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Ch. 15 Managing and Growing Entrepreneurial Firm (Exam 4)

form of business organization in which a firm that already has a successful product or service licenses its trademark and method of doing business to other businesses in exchange for an initial franchise fee and an ongoing royalty.
franchise comes from an old dialect of French and means:
“privilege” or “freedom”
what are the two types of franchise systems?
-product and trademark franchise
-business format franchise
an arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name. (this gives them a little more control of distribution–not a business in a box)
product and trademark franchise
-the most popular approach to franchising and more commonly used
-the franchisor provides a formula for doing business to the franchisee along with training , advertising, and other forms of assistance.
*Business in a box–everything is supplied and it looks like every other store in that business
Business format franchise
what are some of the industries in which business format franchises predominate?
-business services
-quick service restaurants
-real estate
-retail food
-retail products and services
-table/full service restaurants
involves the sale of a single franchise for a specific location
-most common type of arrangement
Individual franchise agreement
allows a franchisee to own and operate a specific number of outlets in a particular geographic area.
-very popular arrangement b/c it give franchisee exclusive rights for a given area
area franchise agreement
similar to area franchise agreement in that it can open and operate a specific number of locations in a particular area, it ALSO has the right to offer and sell the franchise to other people in its area.
master franchise agreement
what are the people who buy franchises from master franchisees called?
when would franchising be a bad idea for a business?
-when the business is LARGE.
ie: burger king franchises their business because each individual outlet is small and has a limited menu–franchising wouldn’t work for a Walmart because of its size
What are the steps to franchising a business?
1. develop a franchise business plan
2. get professional advice
3. conduct an intellectual property audit
4. develop franchise documents
5. prepare operating manuals
6. plan an advertising strategy and a franchisee training program
7. put together a team for opening new franchise units
8. plan a strategy for soliciting prospective franchisees
9. help franchisees with site selection and grand opening of their franchise outlets
what are 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
-adequate financial resources and good credit
-represents franchisor in a positive manner
what are ways franchisors can develop the potential of their franchisees?
-provide mentoring that supersedes routine training
-keep operating manuals up to date
-keep product, services, and business systems up to date
-maintain the franchise system’s integrity
Before deciding to franchise, a firm should consider:
-the uniqueness of its product or service (provide value)
-the consistent profitability of the firm
-the firm’s year-round profitability
-the degree of refinement of the firm’s business systems (procedures for operating business should be polished and documented in written form)
-the clarity of the business proposition
what are advantages of franchising?
-rapid, low-cost market expansion
-income from franchise fees and royalties
-franchisee motivation
-access to ideas and suggestions
-cost savings
-increased buying power
what are disadvantages of franchising?
-profit sharing
-loss of control
-friction with franchisees
-managing growth (can be difficult)
-differences in required business skills
-legal expenses
How do you know if franchising is right for you? what questions should you consider?
-are you willing to take orders?
-are you willing to be part of a franchise system instead of independent businessperson?
-willing to lose creative control over how your business is promoted?
what costs are typically associated with buying a business format franchise?
-initial franchise fee
-capital requirements
-continuing royalty payment
-advertising fees
-other fees (training addit. staff, computer assistance, etc.)
what are the two primary advantages to buying a franchise over business ownership?
-it provides an entrepreneur the opportunity to own a business using a tested and refined business model.

-when an individual purchases a franchise, the franchisor typically provides training, technical expertise, and other forms of support

what is the main disadvantage to buying a franchise?
the cost involved
what are the steps involved in purchasing a franchise?
1. visit several of the franchisor’s outlets
2. meet with a franchise attorney
3. meet with the franchisor and check their references
4. review all franchise documents with the attorney
5. sign the franchise agreement
6. attend training
7. open the franchise business
what are 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
-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.
contains 23 categories of info that gives a prospective franchisee a broad base of information about the background and financial health of the franchisor
franchise disclosure document (FDD)
the document that consummates the sale of a franchise
franchise agreement
by requiring franchisors to file their Franchise Disclosure Documents with a state agency, they provide franchise purchaser important legal protections.
-adopted by a handful of states
-include right to sue franchisor for violation of state disclosure requirements
franchise investment laws
what are the steps to take before buying a franchise in a foreign country?
1. consider the value of the franchisor’s name in the foreign country
2. work with a knowledgeable lawyer
3. determine whether the product or service is salable in a foreign country
4. uncover whether the franchisor has experience in international markets
5. find out how much training and support you will receive
6. evaluate currency restrictions
what are the features of franchising that make it subject to ethical abuse?
-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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