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National College of Business Administration & Economics Presented to: Prof. Sikandar Aziz Presented by: Ahtisham Naseer Program: bba (hons) Reg no: 2063223 WHAT IS FRANCHISING? Franchising is one of three business strategies a company may use in capturing market share. The others are company owned units or a combination of company owned and franchised units. Franchising is a business strategy for getting and keeping customers. It is a marketing system for creating an image in the minds of current and future customers about how the company’s products and services can help them. It is a method for distributing products and services that satisfy customer needs. Franchising is a network of interdependent business relationships that allows a number of people to share: A brand identification A successful method of doing business A proven marketing and distribution system In short, franchising is a strategic alliance between groups of people who have specific relationships and responsibilities with a common goal to dominate markets, i.e., to get and keep more customers than their competitors. There are many misconceptions about franchising, but probably the most widely held is that you as a franchisee are “buying a franchise.” In reality you are investing your assets in a system to utilize the brand name, operating system and ongoing support. You and everyone in the system are licensed to use the brand name and operating system. The business relationship is a joint commitment by all franchisees to get and keep customers. Legally you are bound to get and keep them using the prescribed marketing and operating systems of the franchisor. To be successful in franchising you must understand the business and legal ramifications of your relationship with the franchisor and all the franchisees. Your focus must be on working with other franchisees and company managers to market the brand, and fully use the operating system to get and keep customers. BENEFITS OF FRANCHISING One of the major advantages of franchising is that the company would deal with most of the financial aspect of the business. Even though the applicant needs to provide the franchising fee and other fees later on, the major part of the assets would be taken care of by the company. Also, the company would provide trained employers either initially or on a long-term basis. Even if this were not the case, the company would train all the new employees, saving the training costs for the franchisee. Franchising indicates the company already has a good standing and wishes to expand. So the customer base is already built and the franchising should have no problems even during the initial stages. This will ensure good business right from the start and ensure that the franchiser feels motivated by the response. Also, franchises can attain growth fairly quickly compared to the regular businesses. This is because there is no limit to the number of franchises that can rise under a particular company. There is no way a company can open branches at the same rate as franchises. Also, the companies get franchise fee, franchise royalty, discount from vendors, better lease options, and better discounts on equipment and raw materials. This indicates that the companies get money from a number of sources when compared to individually owned companies. Franchising could be a bad option for the franchisee if the business is already successful and has a good standing in the market. Also, the company gets to control the franchise and not the owner. So, even though a franchisee runs the business, the company pulls all the strings. The company would make all the major decisions and the franchisee usually does not get any say in the matter except when it does not really affect the company’s policies. Even though penetrating the market is easier with franchisees, it might involve a lot more legalities when compared to that of an individually owned business. This might ensure taking up more time before the franchise being able to attain a strong footing in the market. The company must be able to deal with the rapid growth of the franchisees as such situations might, at all times, require excess staffing, and excess training materials. Also, they must take care to avoid any kind of litigations with respect to the franchisees. We have sellected a site for a franchise of a restaurant. This area is open for this opportunity. It has consumers, it has wealthy consumers and ti has an up beat target area.We feel that all these qualities fit into a McDonald’s fast food restaurant McDonald's Corporation (NYSE: MCD) is one of the world's largest chains of fast-food restaurants. "McDonald's is run neither by one man nor by executive committee. Indeed, it is not even a single company. It is a federation of hundreds of independent entrepreneurs - franchisees, suppliers and managers - united by a complex web of partnerships and creativity…a contemporary franchise system flourishing on an unparalleled scale." Introduction to 'Behind the Arches' by John F Love This company began in 1940 with a restaurant opened by siblings Dick and Mac McDonald, but it was their introduction of the "Speedee Service System" in 1948 that established the principles of the fast-food restaurant. However, the company today dates its "founding" to the opening of CEO Ray Kroc's first franchised restaurant, the company's ninth, in 1955. History of McDonald's American businessman Ray Kroc first established McDonald's