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Franchising: Advantages, Evaluation, and Legal Considerations - Prof. Mike Clarke, Study notes of Introduction to Business Management

College of the Sequoias (COS)Introduction to Business Management
Prof. Mike Clarke

This chapter explores the third option for entering small business through franchising. Franchising offers significant advantages during the planning and start-up phases, but it also comes with risks and obligations. Learn about the history, learning objectives, and outline of this topic, including advantages for the franchisee, evaluating the franchise option, franchising and the law, and other entrepreneurial options.

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CHAPTER 5
FRANCHISING
CHAPTER OVERVIEW
The third option for entry into small business, franchising, is explored in this
chapter. Franchising provides some important advantages to the entrepreneur particularly
during the planning and start-up phases of the enterprise. The history of franchising
includes a number of spectacular successes as well as a number of unscrupulous
franchisers. The abuses of the unethical operators have led to attempts to regulate the
franchising practice largely by protecting the rights of franchisees and prospective
franchisees.
LEARNING OBJECTIVES
Franchising has become an extremely popular way of going into business.
Being a part of a franchise chain offers many significant advantages to an
entrepreneur.
Anyone interested in buying a franchise is provided legal protection from being
rushed into a premature decision by the franchiser.
Despite government regulations, many individuals are cheated by unscrupulous
sellers of franchises and business opportunities.
The failure rate of franchises, according to recently gathered data, is slightly
higher than that of independent businesses, contrary to popular opinion.
CHAPTER OUTLINE
I. The Popularity of Franchising
A. Advantages for the Franchisee
1. Start-up advantages include things such as site selection analysis,
facilities layoff advice, financial assistance, and training.
2. Rather than having to establish an image, with the purchase of a
franchise, the entrepreneur can capitalize on the chain’s history and
consumer acceptance.
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Download Franchising: Advantages, Evaluation, and Legal Considerations - Prof. Mike Clarke and more Study notes Introduction to Business Management in PDF only on Docsity!

CHAPTER 5

FRANCHISING

CHAPTER OVERVIEW

The third option for entry into small business, franchising, is explored in this chapter. Franchising provides some important advantages to the entrepreneur particularly during the planning and start-up phases of the enterprise. The history of franchising includes a number of spectacular successes as well as a number of unscrupulous franchisers. The abuses of the unethical operators have led to attempts to regulate the franchising practice largely by protecting the rights of franchisees and prospective franchisees. LEARNING OBJECTIVES  Franchising has become an extremely popular way of going into business.  Being a part of a franchise chain offers many significant advantages to an entrepreneur.  Anyone interested in buying a franchise is provided legal protection from being rushed into a premature decision by the franchiser.  Despite government regulations, many individuals are cheated by unscrupulous sellers of franchises and business opportunities.  The failure rate of franchises, according to recently gathered data, is slightly higher than that of independent businesses, contrary to popular opinion. CHAPTER OUTLINE I. The Popularity of Franchising A. Advantages for the Franchisee

  1. Start-up advantages include things such as site selection analysis, facilities layoff advice, financial assistance, and training.
  2. Rather than having to establish an image, with the purchase of a franchise, the entrepreneur can capitalize on the chain’s history and consumer acceptance.
  1. Being a part of a franchiser group means getting more favorable prices and service from suppliers than independent businesses are likely to receive.
  2. Because the franchiser can spread costs over a large number of units, they can afford sophisticated and cost-effective advertising.
  3. Because of the importance of efficiency, many franchisers provide considerable assistance in improving operations. B. Disadvantages for the Franchisee
  4. As part of a chain, a franchisee must conform to certain restrictions and demands for uniformity.
  5. Being a franchisee brings with it contractual obligations, including payment of fees of various types.
  6. Occasionally franchisees lose their franchises through no fault of their own.
  7. Many people have unrealistically low assessments of the risks associated with franchise ownership. II. Evaluating the Franchise Option A. You as the Franchisee
  8. The psychological make-up of the typical franchisee seems to include elements of the traditional entrepreneur and the corporate manager.
  9. In addition to the right psychological profile, franchisees should have some degree of experience in the business. B. The Industry
  10. A great deal of research into the industry should be conducted.
  11. The focus of this analysis is to determine how good the market is and what it takes to compete in it. C. The Franchiser
  12. The franchiser is the most important element of the franchise contract.

the sales of a variety of products and services.

  1. Although some of these offers are legitimate, many are not, and the lack of effective regulation makes responding to a “business opportunity” a risky move. B. Manufacturing Representative
  2. Instead of relying on a conventional sales department, some large companies use independent companies as their sales agents.
  3. A self-directed individual may find this kind of arrangement provides an attractive combination of independence and low risk. SUGGESTED RESPONSES TO DISCUSSION QUESTIONS
  4. Why has franchising become so popular in recent years? The difficulties of starting an independent business and the lure of independence from employment in a large company have combined to cause many people to go into franchising. An additional factor is the widespread opinion that franchising carries much less risk than individual businesses.
  5. Describe the advantages franchising offers an entrepreneur. Franchise ownership brings advantages during the start-up phase including facilities layout advice, site selection analysis, and far more early recognition from customers. Advantages for the ongoing enterprise include operation management techniques and effective promotion and advertising.
  6. What is the level of risk of failure faced by the buyer of a franchise? How does it compare to the risk faced by entrepreneurs who start businesses? Going into business by buying a franchise is by no means a risk-free undertaking. Indeed, a recent study comparing the performance of franchise units with that of independent businesses concluded that the independents actually outperformed the franchise units. This result is contrary to the data reported by the International Franchise Association.
  7. What is the purpose of the franchise agreement? The franchise agreement is the contract between the franchiser and the franchisee and covers such things as the franchisee fee and other costs required of the franchisee. It also covers the obligations of the franchiser with regard to services provided.
  1. What kind of protection is given by the disclosure statement? The purpose of the disclosure statement is to provide information needed by the prospective franchisee to evaluate the franchise. The 20 topics covered in the statement are important in making this evaluation, and if used carefully, can provide considerable protection. It should be mentioned, however, that not all franchisers are completely honest in providing this information and when they are not, the degree of protection is obviously lessened.
  2. Compare and contrast franchises and business opportunities. Business opportunities involve a relationship between two parties which has a great likelihood of being limited to one transaction. The goal of each of the two is to make money on that transaction. The purchase of a franchise also involves two parties who each hope to make money, but in this case the long-term relationship is something each should be interested in preserving and strengthening. Both can succeed only when neither tries to take advantage of the other.
  3. Why is regulation of the sellers of business opportunities so difficult? The sellers of business opportunities are faced with the same Federal Trade Commission restrictions as are franchiser, but enforcement is difficult due to the fact that the sellers are adept at evading the law. Furthermore, many states have no laws restricting them. LINK TO THE BUSINESS PLAN When writing a business plan for a franchise, information about the franchisor is critical in obtaining financing. The franchisor is the key to the operation. Its success or failure will ultimately be the franchisee’s success or failure. The questions listed in the franchise opportunity handbook (included in this chapter) must be answered. These questions include how many years the franchisor has been in operation, the types of assistance the franchisor provides to the franchisee (training, site selection, financing, etc.), what the franchisor provides for you that you cannot do on your own, how many other franchises the corporation has and where they are located. All franchise costs must also be itemized to show the initial franchise fee, the monthly royalty fee, and advertising fees. Finally, financial institutions and investors will usually want to see a copy of the offering circular and a sample franchise contract. The business plan will require the entrepreneur to answer: How long has this franchise been in business? How many outlets does it have operating?