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Small Business Ch 15

franchising is
a 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 another business or individual in exchange for a franchise fee and an ongoing royalty payment
who is the one who actually licenses out the business
the franchisor
who is the individual who gains the business
franchisee
what are the two types of franchise systems
1. product and trademark franchise
2.business formant franchise
a product and trademark franchise is an
arrangement under which the franchisor grants to the franchisee the right to buy its product and use its trade name
this approach typically
connects a single manufacturer with a network or dealers or distributors
other example of this include
-agricultural machinery dealers
-soft drink bottlers
-beer distributorships
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 (most popular)
some examples of this are
fast food restaurants, convenience stores and motels
10 industries in which business format franchises predominate
1. automotive
2. business services
3. comercial and residential servies
4. loding
5. personal services
6. quick service restaurants
7. real estate
8. retail food
9. retail products and service
10. table/full service restaurant
individual franchise agreement
involves the sale of a single franchise for a specific location
area franchise agreement
allows a franchisee to own and operate a specific number of franchises in a particular geographic area
master franchise agreement
allows a franchisee to own and operate a specific number of franchises in a particular geographic area AND provides the franchisee the right to sell to others who find and manage their own franchises (subfranchisees)
franchising is most appropriate when
a firm has a strong or potentially strong trademark, a well designed business method and a desire to grow
what are the nine steps in setting up a franchise system
1. develop a franchise business plan
2. get advice
3. conduct an intellectual property audit
4. develop franchise document
5. prepare operating manuals
6. plan an advertising strategy and franchisee training program
7. put together a team for opening up new franchise units
8. plan a strategy for soliciting prospective franchisees
9. help franchisees with site selection and the grand opening of their franchise outlets
qualities to look for in prospective franchisees (8)
1.Good work ethic.
2. Ability to follow instructions.
3. Ability to operate with minimal supervision.
4. Team oriented.
5.Experience in the industry in which the franchise competes.
6. Adequate financial resources and good credit history.
7. Ability to make suggestions without becoming confrontational
or upset if the suggestions are not adopted.
8.Represents the franchisor in a positive manner.
what are some ways franchisors can develop the potential of their franchisees
-Provide mentoring that supersedes routine training.
-Keep operating manuals up-to-date.
-Keep products, 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.
what are some advantages of franchising
1. rapid, low cost market expansion
2. income from franchise fees and royalties
3. franchisee motivation
4. access to ideas and suggestions
5. cost savings
6. increased buying power
disadvantages
1. profit sharing
2. loss of control
3. fiction with franchisees
4. managing growth
5. differences in required business skills
6. legal expenses
is it easy to exit a franchise relationship?
no, it is legally and financially difficult
initial franchise fees
the initial fee varies depending on the franchisor
capital requirements
the cost vary but may include cost of buying real estate, putting up the building, purchase of inventory, cost of obtaining a business license
continuing royalty payment
around 5% of monthly gross income
advertising fees
franchisees are required to pay into a national or regional advertising fund
other feels
training staff, providing management expertise when needed
providing computer assistance
advantage of buying a franchise
A proven product or service within
an established market.
An established trademark or
business system.
Franchisor’s training, technical
expertise, and managerial expertise.
An established marketing network.
Franchisor ongoing support.
Availability of financing.
Potential for business growth.
disadvantages of buying a franchise
Cost of the franchise.
Restrictions on creativity.
Duration and nature of the commitment.
Risk of fraud, misunderstandings, or
lack of franchisor commitment.
Problems of termination or transfer.
Poor performance on the part of other
franchisees.
Potential for failure.
what are the seven steps to purchasing a franchise
1. visit several of the franchisor’s outlets
2. meet with a franchise attorney
3. meet with the franchisor and check the franchisor’s references
4. review all the franchise documents with an attorney
5. sing the franchise agreement
6. attend training
7. open the business
what are some 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.
what rule says that franchisors must furnish potential franchisees with written disclosures that provide information about the franchisor, the franchised business, and the franchise relationship.
the federal trade commission, rule 436
made through a lengthy document referred to as
the franchisor disclosure document
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
what are some features that make franchising subject to ethical abuse
1. get rick quick mentality
2. false assumption that buying a franchise is a guarantee of business success
3. conflicts of interest between franchisors and franchisees
international opportunities for franchising are becoming more prevalant for two reasons
1. the market for certain franchised products in the US have become saturated
2. trend toward globalization continues
steps to take before buying a franchise oversease
-Consider the value of the franchisor’s name in the foreign country.
-Get a good lawyer.
-Determine whether the product or service is saleable in the foreign country.
-Find out how much training and support you will receive from the franchisor.

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