Chapter 05 – Becoming the Owner of a Small Business
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CHAPTER OUTLINE AND TEACHING NOTES
VI. WHY FRANCHISING IS GROWING IN IM-
PORTANCE
A. Recent Rapid Growth
1. The number of franchise establish-
ments increased rapidly over the last
few years. In 2015, there were over
B. Causes of Rapid Growth
1. A consumer need has been identified
and a product created to meet that
need.
2. Franchises have emerged to cater to
3. According to the many independent
sources, the failure rate is much
lower for franchises than for other
Chapter 05 – Becoming the Owner of a Small Business
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CHAPTER OUTLINE AND TEACHING NOTES
VII. HOW TO TELL WHETHER A FRANCHISE IS
RIGHT FOR YOU
Learning Objective 6.
Explain how to tell if a franchise is right for you.
A. When you buy a franchise, you can use
the franchiser’s business ideas, skills, and
capital.
1. While there are no guarantees in
buying a franchise, the risk can be re-
B. Look at the Opportunities
1. Learn which are growing the fastest.
C. See What the Franchise Can Do for
You (Figure 5.6 checklist)
1. Franchises provide assistance to en-
trepreneurs with little business expe-
rience.
2. Entrepreneurs feel the help they get
Chapter 05 – Becoming the Owner of a Small Business
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CHAPTER OUTLINE AND TEACHING NOTES
4. A ROYALTY FEE is the continuous
fee paid by the franchisee to the fran-
chiser usually based on a percentage
D. Investigate the Franchise
1. Investigate the franchiser and similar
franchises in the same line of busi-
3. The Federal Trade Commission re-
quires that a franchiser give prospec-
4. The Uniform Franchise Offering
Circular (UFOC) is a document you
should examine closely before you
agree to purchase your franchise. It,
by law, contains reliable information
E. Obtain Professional Advice
Chapter 05 – Becoming the Owner of a Small Business
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CHAPTER OUTLINE AND TEACHING NOTES
1. The legal requirements of franchising
are such that the franchisee and fran–
chiser should work with an attorney
from the start.
2. A professional accountant, banker, or
financial analyst can help determine
F. Know Your Legal and Ethical Rights
1. The International Franchise Associa-
tion (IFA) has a code of ethics that
covers a franchiser’s obligations to its
franchisees.
2. Each member company pledges to
comply with all applicable laws and to
REAL WORLD EXAMPLE 5.10
Chapter 05 – Becoming the Owner of a Small Business
CHAPTER OUTLINE AND TEACHING NOTES
One contract provision in Subway’s franchise agreement
was so restrictive that the SBA intervened…The offending
provision gave Doctor’s[Subway’s Owner] the right to repur-
chase franchises “at any time”.
4. Other problem areas for franchisees:
a. The high price of supplies that
must be bought from the fran-
chiser.
REAL WORLD EXAMPLE 5.11
Franchise outlets, especially fast-food outlets, are multiplying
so rapidly new outlets may open close to existing ones. The
Ninth U.S. Circuit Court of Appeals recently ruled in favor of
the existing franchisee.
5. A 1994 law requires the SBA to pro-
VIII. THE FUTURE OF FRANCHISING
Learning Objective 7.
Explain the future of franchising.
Chapter 05 – Becoming the Owner of a Small Business
5–22
1. Potential franchisees should consider
attending trade shows to learn of dif-
C. Expected Areas of Growth
1. Two-career families, single parents
with increased work hours, families
2. Restaurants
a. The success of restaurants is re-
lated to variables, such as num-
REAL WORLD EXAMPLE 5.12
Andy and Terri King located their pizza franchise in a re-
newed urban area. They entered a unique franchise agreement
that allowed for an expanded menu and bar for on-site dining.
b. Other success factors are prod-
uct appeal, fast service, sanitary
environment, and easily recog-
nizable buildings and signs.
3. Motels
a. The motel industry’s explosive
Chapter 05 – Becoming the Owner of a Small Business
5–23
4. Convenience stores
a. Are on every corner in the form
5. Technology
a. Electronics and technology con-
tinue to soar, from big name
stores to internet sales, there ap-
REAL WORLD EXAMPLE 5.13
Georgia Jones used her computer knowledge to start
Computer Moms, a franchise offering customized computer
training to customers. In 2016, www.irobot.com had ex-
panded in every way imaginable; telemedicine, defense, secu-
rity, and more.
6. Automotive parts, accessories, and
servicing
a. Neighborhood service stations
Chapter 05 – Becoming the Owner of a Small Business
5–24
b. Today there are shops specializ-
D. Other Areas of Expected Development
1. As companies have outsourced, fran-
chises have expanded in areas of
2. Medical franchises have merged ser-
vices. Physical therapy is often given
3. SYNERGY is the concept that two or
more people, working together in a
coordinated way, can accomplish
more than the sum of their independ-
ent efforts.
a. Synergy among some small busi-
Chapter 05 – Becoming the Owner of a Small Business
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Real World Example 5.14
E. Global Franchising
(2015 Biggest Global Franchises are
detailed in Table 5.3)
1. One survey found that about 20% of
U.S. franchisers operate internation-
IX. TURNING YOUR DREAM INTO A REALITY
Figure 5.8 presents a step-by-step review of
what is required to become a franchisee.