in 1955. From those early days McDonald’s has been a franchising company. We have relied on our franchisees to play a major role in the success of the business. Approximately 70% of McDonald's worldwide restaurant businesses are owned and operated by independent businessmen and women, our franchisees. In the UK McDonald's opened its first restaurant, in Woolwich, in 1974. Initially all restaurants were owned & managed by the company. However, McDonald’s started recruiting franchisees in the mid1980 and opened first franchise restaurant in 1986. Since that time the number of UK franchisees has steadily grown. Today over 37% of 1,200+ restaurants are operated by franchisees. Key Points on the McDonald's approach to Franchising The McDonald's franchise represents a chance to run your own business without being alone. You will be supported by the world famous McDonald's system, in the areas of operations, training, advertising, and marketing to name but a few. McDonald's franchises restaurants to individuals only. Never to companies, partnerships, family groups or passive investors. However, many of our franchisees operate their businesses as husband and wife teams. Before an individual can become a franchisee they must successfully complete our training program, which usually takes around nine months (see Training). Franchisees must have an active, hands-on, day-to-day involvement in the operation of the restaurant. No other business interests are allowed. We franchise existing trading restaurants; it is not necessary for applicants to source sites. Franchisees run their restaurant(s) as an independent business. They are responsible for driving the business forward and all normal business functions i.e. recruiting, marketing, accounting and administration and managing and representing the brand in the local community. Independent companies supply all raw materials, goods and services to each restaurant. McDonald's must approve all products used in the restaurant. McDonald's restaurants are usually purchased by a combination of bank finance and personal capital. Candidates must have a minimum of 25% of the total purchase price in non-borrowed funds. The remainder cost may be financed through a bank. McDonald's does not provide any financing. McDonald's franchise one restaurant at a time. We want our Franchisees to be successful with the aim to expanding to multiple restaurant ownership within 3-4 years. The granting of additional restaurant franchises is dependant on the franchisees ability to develop the existing restaurant(s) and maintain excellent standards. McDonald's Franchise Agreement is for twenty years. Under this agreement the property and buildings are owned by McDonald's (or McDonald's hold the head- lease), the restaurant equipment (-kitchen equipment, decor, seating, fixtures and fittings), are purchased by the franchisee. Franchisees are expected to maintain the restaurant décor and building fabric to a high standard. They take on a fully-repairing lease from McDonald's and are responsible for the refurbishment of the restaurant during the whole of the franchise term. For the use of the Property as a McDonald's restaurant, McDonald's charge a monthly rent. This is based on the level of monthly net sales (Total sales less V.A.T.), and currently ranges from 5-19% (of monthly net sales). In addition, McDonald's charges a monthly royalty of 5% of monthly net sales. All McDonald's restaurants make an agreed contribution to a separately managed marketing fund. The contribution rate is currently about 5% of monthly net sales. At the end of the twenty-year franchise term, a new franchise agreement (of twenty years) may be drawn up. This is dependant on the franchisees desire to take up a new franchise term (including conditions), and their track record of running the restaurant throughout the franchise term. Franchisees may only sell approved McDonald's products through their restaurants. Training and Support “We want our Franchisees to be successful; therefore we have a thorough initial training period...” Franchisees must undertake an extensive training program of approximately nine months before they are proposed a restaurant franchise. This training is unpaid. McDonald's do not charge for the training. The training program is very much the bedrock of our approach to franchising and helps ensure the consistency and high standards for which the McDonald's brand is so well known. The majority of the training takes place in a restaurant within commuting distance of your home address. In addition to restaurant based training there are a number of classroom-based courses to attend. These are of four to five weeks duration split over the full training period. The training program broadly divides into three sections. For the first three months they will be working on the various sections of the restaurant - grill, fries, serving customers, and dining and back-up areas. You will learn both the theory and practice of running each part of the restaurant. At the end of this period you will take an examination on McDonald's operations procedures and practices. If successful, you will then attend a managementtraining course focusing on people management. The second part of your training gets you involved in the day-to-day management of the restaurant. Starting from supervising small sections of the restaurant operation, our aim is to build your experience and confidence so that you take on responsibility for the running of the restaurant for certain