Kwame Nkrumah University of

1
Science & Technology, Kumasi, Ghana

Franchising

PROFESSOR W.A. OWUSU-ANSAH

• Email: woansah@gmail.com
• KNUST School of Business
• MCS-472/24 Lecture XI Week 11
 Learning Objectives 2

 Explain franchising and how this form of business ownership works.

 Describe steps entrepreneurs can take to establish a franchise system.
 Become familiar with the advantages and disadvantages of establishing a
franchise system.
 Describe actions and issues associated with a decision to buy a franchise.
 Explain the steps an entrepreneur goes through to buy a franchise.
 Identify and explain the various legal aspects associated with the franchise
relationship.
 Discuss two additional issues—franchise ethics and international
franchising—entrepreneurs should think about when considering
franchising.
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 What is Franchising? 3

• Franchising
− Franchising is a form of business organization in which a firm
that already has a successful product or service (franchisor)
licenses its trademark and method of doing business to another
business or individual (franchisee) in exchange for a franchise
fee and an ongoing royalty payment.
− Some franchisors are established firms (like McDonald’s) while
others are first-time enterprises being launched by entrepreneurs
(like Voltic).
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 Two Types of Franchise Systems (1 of 2)
4

• Product and Trademark Franchise

– An arrangement under which the franchisor grants to the franchisee the
right to buy its products and use its trade name.
– This approach typically connects a single manufacturer with a network of
dealers or distributors.
• For example, General Motors has established a network of dealers that
sell GM cars and use the GM trademark in their advertising and
promotions.
• e.g. in Ghana- Shell & OMCs
• Other examples of product and trademark franchisors include agricultural
machinery dealers, soft drink bottlers, and beer distributorships.
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 Two Types of Franchise Systems (2 of 2)
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• Business Format Franchise

– An arrangement under which the franchisor provides a
formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
– Fast-food restaurants, convenience stores, and motels are
well-known examples of business format franchises.
• Business format franchises are by far the most popular
form of franchising, particularly for entrepreneurial firms.

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 Format Franchising Defined
6

Franchising is a system of marketing goods and/or services

and/or technology, which is based upon a close and ongoing
collaboration between legally and financially separate and
independent undertakings, the franchisor and its individual
franchisees whereby the franchisor grants its individual
franchisees the right, and imposes the obligation, to conduct
a business in accordance with the franchisor's concept.

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 Business Format Franchises
7

10 Industries in Which Business Format Franchises Are Used Prominently

1. Automotive
2. Business Services
3. Commercial and Residential Services
4. Food Retailing
5. Lodging
6. Personal Services
7. Quick Serve Restaurants
8. Real Estate
9. Retail Products & Services
10. Table/Full-Service Restaurants www.knust.edu.gh
 Types of Franchise Agreements (1 of 3)
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Individual Franchise Agreement

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 Types of Franchise Agreements (2 of 3)
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Area Franchise Agreement

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 Types of Franchise Agreement (3 of 3)
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Master Franchise Agreement

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 When to Franchise? (1 of 2) 11

• When Is Franchising Most Appropriate?

– Franchising is most appropriate when a firm has a strong or potentially strong
trademark, a well-designed business method, and a desire to grow.
– In some instances franchising is not appropriate.
• For example, franchising works for KFC but would not work for
Melcom/Shoprite.
• Each individual KFC store is relatively small and policies and procedures can be
written for almost any contingency.
• In contrast, Melcom/Shoprite stores are much larger, more expensive to build, and
more complex to run compared to KFC. It would be nearly impossible for
Melcom/Shoprite to find enough franchisees with the financial capital and
expertise to open and successfully operate a Melcom/Shoprite store.