LEARNING OBJECTIVES REVISITED
1. Explain how to go into business for yourself.
● The process begins with developing an idea for a new product.
2. Describe the steps involved in the procedure recommended for going into business.
● Search for and identify a needed product.
● Study the market for the product.
Chapter 05 – Becoming the Owner of a Small Business
5–26
3. Describe how to search for and identify a product needed by the public—that is, how to
find your niche.
● Start by searching for a product to sell.
4. Decide whether to start a new business, buy an existing one, or buy a franchise.
● Reasons FOR starting a new business—the owner has freedom to:
○ Define the nature of the business.
● Reasons for NOT starting a new business:
○ Problems in finding the right business.
● Reasons FOR buying an existing business:
○ Personnel are already working.
● Reasons for NOT buying an existing business:
Chapter 05 – Becoming the Owner of a Small Business
5–27
○ The physical facilities may be old or obsolete.
● Reasons FOR buying a franchise:
○ Franchiser brings successful methods of operation.
● Reasons for NOT buying a franchise:
○ New franchises face far greater financial risk.
5. Describe the growing opportunities in franchising.
● There are about 2,552 franchise companies in the U.S.
6. Explain how to tell if a franchise is right for you.
● Franchises are responsible for nearly 41% of all U.S. retail sales.
● Look at the opportunities and identify the ones that are fastest growing.
7. Explain the future of franchising.
Chapter 05 – Becoming the Owner of a Small Business
5–28
roof.
KEY TERMS USED IN THIS CHAPTER
Business format franchising grants the franchisee the right to market the product and trademark and use
a complete operating system.
In combination franchising (or multi-format franchising, or dual branding, or complementary brand-
ing) big-name franchise operations offer both company’s products under the same roof.
Due diligence is the research and analysis of a company that is completed prior to a business transaction.
chiser’s requirements.
The franchiser owns the franchise’s name and distinctive elements and licenses others to sell its products
Franchising is a marketing system whereby an individual owner conducts business according to the
terms and conditions set by the franchiser.
Market research is the systematic gathering, recording, classifying, analyzing, and interpreting data re-
lated to the marketing of goods and services.
Niche marketing is the process of finding a small—but profitable—demand for something, and produc-
ing a custom-made product for that market.
Chapter 05 – Becoming the Owner of a Small Business
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NOTES FOR DISCUSSION QUESTIONS
1. What are some important factors to consider in choosing the type of business to enter?
Factors to consider are the amount of capital required, how long it will take to recoup investment,
2. How can you identify a business you would like to own? What characteristics do you have that
would help make that business successful?
3. How do you determine the market for a product? Your share of that market?
Small businesses usually select one segment of the population for their customers, or choose one
In estimating your sales and market share, there are four things you need to do:
(1) Estimate the size of the industry.
5. (a) What are some reasons for and against starting a new business?
Some reasons for starting a new business might be the owners’ freedom to: define the nature of
the business; create the preferred type of physical facilities; obtain fresh inventory; have a free hand in
(b) What are some reasons for and against buying an existing business?
Reasons for buying an existing business might include that: personnel are already working; facili-
ties are already available; a product is already being produced for an existing market; the location may be
Chapter 05 – Becoming the Owner of a Small Business
(c) What are some reasons for and against buying a franchise?
Reasons for buying a franchise might include: the franchiser brings successful methods of opera-
6. What distinguishes a franchise from an independent small business?
In a franchise, the franchisee conducts business as an individual owner but abides by the terms
7. What are the two most important forms of franchising? Describe each.
The two most important forms or types of franchising are product and trademark franchising and
business format franchising.
8. Describe why franchising is growing in importance.
There are three reasons why franchising has become so popular. First, a franchise operation has
9. What are some expected areas of growth for franchising in the future?
Some industries that are particularly appropriate for franchising and offer the best future opportu-
nities are:
Chapter 05 – Becoming the Owner of a Small Business
5–31
10. Why is franchising growing internationally?
The success achieved by some franchises has resulted in growing global interest. Franchises help
NOTES FOR CASE QUESTIONS
CASE 5.1: Fun Fast Food Franchise Facts
1. Do you believe McDonald’s claim that 9 in 10 American children visit a McDonald’s every
month? Or that the average American spends upward of $1,200 a year on fast food? What
are your thoughts on this?
CASE 5.2: Failed Franchise
1. Do you think Herb was really cut out to operate this FBO?
Although he had extensive experience in aviation, Herb has not been able to grow a successful
2. Discuss the “small market” implication of this case.
The text stresses the importance of niche marketing, finding a small, but profitable demand for
Chapter 05 – Becoming the Owner of a Small Business
CASE 5. 3: is this business ready to open a franchise?
1. Does consulting with others equal a feasibility study? Do you think he gathered enough
information to make a sound decision?
2. Did Josh Skolnick exercise due diligence? What would you do?
BONUS EXERCISE
5.1. Business Feasibility Study
Give selected students a special assignment. For those interested in entering a new business—a