parts of the day - in effect you will be a shift manager. The final three months of your training introduce you to more business management and administration tasks and procedures whilst maintaining your shift running responsibilities. Ideally you will be trained in at least two different restaurants, to give you experience of differing operating conditions. During your training you will be supported by a member of our Field Services team. The role of this group is to help franchisees profitably build sales, and enhance McDonald's brand through top quality operations. Field Services will review your training and decide when you are ready to be proposed a McDonald's restaurant. Once you have your own restaurant, Field Services will provide whatever support is necessary to help you build the sales and profits of your own restaurant business. This may range from direct 'hands-on' support to discussing business and marketing plans. Field Services provide relevant support and advice, benchmarking, and share best practice with you. Financial Information Depending on the amount of capital you have available, there are two financial routes to become a McDonald’s Franchisee: Conventional Franchise - the normal practice in the UK - the purchase price will be based on restaurant profitability (cash flow) and vary from £150k upwards. Candidates should have at least 25% of the purchase price in personally owned funds i.e. unencumbered. In addition, there is a £30,000 franchise fee and £5,000 training Deposit to pay. Business Facilities Lease Franchise - In a limited number of cases, McDonald's grants a Business Facilities Lease (BFL) franchise to candidates who excel in all qualifications but are unable to meet the financial requirements of the conventional franchising program. An individual must have a minimum of £35,000 of non-borrowed personal resources to be considered for a franchise under the BFL program. The BFL franchise allows a trained applicant a threeyear period to run their restaurant and build a target equity sum from profits. These funds are then used for the outright purchase of the franchise as in the conventional franchising program. Who's Ideal for Us McDonald’s continues to look for people who can help develop the global brand locally. There are opportunities to take on existing businesses throughout the UK. These opportunities are restaurants currently owned directly by the company or owned by Franchisees who are retiring. Therefore the benefits of this are that for new Franchisees, there is an existing restaurant team and cash flow to take over. For new Franchisees to the system there is no requirement to find a site and negotiate terms with a landlord thus allowing you to concentrate all your efforts on building the restaurant business. We seek to give our successful Franchisees the opportunity to operate multiple units. Currently 74% run multiple restaurants. This normally happens within 3-4 years. Our selection of prospective franchising candidates is based on an assessment of overall business experience and personal qualifications. We look for individuals with "common business sense", a proven ability to effectively lead and develop people, and a history of previous success in business and personal endeavors. A restaurant background is not necessary. We franchise only to individuals, not to limited companies, partnerships, or passive investors. The following qualifications, among others, are essential to be considered for a McDonald's franchise: High personal integrity An entrepreneurial spirit and strong desire to succeed A proven ability to manage, motivate and train people The ability to manage finances - both business and personal A willingness to personally devote full-time and best efforts to the day-to-day operation of the restaurant as an on-premise owner operator A willingness to complete a comprehensive training program and become proficient in all aspects of operating a McDonald's restaurant business Financial resources & understanding The Selection Process When selecting new franchisees, we take great care to make sure that we - and you - feel you're absolutely right for the business. We're going to be partners for 20 years, so a mistake will be costly for us both. To begin the selection process, McDonald’s asks their franchisees to complete an application form (contained within their franchising information pack), and return this to us, together with any other information you consider relevant to enhance your application. If we believe you have the potential we're looking for, our franchising team will invite you to a meeting at which we'll discuss your background and experience, your achievements and financial status. We'll also be trying to discover if you have a strong business track record, coupled with the people skills, integrity and tenacity that you'll need to make your McDonald's restaurant a success. After the meeting, if we're both still interested, we will invite you to spend five days working in a McDonald's restaurant. This lets you find out more about the working environment you might be choosing for the next 20 years, and allows us to see how you adapt to life in one of our restaurants. Assuming this 'on-job experience' is a success, our Regional Manager will ask you to visit several existing franchisees and then invite you to a final meeting at our Head Office. If this meeting is successful, you can begin your training just as soon as you're ready.
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