Entrepreneurship

Franchising
BSCS Semester 3
Week 11
Miss Ayesha Shakoor
ayesha.shakoor@numl.edu.pk
Franchising
Introduction…

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Franchising
Some questions…
• How does this form of business ownership work?
• How is a franchise system established?
• Advantages?
• Disadvantages?
• Actions and issues associated with buying a
franchise?
• What are franchising ethics?
• How does international franchising create issues for
the entrepreneur?

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Franchising
Defined and function?
• Old French - privilege/freedom
• 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 other businesses (franchisees) in
exchange for an initial franchise fee and an ongoing
royalty.
• Established or first-time enterprises
• Post world war era
• Form of growth that uses efforts of partners/
franchisees to get its products/services to market

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Franchising
Defined and function?
• 2 different types of franchise systems
• Product and trademark franchise: arrangement under which the
franchisor grants to the franchisee the right to buy its products and
use its trade name – single manufacturer with a network of dealers
of distributers
• Format franchise: franchisor provides a formula for doing business
to the franchisee along with training, advertising, and other forms of
assistance – KFC etc.
• Franchise agreement:
• Individual – single franchise for a specific location
• Area franchise – own and operate a specific number of outlets in a
particular geographic area
• Master franchise – right to open and operate a specific number of
locations, offer and sell franchise to others – sub franchises –
multiple-unit franchisee

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Franchising
Establishing a franchise system
• Complicated- deliberately and carefully – all aspects
before buying rights
• When? 2 options: building company-owned outlets or
franchising – appropriate when a firm has a
strong/potentially strong trademark/well-designed
model/desire to grow

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Franchising
Steps to franchising
• Step 1: Develop a franchise business plan.
• Step 2: Get professional advice.
• Step 3: Conduct an intellectual property audit.
• Step 4: Develop franchise documents.
• Step 5: Prepare operating manuals.
• Step 6: Plan an advertising strategy and a franchise training
program.
• Step 7: Put together a team for opening new franchise units.
• Step 8: Plan a strategy for soliciting prospective franchisees.
• Step 9: Help franchisees with site selection and the grand
openings of their franchise outlets.

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Franchising
Selecting and developing effective franchisees

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Franchising
Pros and cons of franchising
• Helps grow quickly with franchisees providing capital
needed for brand recognition and economies of scale
• Agency theory: more effective than when run by
managers

• Others profit from trademarks and business method

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Franchising
Pros and cons of franchising

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Franchising
Buying a franchise
• Is franchising right for me?
• Are you willing to take orders?
• 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?
• What are you looking for in a business?
• How willing are you to put your money at risk?

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Franchising
Cost of a franchise

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Franchising
Pros and cons of buying a franchise

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Franchising
Steps in buying a franchise

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Franchising
Legal issues
• Federal level – Federal Trade Commission Rule 436 –
franchisors must furnish potential franchisees with
written disclosures that provide information about the
franchisor, the franchised business, and the franchise
relationship
• Document called – Franchise Disclosure Document
(FDD) – 23 categories about background and financial
health of franchisor
• Franchise agreement/contract
• State rules and regulations – FDD is under public record

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Franchising
Legal issues

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Franchising
Franchise ethics
• Fair return on investment
• The get-rich-quick mentality
• The false assumption that buying a franchise is a
guarantee of business success
• Conflicts of interest between franchisors and their
franchisees

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Franchising
International franchising
• International opportunities for franchising are becoming more
prevalent as the markets for certain franchised products in the
United States have become saturated.
• Foreign firms are also taking advantage of the trend toward
globalization and are offering franchises in the United States and
other countries.
• Steps to take before buying a franchise in a foreign country:
• Value of the franchisor’s name in the foreign country
• Work with a knowledgeable lawyer
• Determine whether the product/service is sale-able in a foreign
country
• Uncover whether franchiser has experience in international markets
• find out how much training and support you will receive
• Currency restrictions

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Franchising
Future of franchising
• Bright!!
• Why? – invitation to brainstorm

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Franchising
Q3
• Choose a Case from Chapter 15.
• Describe what went right/wrong for the
franchisor/franchisee.

• Other instructions:
• Group
• Deadline: next class

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