Module:

Entrepreneurship
Dr Tamer Karam
Essentials of Entrepreneurship and Small
Business Management
Eighth Edition
Section 2: The Entrepreneurial Journey Begins

Chapter 7
Franchising and
the Entrepreneur

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 Despite the seeming ubiquitousness of McDonald's golden
arches and the Starbucks mermaid, the sandwich chain Subway
actually has the most locations of any restaurant worldwide,
about 43,000 in 2017. This number, however, belies the
economic reality: while McDonald's and Starbucks continue to
grow their profits, Subway's have been slipping since 2014.
Industry analysts point to a few reasons for this, including a lack
of innovation and fraught relationships with franchise owners.

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Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
1. Describe the three types of franchising:
trade name, product distribution, and pure.
2.Explain the benefits of buying a
franchise.
3.Explain the drawbacks of buying a
franchise.
4.Understand the laws covering franchise
purchases.
5. Discuss the right way to buy a franchise.
6.Outline the major trends shaping
franchising.
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The Franchising Boom
• About 3,000 franchisors operate more than 770,000
outlets
in the United States.
• Franchises generate more than $800 billion in
annual sales and account for 4.1% of the U.S.
GDP.
• Franchises employ 8.1 million workers in the United
States in more than 300 major industries.

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Franchised Outlets by Industry

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Franchising
• Franchising:
– A system in which semi-independent business
owners (franchisees) pay fees and royalties to a
parent company (franchiser) in return for the right
to become identified with its trademark, to sell its
products or services, and often to use its
business format and system.

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Franchising Basics
• Franchisee gets the right to use all of the elements
of a fully integrated business operation.
• Essence of what franchisees purchase from
the franchisors: Experience.
• Key Question: “What can a franchise do for me
that I cannot do for myself?”

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The Franchising Relationship
Element The Franchisor The Franchisee
Site selection Oversees and approves; may choose site. Chooses site with franchisor’s approval.
Design Provides prototype design. Pays for and implements design.
Makes general recommendations and
Employees Hires, manages, and fires employees.
training suggestions.
Products and services Determines product or service line. Modifies only with franchisor’s approval.
Prices Can only recommend prices. Sets final prices.
Establishes quality standards; provides list Must meet quality standards; must purchase
Purchasing of approved suppliers; may require only from approved suppliers; must purchase
franchisees to purchase from the franchisor. from supplier if required.
Develops and coordinates national ad Pays for national ad campaign; complies with
Advertising campaign; may require minimum level of local advertising requirements; gets
spending on local advertising. franchisor approval on local ads.
Sets quality standards and enforces them Maintains quality standards; trains employees
Quality control
with inspections; trains franchisees. to implement quality systems.
Provides support through an established Operates business on a day-to-day basis with
Support
business system. franchiser’s support.

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Types of Franchising
• Trade-Name:
– A franchisee purchases the right to use the franchisor’s
trade name without distributing particular products
exclusively under the franchisor’s name.
• Product Distribution:
– A franchisor licenses a franchisee to sell its products
under the franchisor’s brand name and trademark
through a selective, limited distribution network.
• Pure:
– A franchisor sells a franchisee a complete business
format and system.
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Benefits of Franchising (1 of 3)
• A business system
• Management training and support
– Start-up
– Ongoing
• Brand name appeal
– “Cloning”
• Standardized quality of goods and services

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Benefits of Franchising (2 of 3)
• National advertising programs
– Franchisees contribute 1% to 5% of sales.
• Financial assistance
– About 20% of franchisors offer direct financial
assistance to franchisees.

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Benefits of Franchising (3 of 3)
• Proven products and business formats
• Centralized buying power
• Site selection and territorial protection
– Important issue: Territorial encroachment
• Greater chance for success

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Drawbacks of Franchising (1 of 3)
• Franchise fees and ongoing royalties
– Average upfront franchise fee = $25,147
– Royalties range from 1% to 11% of franchisees’
sales
– Average royalty = 6.7% of sales

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Planned Sources of Financing for
Prospective Franchisees

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Drawbacks of Franchising (2 of 3)
• Strict adherence to standardized operations
• Restrictions on purchasing
– Approved suppliers only
• Limited product line
• Contract terms and renewal
– Average term = 10.3 years

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Drawbacks of Franchising (3 of 3)
• Unsatisfactory training programs
• Market saturation
• Less freedom
– “No independence”
– “Happy prisoners”

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Ten Myths of Franchising (1 of 2)
1. Franchising is the safest way to go into business
because franchises never fail.
2. I’ll be able to open my franchise for less money than
the franchiser estimates.
3. The bigger the franchise organization, the
more successful I’ll be.
4. I’ll use 80 percent of the franchiser’s business
system, but I’ll improve upon by substituting my
experience and know-how.
5. All franchises are the same.

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Ten Myths of Franchising (2 of 2)
6. I don’t have to be a hands-on manager. I can be an
absentee owner and still be very successful.
7. Anyone can be a satisfied, successful franchise
owner.
8. Franchising is the cheapest way to get into business
for yourself.
9. The franchiser will solve my business problems for
me; after all, that’s why I pay an ongoing royalty
fee.
10. Once I open my franchise, I’ll be able to run things
the way I want to.
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The Right Way to Buy a Franchise
• Evaluate yourself: What do you like and dislike?
• Research your market.
• Consider your franchise options.
• Get a copy of the Franchisor’s FDD – and read it!
• Talk to existing franchisees.
• Ask the franchiser some tough questions.
• Make your choice.

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Factors That Make a Franchise
Appealing
• Unique concept or marketing approach
• Profitability
• Registered trademark
• Business system that works
• Solid training program
• Affordability
• Positive relationship with franchisees

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Trends Shaping Franchising (1 of 5)
• Changing face of franchisees
– Minorities own 20.5% of all franchises compared to
14.2% of independent businesses.
• International opportunities
– Many franchises are focusing on international
markets as a source of growth.
§ Yum! earns 75% of its revenues from
international franchises.
§ McDonald’s earns 70% of its sales
internationally.

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Trends Shaping Franchising (2 of 5)
• Smaller, nontraditional locations
– Intercept Marketing: putting a franchise’s products or
services directly in the paths of potential consumers,
wherever they may be.
• Conversion Franchising
– Owners of independent businesses become
franchisees to gain the advantage of name recognition.
– 72% of North American franchisors use it as a
growth strategy.

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Trends Shaping Franchising (4 of 5)
• Area development and master franchising
– Area Development: the franchisee earns the exclusive
right to open multiple units in a specific territory in a
specific time.
– Master Franchise: franchisee has the right to create a
semi-independent organization in a particular territory
to recruit, sell, and support other franchisees.

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Trends Shaping Franchising (5 of 5)
• Co-Branding
– Aka piggyback or combination franchising:
§ Two or more franchises team up to sell
complementary products or services under one roof.

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There's no question about it, McDonald's is the most
successful restaurant in the history of the world. The
company isn't worth millions, but billions, nearly
$150 billion, and that number keeps climbing every
day.
Conclusion
• Franchising:
– Is a key part of the small business sector
– Increases the chance of business success for
the entrepreneur
– Growth continues

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