pages 267 and 268)
Learning Objective 14-1: Describe the elements of franchising
A. Basics of franchising
i. Defining a franchise
1. A new entrepreneur pays fees to an established firm to
open the business at a different location
2. Also known as a prepackaged business that includes
policies, procedures, and buying patterns that exist before
the operations begin
ii. Defining a franchisor
1. The firm that originates the idea for the business,
develops the operational methods, and then sells them to
franchisees.
IM 14-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
iii. Defining a franchisee
1. The entrepreneur is the franchisee
a. Pays a fee to the franchisor
b. Establishes the business at a specific location
c. Uses the franchisor’s name
d. Operates the business per the agreement
iv. Defining a franchise agreement
1. It is a contract from the franchisor for all the franchisees
2. It specifies purchase specifications or requirements
3. It contains clauses that stipulate the display of marketing
material
4. It states fees based on sales
v. International Franchise Association
1. In 2016, it reported that there were 900,000 franchises in
the United States providing eighteen million jobs
vi. Franchising is popular
1. It has a popular and established brand name
2. It provides a standardized, well known product
3. Has a consistent, well-tested process
4. It utilizes group purchasing power
5. It uses national advertising
vii. Franchisor does innovative and continued research and
development
1. Small businesses can’t afford the research and
development that a franchisor offers franchisees
viii. The entrepreneur spends less personal resources
ix. The franchisor can experiences rapid expansion with minimized
funds invested in the expansion
x. The franchisor makes money from:
1. Selling the franchise to franchisees
2. Selling supplies to the franchisee
3. Collecting a percentage of sales
4. Providing company specific training
3. The Process of Buying a Franchise (text pages 269 through 275)
Learning Objective 14-2: Explain the process of buying a franchise
A. General Franchise Questions
IM 14-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
i. The potential franchisee should evaluate individual skills and
interests to determine likes and dislikes in a particular industry
ii. Evaluate the industry
1. The competitors in the industry should be identified
2. The position relative to other new franchisees that are
entering the franchisee’s industry should be checked
iii. Examine the competitive strengths of various franchises in the
same industry
iv. Identify a franchisor that is the closest match
1. To get support
2. To learn the history of the business
3. To learn of expansion plans or opportunities
v. Examine the franchisor with the mindset to plan to purchase the
entire business operations
1. Contact other franchisees with the mindset to purchase
the entire business operations
2. Contact other franchisees to discuss their experience
3. Compare the franchisor to other franchise opportunities
B. Specific franchise questions
i. What does a franchise include?
1. There is a range of support that can be offered to the
franchisor including
2. Buying a name
3. Getting full operational plans
4. Different franchisors offer unique sets of support at a variety
of prices
5. Entrepreneur can choose which package and price to pursue
6. The franchisor makes decisions based upon what is best for
the total business
7. Franchisees pursue the ability to cater to their local market
8. The franchisor may seek uniformity
ii. The franchisee purchases specific rights that vary between
franchise opportunities. These rights include:
1. Having an established name, branded products, and
services
2. Operating under that name for a period of time
a. Times vary from 5, 10, 15, or 20 years
3. Having a single location or multiple locations
IM 14-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
4. Having the commitment from the franchisor to limit the
number of franchises within a specific radius of the new
franchise
a. A key competitive advantage is having a name brand
operation without having to compete against identical
fellow franchisees
b. Franchisees can work together within their local
geographic areas
iii. Franchisors provide operational systems and monitoring techniques
to run the business consistently with the other identical franchise
operations
1. These systems vary widely from one franchisor to another
2. Franchisors understand how their systems work
3. Franchisees must develop a deep understanding of all
business operations
iv. A potential franchisee can work with an established franchisee for a
stated period of time prior to the purchase of this franchise
v. There are support areas that the potential franchisee should use to
evaluate the franchisor’s operations:
1. Accounting support
a. The franchisor may provide support custom tailored to
the dual needs of the franchisor and the franchisee
2. Marketing support may include:
a. Brochures
b. Signs
c. Logos
d. Television advertisements
e. Newspaper advertisements
f. Sales techniques
g. Internal business design
h. The quantity, quality, and value of these vary from
franchisor to franchisor
i. There are risks associated with franchisor’s
operations. Advertising expenses are
charged to a franchisee based on the
overall advertising budget.
ii. The location of the franchise may determine
the amount of money allotted to its
advertising.
