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
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.
Limiting sales territories
Requiring site approval for the retail outlet and imposing requirements regarding
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
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
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
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.
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
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
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