Chapter 7-١

Essentials of Entrepreneurship and Small
Business Management
Ninth Edition, Global Edition
Chapter 7
Franchising and the
Entrepreneur
Copyright © 2019, 2016, 2014 Pearson Education Ltd. All Rights Reserved.
Learning Objectives (1 of 2)
1. Describe the three types of franchising: trade name,

product distribution, and pure.
2-A. Explain the benefits of buying a franchise.
2-B. Explain the drawbacks of buying a franchise.
Learning Objectives (2 of 2)
3. Understand the laws covering franchise purchases.

4. Discuss the right way to buy a franchise.
5. Describe the major trends shaping franchising.
The Franchising Boom
• About 3,800 franchisors operate more than 750,000 outlets
in the United States.
• Franchises generate more than $710 billion in annual
sales and account for 2.3% of the U.S. GDP.
• Franchises employ 7.8 million workers in the United States
in more than 300 major industries.
Franchised Outlets by Industry
Franchised Outlets by Industry
Source: Based on data from Franchise Business Economic Outlook for 2017, IHS Economics and the
International Franchise Association Educational Foundation, January 2017, p. 2.
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.
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?”
The Franchising Relationship
The Franchising Relationship
Source: Adapted
from Economic
Impact of
Franchised
Businesses: A
Study for the
International
Franchise
Association
Educational
Foundation,
Copyright 2004 by
the International
Franchise
Association.
eprinted with
permission.
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.
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
• National advertising programs

– Franchisees contribute 1% to 5% of sales.
• Financial assistance
– About 20% of franchisors offer direct financial
assistance to franchisees.
– SBA – Franchise Registry
• Proven products and business formats

• Centralized buying power
• Site selection and territorial protection
– Important issue: Territorial encroachment
• Greater chance for success
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
• Strict adherence to standardized operations

• Restrictions on purchasing
– Approved suppliers only
• Limited product line
• Contract terms and renewal
– Average term = 10.5 years
• Unsatisfactory training programs

• Market saturation
• Less freedom
– “No independence”
– “Happy prisoners”
Franchising and the Law
• Franchise Disclosure Document (FDD)
– Established in 2008 to replace the Uniform Franchise
Offering Circular (UFOC)
– Requires franchisors to disclose to potential
franchisees information on 23 important topics
– Objective: To give franchisees the information they
need to protect themselves from dishonest franchisees
and to make good investment decisions.
• Joint Employer Liability
– Browning-Ferris Industries (BFI) decision
Are You Franchise Material?
• Successful franchise owners have:
– Commitment – A learning attitude

– A willingness to work – Patience
with others – General business skills
– A positive attitude – Coachability
– Leadership ability – Adequate capital
– Solid people skills – A willingness to follow
– Adequate capital the system
– Compatible values
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
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.
Trends Shaping Franchising
• International opportunities
– Many franchises are focusing on international markets
as a source of growth.
▪ McDonald’s earns 67% of its sales internationally.
▪ Yum! Brands has more than 14,000 restaurants
outside the United States.
Top 10 Franchise Markets
Top 10 Franchise Markets
Rank Country
1 Canada
2 Australia
3 China
4 Indonesia
5 South Africa
6 Mexico
7 India
8 Vietnam
9 Colombia
10 Brazil
Source: 2016 Top Markets Report: Franchising, U.S. Department of Commerce, International Trade
Administration, 2016, pp. 2–3.
• Mobile Franchises
– Putting businesses on wheels.
• 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.
• Refranchising
– Franchisors sell their company-owned outlets to
franchisees.
• Multi-unit franchising
– IFA: 20% of franchise owners are multiple-unit owners.
– Typical multiple-unit franchises own five outlets.
• 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.
• Co-Branding
– Aka piggyback or combination franchising:
▪ Two or more franchises team up to sell
complementary products or services under one roof.
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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Essentials of Entrepreneurship and Small

1. Describe the three types of franchising: trade name,

3. Understand the laws covering franchise purchases.

• National advertising programs

• Proven products and business formats

• Franchise fees and ongoing royalties

• Strict adherence to standardized operations

• Unsatisfactory training programs

– Commitment – A learning attitude

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