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Chapter 4

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Administrative Studies
ADMS 3920
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15 September 2012 CHAPTER 4: FRANCHISING AND BUYOUTS Franchising – a marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to terms specified by the franchisor. Franchisee is an entrepreneur whose power is limited by a contractual relationship with a franchising organization. Franchisor is the party in a franchise contract who specifies the methods to be followed and the terms to be met by the other party. Franchise Contract – the legal agreement between franchisor and franchisee. Franchise – the privileges in a franchise contract. Product and trade name franchising – a franchise relationship granting the right to use a widely recognized product or name. E.g. gasoline service stations, automobile dealerships, and soft-drink bottlers Business-format franchising – an agreement whereby the franchisee obtains an entire marketing system and ongoing guidance from the franchisor. E.g. Fast food restaurants, hotels and motels, and business services. A master franchisor is a firm or individual that purchases the rights to a franchise brand and develops it within a specific geographic region. Master franchisors are responsible for finding new franchisees within a specified territory. Multiple Usage Ownership – a situation in which a franchisee owns more than one franchise from the same company. Some of these franchisees are area developers – individuals or firms that agree to develop a specific number of locations within a specific geographic area and time period. Master Franchise – a firm or individual that purchases the rights to a franchise brand and then acts as a sales agent with the responsibility for finding new franchisees within that specified territory. Piggyback Franchising – the operation of a retail franchise within the physical facilities of a host store. E.g. McDonald’s Restaurant inside Wal-Mart PROS AND CONS OF A FRANCHISE 15 September 2012 The costs associated with a franchise: 1. Initial Franchise Fee – the total cost of a franchise begins with an initial franchise fee, which may range for hundreds to thousands of dollars. 2. Cash Investment – Costs involved in renting or building an outlet and stocking it with inventory. Also insurance premiums and legal fees must be considered. 3. Royalty Payments – percentage of sales charged annually by the franchisor. 4. Advertising Costs – Many franchisors require a contribution by franchisees to an advertising fund to promote the franchise. Imposed Restrictions:  Limiting sales territories  Requiring site approval for the retail outlet and imposing requirements regarding outlet appearance  Limiting goods and services offered for sale  Limiting the resale of the franchise without the franchisor’s permission  Limiting advertising and hours of operation EVALUATING FRANCHISE OPPORTUNITIES The task of initially locating an appropriate franchise has become much easier. Personal observation and newspaper advertisements are few of the best sources to look for an appropriate franchise opportunity. Websites and Internet is also a good option. INVESTIGATING THE POTENTIAL FRANCHISE The entrepreneur’s first step in evaluating a franchising opportunity should be to tap into sources of information: 1. The Franchisors Themselves – a franchisee can correspond with the franchisor directly, or through reading service cards that are provided by most business magazines. Financial data estimates are provided in the information packet sent initially by the franchisor. After an entrepreneur has expressed further interest in a franchise by completing an application form, a meeting is usually arranged to discuss the disclosure document. A disclosure document is a detailed statement of information such as the franchisor’s finances, experience, size, and involvement in litigation as well as any restrictions, costs, and provisions for renewal or cancellation of the franchise. 2. Current or Previous Franchisees – a meeting or a simple phone call can provide you with the viewpoint of someone in the position you are considering. 3. Independent, third party sources – provincial or federal governments are valuable source of franchising information. The International Franchise Association (IFA) and The Canadian Franchise Association (CFA) offer a number of publication and 15 September 2012 resources to assist individuals interested in pursuing franchise opportunities. Various magazines and websites also offer valuable information. SELLING A FRANCHISE Why would a businessperson wish to become a franchisor? At least three benefits can be identified: 1. Reduction of Capital Requirements – Franchising allows and owner to expand without spending their own capital. 2. Increases in management motivation – Franchisees are probably more highly motivated than salaried employees because of profit incentives. 3. Speed of expansion – franchising lets a business enter many more markets much faster than it could using only its own resources. Drawbacks? 1. Reduction in Control 2. Sharing of Profits with the franchisee 3. Increase in operating support costs money to the franchisor (training and assistance) UNDERSTANDING THE FRANCHISOR/FRANCHISEE RELATIONSHIPS 1. Legal counsel must be retained & consulted 2. Discuss franchise proposal with banker 3. Seek a professional accounting firm advice 4. Closely consider how franchisor behaves (should be open, considerate and reliable) 5. Franchisee should be wary of contract provisions that contain overly strict cancellation policies Ontario enacted Bill 33, the Author Wishart Act 2000, on Januray 1, 2001. The act clearly states the responsibilities of the franchisor to provide presale disclosure of all materials and financial statements. Franchisors are required to provide a franchise prospectus that includes a copy of the franchise agreement, the financial statements of the franchisor, and a statement of obligations of both the franchisee and franchisor. 15 September 2012 The possibility of fraudulent schemes requires alertness on the part of prospective franchisees. Only careful investigation of the company and the product can distinguish between fraudulent operators and legitimate franchising opportunities. BUYING AN EXISTING BUSINESS Entrepreneurs can choose to buy an established business as an alternative to starting from scratch, buying a franchise, or joining a family business. The reasons for buying an existing business can be condensed into three general categories: 1. To reduce some of the uncertainties and unknowns that must be faced when starting a business from scratch. 2. To acquire a business with ongoing operations and already established relationships. 3. To obtain an ongoing business at a bargain price – a price below what it would cost to start a new business. Matchmakers – specialized brokers who bring together buyers and sellers of businesses. Sources of lead
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