3. Training may include
IM 14-5
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
a. Classroom training
b. Training at other locations
c. Experienced manager mentoring at the new
franchise location
d. Additional training available for a fee
e. Evaluate the training availability with the purchase
of a franchise
4. Real estate services may include:
a. A large and profitable real estate brokering
service
b. Basic site selection services
c. Professional assistance in selection, acquisition,
and building construction are good when offered
5. Other services may include:
a. Human resource support to develop management
training programs
b. Quality control methods
c. Business forecasting
d. Equipment purchasing assistance
e. Typically these offer guidelines rather than mandates
vi. There are Government Requirements for the Franchisor/Franchisee
Relationship
1. Uniform Franchise Offering Circular (UFOC)
a. This is the principal governing mechanism of the
franchisor/franchisee
b. It specifies what information must be provided to the
franchisee prior to the investment
c. The franchisor is required to provide this to the
franchisee early in the process of buying the
franchise
d. It contains twenty three specified items
i. The Franchisor, Its Predecessors and Affiliates
1. This full disclosure is required and must
be disclosed listing any predecessors to
current business and any other
businesses affiliated with the business
ii. Business Experience
1. The background of the principals must
be disclosed. It states how long they
IM 14-6
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
have been in business and their
experience in the industry.
iii. Litigation
1. Any pending litigation must be noted
2. Pending litigation could destroy the
value of the franchise if the litigation
concerns ownership issues
iv. Bankruptcy
1. Any prior and current bankruptcy filings
must be noted by the firm, including any
filings against key managers
v. Initial franchise fee
1. The franchisor is required to disclose all
fees associated with the franchise
vi. Other fees
1. Any extensive fees charged for other
services offered by the franchisor are
required to be disclosed
2. Fees for other services could reduce the
value of the franchise
3. Franchisor supports may appear
desirable but if their costs exceed the
price they are not a worthwhile
investment
a. Excessive fees could include
those for training, site selection,
accounting, auditing, and
management assistance
vii. Initial Investment
1. This amount is larger than the initial fee
paid by the franchisee; it includes
reasonable estimates of the total
amount required to initiate the
operations
viii. Restrictions on Sources of Products and
Services
1. This details franchisor sourcing. The
franchise must know which items must
be purchased from the franchisor and
IM 14-7
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
which can be purchased from other
sources.
ix. Franchisee’s Obligations
1. All specific obligations are listed in this
section.
2. It includes the requirements about
specific equipment to be used and how
that equipment is expected to be
replaced after a certain period of time.
3. It includes restrictions that extend into
other domains
4. It includes any requirements placed on
the franchisee to fund various activities
through various fees, whether or not the
franchisee agrees with that particular
program
x. Financing
1. Franchisors may be required to make
significant financing available to
potential franchisees
a. Financing terms should be
outlined in this section of the
document
xi. Franchisor’s Obligations
1. All ancillary services are detailed here,
possibly including:
a. Site selection
b. Training
c. Available on-site experienced
manager to work with the new
franchisee
xii. The identification of the franchisee’s territory
xiii. Trademarks
xiv. The status of Patents, Copyrights and
Proprietary Information
xv. Any requirement on the franchisee to
Participate in the actual operation of the
franchise business
IM 14-8
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
1. The franchisee may be required to
actively participate in the daily
management of the operation as
opposed to hiring managers
xvi. Restrictions on What the Franchisee May Sell
1. This lists the limitations placed on the
franchisee by the franchisor
2. It may include other limits that relate to
products and the selection of them
xvii. Renewal, Termination, Transfer, and Dispute
Resolution
1. The methods of dispute resolutions are
listed in this section along with who is
responsible for the costs of such
resolutions
xviii. Public Figures
a. This lists any public figures or
celebrities involved in the
business and what they are paid
xix. Earnings Claims
1. This is a detailed description of the
financial performance of a typical
franchisee
xx. List of Outlets
xxi. Financial Statements
xxii. Contracts
1. These are a sample of the contracts that
the franchisee will be required to sign
xxiii. Receipt
1. The franchisee’s signature is required to
acknowledge that this data was received
2. The Franchise process
a. Starting a franchise is quite similar to creating a new
business from scratch
b. Upfront cash payments are typical in the purchase of
a franchise
c. An assessment of the skills of the franchisee should
be mandatory at the beginning of any new business
investigation
IM 14-9
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
d. A person who has no experience in the field may not
be successful in the business of the franchise
e. The potential franchisee needs to understand the
market and the industry where the franchise is
expected to operate
f. The International Franchise Association
i. This is a good source for locating potential
franchisor firms. The website is
www.franchise.org
ii. The webpage of a franchisor firm can be used
to request information from that firm
iii. The firm will send a packet of information that
details the firm’s operations, its business, and
the costs associated with the franchise
iv. There is a short application form that an
entrepreneur fills out if interested in pursuing a
possible franchise opportunity with a firm
v. A mutual selection process is standard in the
franchise industry
vi. A potential franchisee can select from 10,000
or more franchise opportunities
vii. Franchisors are picky about who they will sell
the franchise to
viii. A poor performing franchise detracts from the
operations and the future growth of the brand
name
ix. A good match between all parties is a
requirement
x. A potential franchisee must be vetted ( credit
check and personal background check)
xi. After the background check the entrepreneur
receives the complete UFOC with a complete
application that is required to be completed
and returned
xii. The entrepreneur attends a series of meetings
and has the opportunity to meet other
franchisees in the area
xiii. The entrepreneur can evaluate the franchise
by calculating the total profits of the group and
IM 14-10
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
then dividing that by the total number of
franchises.
