978-1259912191 Chapter 14 Lecture Notes

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)

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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.

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