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 When to Franchise? (2 of 2) 12

Nine Steps in Setting Up a Franchise System

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Selecting and Developing Effective Franchisees (1 of 2) 13

Qualities to Look for in Prospective Franchisees

• Good work ethic
• Ability to follow instructions
• Ability to operate with minimal supervision
• Team oriented
• Experience in the industry in which the franchise competes
• Adequate financial resources and good credit history
• Ability to make suggestions without becoming confrontational or upset if the
suggestions are not adopted

• Ability to represent the franchisor in a positive manner

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Selecting and Developing Effective Franchisees (2 of 2) 14

Ways Franchisors Can Develop Their Franchisees’ Potential

• Provide mentoring that supersedes routine training

• Keep operating manuals up-to-date

• Keep product, services, and business systems up-to-date

• Solicit input from franchisees to reinforce their importance in the larger system

• Encourage franchisees to develop a franchise association

• Maintain the franchise system’s integrity

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 Advantages and Disadvantages of Establishing a 15

Franchise System (1 of 2)
• There are two primary advantage of franchising.
− First, early in the life of an organization, capital is typically scarce.
Franchising helps a venture grow quickly because franchisees provide the
majority of the capital.
− Second, a concept called agency theory argues that for organizations with
multiple units, it is more effective for the units to be run by franchisees than
by managers who run company-owned stores.
− The theory is that managers, because they are paid a salary, may not be
as committed to the success of their individual units as franchisees, who
are in effect business owners.
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 Advantages and Disadvantages of Establishing a 16

Franchise System (2 of 2)
Advantages and Disadvantages of Franchising as a Method of Business Expansion

Advantages Disadvantages
• Rapid, low-cost market expansion. • Profit sharing.
• Income from franchise fees and • Loss of control.
royalties. • Friction with franchisees.
• Franchisee motivation. • Managing growth.
• Access to ideas and suggestions. • Differences in required business skills.
• Cost savings. • Legal expenses.
• Increased buying power.
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 Buying a Franchise (1 of 4) 17

• From the Franchisee’s Point of View

– Purchasing a franchise is an important business decision involving
a substantial financial commitment.
– Potential franchise owners should strive to be as well informed as
possible before purchasing a franchise and should be aware that it
is often legally and financially difficult to exit a franchise
relationship.
– Franchising may be a particularly good choice for someone who
wants to start a business but has no prior business experience.
• Many franchise systems provide their franchisees substantial
training and support. www.knust.edu.gh
 Buying a Franchise (2 of 4) 18

Answering the following questions will help determine

if franchising is right for you:
• Are you willing to take orders? Franchisors are
typically very particular about how outlets operate.
• Are you willing to be part of a franchise “system”
rather than be an independent businessperson?
• How will you react if you make a suggestion to your
franchisor and your suggestion is rejected?
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 Buying a Franchise (3 of 4) 19

• What are you looking for in a business? How hard

do you want to work?
• How willing are you to put your money at risk?
• How will you feel if your business is operating at
a net loss, but you still MUST pay royalties on
your gross income?

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 Buying a Franchise (4 of 4) 20

Advantages Disadvantages
• A proven product or service within an • Cost of the franchise.
established market. • Restrictions on creativity.
• An established trademark or business • Duration and nature of the commitment.
system.
• Franchisor’s training, technical expertise,
• Risk of fraud, misunderstandings, or lack of
franchisor commitment.
and managerial expertise.
• Problems of termination or transfer.
• An established marketing network.
• Poor performance on the part of other
• Franchisor’s ongoing support.
franchisees.
• Availability of financing. • Potential for failure.
• Potential for business growth.

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 The Cost of a Franchise (1 of 4)
21

• Initial Franchise Fee

– The initial fee varies depending on the franchisor.
• Capital Requirements
– The costs vary but may include the cost of buying real estate, the
cost of putting up a building, the purchase of inventory, and the
cost of obtaining a business license.
• Continuing Royalty Payment
– Is usually around 5% of monthly gross income.
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 22

The Cost of a Franchise (2 of 4)

• Advertising Fees
– Franchisees are often required to pay into a national or regional
advertising fund.
• Other Fees
– Other fees may be charged for various activities, including:
• Training additional staff.
• Providing management expertise when needed.
• Providing computer assistance.
• Providing a host of other items or support services.
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 The Cost of a Franchise (3 of 4) 23

