Pursuing New

Venture
Opportunities

Franchising
Opportunities

PowerPoint Presentation by Charlie Cook

12e Copyright © 2003 South-Western College Publishing.
All rights reserved.
 Looking Ahead
After studying this chapter, you should be able to:
2. Explain franchising terms and the structure of the
industry.
3. Identify the major pros and cons of franchising
4. Describe the process for evaluating a franchise
opportunity.
5. Discuss certain legal considerations in franchising.

Copyright © by South-Western College Publishing. All rights reserved. 6–2

 Franchising Terms
• Franchising
– A marketing system revolving around a two-party
agreement, whereby the franchisee conducts
business according to the terms specified by the
franchisor
• Franchise contract
– The legal agreement between franchisor and
franchisee
• Franchise
– The privileges conveyed in the franchise contract

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 Franchising Terms (cont’d)
• Franchisee
– An entrepreneur whose power is limited by a
contractual agreement with a franchisor
• Franchisor
– The party in the franchise contract that specifies
the methods to be followed and the terms to be
met by the other party

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 Types of Franchises
• Product and Trade Name Franchise
– Grants the right to use a widely recognized
product or name
• Business Format Franchise
– Provides an entire marketing system and ongoing
guidance from the franchisor
• Piggyback Franchising
– The operation of a retail franchise within the
physical facilities of a host store

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 Types of Franchises (cont’d)
• Master Licensee
– An independent firm or individual acting as a sales
agent with the responsibility for finding new
franchises within a specified territory
• Multiple-Unit Ownership
– Holding by a single franchisee of more than one
franchise from the same company
• Area Developers
– Individuals or firms that obtain the legal right to
open several franchised outlets in a given area

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 The Structure of Franchising

Franchise Franchise
Parties Facilitators

Franchisor Industry Associations

Master Licensee/ Federal/State Agencies

Area Developers

Franchisee- Company- Business/Consulting

Owned Owned Firms
Operating Units Stores

Fig. 6-1
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 The Pros and Cons of Franchising
• Advantages • Limitations
– Probability of success – Franchise costs
Proven line of  Initial franchise fee
business  Investment costs
Pre-qualification of  Royalty payments
franchisee  Advertising costs
– Training – Restrictions on
Franchisor-provided Business Operations
– Financial assistance – Loss of independence
Franchisor
assistance
– Operating benefits
Franchisor-aided
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 Franchisor Controls on Franchisees
• Restricting of sales territory
• Requiring site approval and imposing
requirement on the outlet’s appearance
• Restricting the goods/
services that can be sold
• Requiring specific
operating hours
• Controlling advertising

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 The Pros and Cons of Franchising

Pluses Minuses
Formalized training Franchise fees

Financial assistance Royalties

Proven marketing Restrictions on growth

methods
Less independence in
Managerial assistance operations
Franchisor may be sole
Quicker startup time supplier of some
Overall lower failure supplies
rates Termination/renewal
clauses

Fig. 6-2
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 Evaluating Franchise Opportunities
• Locating a Franchise Opportunity
• Investigating the Potential Franchise
– Information sources
Independent, third-party sources
Franchisors themselves
Existing and previous franchisees

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 Franchising from the
Franchisor’s Perspective

• Benefits • Drawbacks
– Reduction of capital – Reduction in control
requirements – Sharing of profits
– Increase in – Increase in
management operational support
motivation costs
– Speed of expansion

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 Legal Considerations in Franchising
• The Franchising Contract
– Signed with legal counsel present
– Contains a termination and transfer provision
– Contains statement of rights to renew contract

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 Franchise Disclosure Requirements
• Basic Requirement: Franchisors must furnish potential franchisees with
written disclosures providing important information about the franchisor, the
franchised business and the franchise relationship, and give them at least ten
business days to review it before investing.
• Disclosure Option: Franchisors may make the required disclosures by
following either the Rule’s disclosure format or the Uniform Franchise
Offering Circular Guidelines prepared by state franchise law officials.
• Coverage: The Rule primarily covers business-format franchises, product
franchises, and vending machine or display rack business opportunity
ventures.
• No Filing: The Rule requires disclosure only. Unlike state disclosure laws,
no registration, filing, review or approval of any disclosures, advertising or
agreements by the FTC is required.
• Remedies:The Rule is a trade regulation rule with the full force and effect
of federal law. The courts have held it may only be enforced by the FTC, not
private parties. The FTC may seek injunctions, civil penalties and consumer
redress for violations.

Fig. 6-3
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