Recognizing Franchising Opportunities

Recognizing Franchising OpportunitiesChapter 2

Paulink C. BarbaBSBA Marketing Management

Key Points:

A. The advantages of franchising for Franchisee

1. Established Price Product or Service

This advantage is where the consumers are alreadyAWARE of the name and reputation of the product or service the franchise system offers. Suchfranchisors generally spend a large portion ofadvertising budget on national campaigns ortelevision and radio, magazines and newspapers tokeep their public awareness.

2. Technical and Managerial Assistance

This type of advantage isprovided by the franchisor.The new franchisee willreceive technical assistancewhich often includes locationand site selection, storelayout and design, storeremodelling (if the franchiseeis converting an existingsite), inventory purchase andcontrol methods, equipmentand fixture purchasing orleasing and assistance withthe grand opening of the newfranchise business.

3. Quality Control Standards

This third type of advantage is again provided bythe franchisor. By setting and maintaining highstandards, a franchisor does the franchisee agenuine service. Properly administered andcontrolled, such standards help the franchise toachieve positive results by ensuring product serviceuniformity throughout the franchise system.

4. Less Operating Capital

Franchising offers its prospects with lesscash than if he or she were to open abusiness 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 agingof stock, waste, spoilage and unprofitablestorage of low item demands 3. A new franchiseemay be able to receive some financial assistancein the form of credit, as cash or inventory fromthe franchisors resources.

5. Opportunity for Growth

This fifth potential advantageconcerns growth opportunities foroperating a territorial franchise. Aterritorial franchise guaranties nocompetition from the same franchisorwithin a specified geographic boundary. Itmay later be in a position to sub franchiseor license other persons to operate storesbelonging to the territorial franchisee. If anew franchised company is enjoyingsuccessful growth, its franchisees couldhave more opportunity for financial gainas territorial franchisees.B. The potential disadvantages of franchising to the franchisee

1. Failed Expectations

These are the expectations of the franchisee to thefranchisors business expertise, experience, sellingmethods, trademark and advertising. Because ofthe following elements the franchisor had, thefranchisee sees the value of franchisor-franchiseerelationship. Without such assistance, there wouldbe little reason for a prospective business owner toenter a franchising agreement.

2. Service Costs

These services are expense items to the franchiseewhich are provided by the franchisor. In someinstances, they may be of dubious value. Theseinclude franchise fees and royalties which thefranchisee might find excessive especially afterbeing in business for several months and realizingthe effect that the royalties and fees are having onthe franchisees anticipated return on investment.

3. Overdependence

This type of disadvantage again points to thefranchisor-franchisee relationship. A franchisee canbecome too dependent on the advice of thefranchisor to address operations, crises, changingmarket conditions, pricing strategy or promotionsand so may fail to apply commonsense andknowledge of local customers and marketconditions.4. Restrictions of Freedom OwnershipThe franchising contract maycontain restrictions orrequirements that anindependent business personwould not have to satisfy. Forexample, territorialrestrictions imposed by thefranchisor may limit the potentialcustomer contacts a franchiseemight see or territories mayoverlap or be inequitablydetermined by a franchisor.

5. Termination of Agreement

This concerns the franchisees decision to terminatethe franchising relationship as a result of perceivedor real differences with the franchisor. Lack ofcooperation from the franchisor can make itdifficult to sell the business to a prospective buyeror 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 throughexpansion of their distributionsystem. Yet the average businessowner wishing to broadendistribution of a product or servicemay not have the same options toconsider as Sloan. In fact,franchising may be the only viableoption for growth, unless that ownerwould choose to become part of alarger existing company as a captiveproducer or a franchisee, or choose toexpand at a slow pace by savingprofits earned from the principalbusiness.

2. Motivation

Another advantage to the franchisor is that thefranchisee is usually more motivated that thecompany-employed manager, When a franchisedunit is operated by an owner as opposed to acompany-employed manager, that unit will usuallybenefit from the owners motivation, self-directionand personal interest in the success of theOperation.

3. Operation of Non-union Business

In the decision whether tofranchise, a business owner shouldalso give consideration to the areaof employee and labor relations.

There is greater likelihood thatcompany-owned units would be moreattractive to union organizers thanfranchised units, largely because asingle franchised operating unit is lesslikely to be unionized and to developlabor relations appropriate to the localsupply-and-demand conditions of thelabor pool.

4. Bulk Pricing

An advantage exists for franchisors in businessthat require inventory of parts, completed units forsale and supplies or packaging associated with theproduction or sale of the product, Economy of scalein purchasing can be achieved more rapidly by acompany choosing franchising compared with acompany that expands through company-ownedunits.D. Disadvantages to the Franchisor Potential Problems

A. Recruitment

The recruitment problem concerns the difficulty offinding promising franchisees. Although many seekfranchising as a means to enter business, mostprospective franchisee candidates lack theexperience, motivation, or the proper capitalbacking needed to become successful franchises.

B. Communication

As in any business relationships, communicationproblems can arise. In franchising, a franchiseemay develop a sense of independence and no longerfeel a need to rely on the franchisor for thesuccessful operation of the business; he or she mayconclude that the business would run just assmoothly without the franchisors advice and seekto discontinue the relationship.

C. Loss of Freedom

Independent business persons can easilymake decisions and change policies withintheir organizations; but once a franchisesystem is developed, the franchisor orparent company must get permission fromfranchisees to introduce new products, toadd or eliminate services, or to changeoperating policies. Thus the franchisorstands to lose a substantial amount ofcontrol as a franchises system increases itssize. It can become difficult for thefranchisor to modify product or process inorder to meet the ever-changing needs ofcustomers, particularly if the franchisesystem increases its size.

E. 7 Steps for franchise protection before investing in a franchise

1. Protect yourself by self-evaluation2. Protect yourself by investing the franchise3. Protect yourself by studying the disclosure document.4. Protect yourself by checking out the disclosures5. Protect yourself by questioning earnings claims6. Protect yourself by obtaining professional advice7. Protect yourself by knowing your legal rights

F. The typical elements included in a franchising agreement

1. Franchising2. Fee3. Signs4. Quality Control5. Business Hours6. Advertising7. Decor8. Products and services available9. Reporting

10. Royalties11. Bookkeeping12. Equipment13. Supplies14. Location requirements15. Personnel (appearance and training)16. Facilities17. Franchisor-Franchisee Relationships18. Maintenance

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