Initial Costs to the Franchisee of a Sample of Franchise Organizations

Franchise Year Started Company- Franchised Franchise Ongoing Total Initial

Organization Franchising Owned Units Units Fee Royalty Fee Investment
Anytime 2002 38 3,386 $19,000-- $449-$549/ $80,020--
Fitness $37,500 month $490,100
Budget 1994 0 1,087 $19,950 Varies $99,240–
Blinds $202,070
Edible 2001 8 1,245 $30,000 5% $196,610--$327,810
Arrangements

Hampton 1984 1 2,148 $75,000 6% $4.2--$14.9

Inn Hotels million
Liberty Tax 1973 351 3,753 $40,000 14% $58,700--
Service $71,900
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 The Cost of a Franchise (4 of 4) continued) 24

Franchise Year Started Company- Franchised Franchise Ongoing Total Initial

Organization Franchising Owned Units Units Fee Royalty Fee Investment
Pinkberry 2006 33 242 $35,000 6% $310,842—
$615,145
Play It Again 1988 0 285 $25,000 5% $240,300--
Sports $397,200
Qdoba 1997 359 330 $30,000 5% $851,600--$1.13
Mexican Grill million
The UPS 1980 0 4,910 $29,950 5% $159,224--
Store $434,521
Wetzel’s 1996 9 294 $35,000 7% $164,950--
Pretzels $405,850
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 Steps in Purchasing a Franchise (1 of 2) 25

• The first rule of buying a franchise is to avoid making a hasty decision.

• Owning a franchise is typically costly and labour-intensive. As a result, the
purchase of a franchise should be a careful, deliberate decision.
 3 components –the 3Ms – market demand, market size and structure and
margin analysis
 Fundamental to this is PTA (primary target audience)
 Also the degree of market penetration of the secondary target
 Due diligence
• Purchasing a franchise system is a seven-step process, as illustrated in the
following slide.
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Steps in Purchasing a Franchise (2 of 2) 26

Seven Steps in Purchasing a Franchise

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 27

Watch Out! Common Misconceptions about Franchising

• Franchising is a safe investment.
• A strong industry ensures franchise success.
• A franchise is a “proven” business system.
• There is no need to hire a franchise attorney or an accountant.
• The best systems grow rapidly, and it is best to be part of a rapid-
growth system.
• I can operate my franchise outlet for less than the franchisor predicts.
• The franchisor is a nice person—he’ll help me out if I need it.

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 Legal Aspects of the Franchise Relationship 28

• Rules and Regulations

– The offer and sale of a franchise are regulated.
• For instance, franchisors must furnish potential franchisees with written
disclosures that provide information about the franchisor, the franchised
business, and the franchise relationship.
• In most cases, the disclosures are made through a lengthy document
referred to as the Franchisor Disclosure Document (FDD).
• The FDD contains 23 categories of information that give a prospective
franchisee a broad base of information about the background and
financial health of the franchisor.
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 29

More About Franchising (1 of 3)

• Franchise Ethics
– The majority of franchisors and franchisees are highly ethical.
– There are certain features of franchising, however, that make it
subject to ethical abuse. These features are as follows:
• The get-rich-quick mentality.
• The false assumption that buying a franchise is a guarantee
of business success.
• Conflicts of interest between franchisors and franchisees.

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 30

More About Franchising (2 of 3)

• International Franchising
– International opportunities for franchising are
becoming more prevalent for the following two
reasons:
• The markets for certain franchised products in the
U.S. have become saturated (i.e., fast food).
• The trend toward globalization continues.
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 More About Franchising (3 of 3)
31

• International Franchising (continued)

– Steps to take before buying a franchise overseas:
• Consider the value of the franchisor’s name in the foreign country.
• Work with a knowledgeable lawyer.
• Determine whether the product or service is saleable in a foreign
country.
• Uncover whether the franchisor has experience in international
markets.
• Find out how much training and support you will receive from the
franchisor.
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 Debate
32

Are franchising and entrepreneurship

essentially incompatible with each
other ?

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 Conclusion
33

Is a Franchise a small business?

Or
Should it classified as a form of managed branch of a larger
organisation?
In relation to:
Concept of independence
Customers as powerful controlling factor
Study of 3 franchise network reveals disagreement re:
enforcement of contractual agreement
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