xiv. Franchisors and franchisees need to establish
good working relationships
g. The deal is negotiated
i. Most franchisors negotiate on a wide range of
items, other than just the fee
ii. The franchisor may finance a portion of the
start-up expenses or provide additional
marketing support or another negotiable item
iii. High-profile individuals can negotiate unique
deals
1. Preferential opportunities exist where
the franchisor can publicize such an
individual as one of its franchisees
iv. The franchisee should make a list of the wants
and desires associated with the franchise
v. Explore up-front capital requirements, financing
arrangements, and continuing fees
vi. The time period of the franchise contract may
be negotiable
vii. Contract renewal rights may be negotiable
viii. Ask about performance quota requirements
1. Learn if the remedies are negotiable if a
quota is not met or maintained?
ix. Determine if a personal guarantee is required
or if that is negotiable
1. Many successful entrepreneurs seek to
avoid personal guarantees
x. Seek the advice of an attorney to assist with
the negotiations in the franchise deal
4. The Process of Buying an Existing Business (text pages 276 through 278)
Learning objective 14-3: Discuss the process for buying an existing business
A. How to buy an existing business
i. Purchasing a business is a process
1. Locate a business to purchase
2. Develop a plan for operating the business
IM 14-11
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
3. Negotiate a deal to acquire exactly what you want from
the operation
4. Organize the process of ownership change within the
organization
ii. Locating a business to purchase
1. Business brokers specialize in selling businesses
2. Businesses are listed for sale in the newspapers
3. Businesses are listed for sale in local magazines
4. Businesses are listed for sale on Websites
5. Attorney and CPA firms may have clients looking to sell
6. Identify a business that is not maximizing its opportunity
7. Trade associations for an industry maintain a listing of the
status of member companies
8. The Local Small Business Administration Office and/or the
Small Business Development Center may have leads
9. Bankruptcy filings in the local community can be checked
a. An opportunity arises if an individual or group lacks
the financial ability to maintain a business
b. Poor management practices
c. An opportunity arises to purchase a business prior to
its bankruptcy proceedings
i. A Turnaround project requires unique skills and
abilities
iii. Plan of Operation
1. Develop a plan of operation for the business
The cost of the business includes any premium for
its current performance
a. Evaluate the business to determine what is missing
in its operation, current management practices, and
mission
b. Determine how you will add value to the business
c. Determine if there should be a new mission for the
organization
d. Determine if there are resource-based advantages of
the new organization
2. Organize the change process
a. Discuss the transition with the current employees
i. Implementing lay-off plans immediately
b. Be visible at the new business establishment
i. Talk to employees
IM 14-12
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
ii. Make suggestions
iii. Perform some menial work
c. Make all significant changes in one day to calm
employees
d. Implement new metrics and standards as soon as
possible
e. Ask the former owner not to frequent the business
for several weeks while the transition occurs
f. Send notification letters to clients and suppliers
informing them of the change in ownership
5. For Review (text page 278)Key Terms
Business Brokers: Businesses that specialize in selling businesses. (LO 14-3)
Franchise Agreement: The basic contract generated by the franchisor for all
franchisees; it usually contains clauses requiring the purchase of supplies, the
displaying of marketing material, and the payment of fees that are based upon the sales
of the branch operation. (LO 14-1)
Franchisee: The entrepreneur who buys the franchise from the franchisor. (LO 14-1)
Franchisor: The firm that originates the idea for the business and develops the
operational methods, then sells them to franchisees. (LO 14-1)
Uniform Franchise Offering Circular (UFOC): The principal governing mechanism of
the franchisor/franchisee. (LO 14-2)
IM 14-13
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Fourteen: Franchising and Purchasing an Existing
Business
Suggested Text Responses
Opening Vignette “Chocolate Works” – p. 265
Student responses will vary.
Exercise 1 – p. 271
Student responses will vary.
Exercise 2 – p. 275
Student responses will vary.
IM 14-14
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
