Franchising
The Selling Of A Proven System
Noor Shawwa
Franchising
One of the most effective and efficient methods of market
expansion
Definition of franchising: A system of marketing -- the leasing
of a name & idea to investors in specified geographic regions
Noor Shawwa
Franchising
Types of franchises:
Spin-off: a manager (or others) within the company is offered a
branch office -- often the branch is less profitable -- in order to
acquire equity financing (the branch continues to operate under
the parent company’s name)
Distribution (traditional): a retailer enters into an agreement
with a franchisor to sell products within a specified territory, using
the franchisor’s name and/or trademark
Identical operation (system - non-traditional): MMMuffins,
McDonalds, the right to operate an identical outlet under the
original’s name
Noor Shawwa
What The Franchisor Sells
The franchisor sells a package -- a way of participating in a business
that has a track record of success
The disclosure statement: designed to attract potential franchisees
to consider the purchase -- includes:
The franchise fee: can be set at any amount (one time expense)
A statement of required investment: equipment, building costs,
furniture, fixtures, supplies, advance rent, permits, working
capital
The royalty: 3-8% of sales
What the franchisor offers the franchisees: training, technical
information, operating manuals, trademarks, real estate, continued
support, purchasing, territorial support, financial assistance (in some
cases)
Noor Shawwa
Advantages & Disadvantages Of
Franchising - for the Franchisor
Pros:
Greatly reduced capital requirements for expansion
Minimal staffing responsibility
The ability to expand rapidly
Control
Cons:
Risk of losing image and credibility - this is in the hands of the
franchisees
The larger the number of franchises - the more difficult it
becomes to coordinate the operation
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Advantages & Disadvantages Of
Franchising - for the Franchisee
Pros:
Greater chance for initial success (70%)
The ability to enter an industry without previous experience
Opportunity to open a business with limited capital
Benefit from the franchisor’s experience
Continuous market research and product/service support
Standardization of prices, products etc.
Noor Shawwa
Advantages & Disadvantages Of
Franchising - for the Franchisee
Cons.
Not suited for individuals who are independent
Services or products can sometimes be purchased elsewhere
cheaper
Franchisor could over-structure or over-saturate the market
Corrupt franchisors
Trademarks and symbols may not bring in as much business
as anticipated (e.g. KFC in Peru)
Noor Shawwa
Starting A Franchise: Franchisor
The following must be assessed:
Business concept: will it have a long life-cycle
Transferability: can this business operate on a multiple
scale or is it best suited to a single location
Resources: are management and financial resources
available to pursue a franchising strategy - in light of
training needs, accounting, market research, and financial
support
Noor Shawwa
Selecting A Franchise: Franchisee
The following must be assessed;
Success of the operation: is the track record sufficient to
determine with relative certainty that the business will be
profitable
Franchisor experience: does the franchisor offer
adequate training and support
Time span of the opportunity: is this a business that will
be around for a long time
Contract: do the fees and royalties allow for an adequate
return on investment (e.g. are supplies sold to the
franchisee at the market price?)
Noor Shawwa
Franchising Success
Ownership, even with limited decision-making power,
provides a strong motivation for franchisees
Franchises penetrate the local market effectively - especially
when they can employ local strategies (local franchisees
know their market)
Franchises have a simple organizational structure
streamlining the decision-making process
The franchisor-franchisee relation is more conducive to
communication than the traditional superior-subordinate
relationship
Franchises in general have lower overhead than corporate
structures
Noor Shawwa