RECOGNIZING FRANCHISING OPPORTUNITIES Chapter 2 Paulink C. Barba BSBA Marketing Management
KEY POINTS: I. The advantages of franchising for both franchisor and franchisee II. The potential disadvantages of franchising to the franchisor and the franchisee III. The seven steps for franchise protection before investing in a franchise IV. The typical elements included in a franchising agreement
A. THE ADVANTAGES OF FRANCHISING FOR FRANCHISEE
1. ESTABLISHED PRICE PRODUCT OR SERVICE This advantage is where the consumers are already AWARE of the name and reputation of the product or service the franchise system offers. Such franchisors generally spend a large portion of advertising budget on national campaigns or television and radio, magazines and newspapers to keep their public awareness.
2. TECHNICAL AND MANAGERIAL ASSISTANCE This type of advantage is provided by the franchisor. The new franchisee will receive technical assistance which often includes location and site selection, store layout and design, store remodelling (if the franchisee is converting an existing site), inventory purchase and control methods, equipment and fixture purchasing or leasing and assistance with the grand opening of the new franchise business.
3. QUALITY CONTROL STANDARDS This third type of advantage is again provided by the franchisor. By setting and maintaining high standards, a franchisor does the franchisee a genuine service. Properly administered and controlled, such standards help the franchise to achieve positive results by ensuring product service uniformity throughout the franchise system.
4. LESS OPERATING CAPITAL Franchising offers its prospects with less cash than if he or she were to open a business independently. This is because 1. The business may not require as much inventory as a comparable nonfranchised business 2. Knowledge and experience is always provided by the franchisor concerning how much stock is needed and when to reorder. This can dramatically reduce the potential aging of stock, waste, spoilage and unprofitable storage of low item demands 3. A new franchisee may be able to receive some financial assistance in the form of credit, as cash or inventory from the franchisor s resources.
5. OPPORTUNITY FOR GROWTH This fifth potential advantage concerns growth opportunities for operating a territorial franchise. A territorial franchise guaranties no competition from the same franchisor within a specified geographic boundary. It may later be in a position to sub franchise or license other persons to operate stores belonging to the territorial franchisee. If a new franchised company is enjoying successful growth, its franchisees could have more opportunity for financial gain as territorial franchisees.
B. THE POTENTIAL DISADVANTAGES OF FRANCHISING TO THE FRANCHISEE
1. FAILED EXPECTATIONS These are the expectations of the franchisee to the franchisor s business expertise, experience, selling methods, trademark and advertising. Because of the following elements the franchisor had, the franchisee sees the value of franchisor-franchisee relationship. Without such assistance, there would be little reason for a prospective business owner to enter a franchising agreement.
2. SERVICE COSTS These services are expense items to the franchisee which are provided by the franchisor. In some instances, they may be of dubious value. These include franchise fees and royalties which the franchisee might find excessive especially after being in business for several months and realizing the effect that the royalties and fees are having on the franchisee s anticipated return on investment.
3. OVERDEPENDENCE This type of disadvantage again points to the franchisor-franchisee relationship. A franchisee can become too dependent on the advice of the franchisor to address operations, crises, changing market conditions, pricing strategy or promotions and so may fail to apply commonsense and knowledge of local customers and market conditions.
4. RESTRICTIONS OF FREEDOM OWNERSHIP The franchising contract may contain restrictions or requirements that an independent business person would not have to satisfy. For example, territorial restrictions imposed by the franchisor may limit the potential customer contacts a franchisee might see or territories may overlap or be inequitably determined by a franchisor.
5. TERMINATION OF AGREEMENT This concerns the franchisee s decision to terminate the franchising relationship as a result of perceived or real differences with the franchisor. Lack of cooperation from the franchisor can make it difficult to sell the business to a prospective buyer or to simply dissolve the business entirely.
6. PERFORMANCE OF OTHER FRANCHISEES This is the least-considered potential disadvantage to the franchisee. If the franchisor becomes lax in managing the franchise system or does not enforce the quality standards imposed throughout the network, poor performance by some in the franchise network can affect the sales of others. Usually, a customer of a multiunit franchised company will tend to blame the entire franchise and nit the single operating unit for poor service or low quality.
C. ADVANTAGES TO THE FRANCHISOR
1. EXPANSION Most businesses grow through expansion of their distribution system. Yet the average business owner wishing to broaden distribution of a product or service may not have the same options to consider as Sloan. In fact, franchising may be the only viable option for growth, unless that owner would choose to become part of a larger existing company as a captive producer or a franchisee, or choose to expand at a slow pace by saving profits earned from the principal business.
2. MOTIVATION Another advantage to the franchisor is that the franchisee is usually more motivated that the company-employed manager, When a franchised unit is operated by an owner as opposed to a company-employed manager, that unit will usually benefit from the owner s motivation, self-direction and personal interest in the success of the Operation.
3. OPERATION OF NON-UNION BUSINESS In the decision whether to franchise, a business owner should also give consideration to the area of employee and labor relations. There is greater likelihood that company-owned units would be more attractive to union organizers than franchised units, largely because a single franchised operating unit is less likely to be unionized and to develop labor relations appropriate to the local supply-and-demand conditions of the labor pool.
4. BULK PRICING An advantage exists for franchisors in business that require inventory of parts, completed units for sale and supplies or packaging associated with the production or sale of the product, Economy of scale in purchasing can be achieved more rapidly by a company choosing franchising compared with a company that expands through company-owned units.
D. DISADVANTAGES TO THE FRANCHISOR POTENTIAL PROBLEMS
A. RECRUITMENT The recruitment problem concerns the difficulty of finding promising franchisees. Although many seek franchising as a means to enter business, most prospective franchisee candidates lack the experience, motivation, or the proper capital backing needed to become successful franchises.
B. COMMUNICATION As in any business relationships, communication problems can arise. In franchising, a franchisee may develop a sense of independence and no longer feel a need to rely on the franchisor for the successful operation of the business; he or she may conclude that the business would run just as smoothly without the franchisor s advice and seek to discontinue the relationship.
C. LOSS OF FREEDOM Independent business persons can easily make decisions and change policies within their organizations; but once a franchise system is developed, the franchisor or parent company must get permission from franchisees to introduce new products, to add or eliminate services, or to change operating policies. Thus the franchisor stands to lose a substantial amount of control as a franchises system increases its size. It can become difficult for the franchisor to modify product or process in order to meet the ever-changing needs of customers, particularly if the franchise system increases its size.
E. 7 STEPS FOR FRANCHISE PROTECTION BEFORE INVESTING IN A FRANCHISE 1. Protect yourself by self-evaluation 2. Protect yourself by investing the franchise 3. Protect yourself by studying the disclosure document. 4. Protect yourself by checking out the disclosures 5. Protect yourself by questioning earnings claims 6. Protect yourself by obtaining professional advice 7. Protect yourself by knowing your legal rights
F. THE TYPICAL ELEMENTS INCLUDED IN A FRANCHISING AGREEMENT 1. Franchising 2. Fee 3. Signs 4. Quality Control 5. Business Hours 6. Advertising 7. Decor 8. Products and services available 9. Reporting 10. Royalties 11. Bookkeeping 12. Equipment 13. Supplies 14. Location requirements 15. Personnel (appearance and training) 16. Facilities 17. Franchisor-Franchisee Relationships 18. Maintenance
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