Slide 1Slide 2FranchisingSlide 4II. How Franchising Addresses These challengesIII. Types of FranchisingFranchising is UniqueIV. Why Become a Franchisee?V. A Check List Before Signing UpVI. Four Steps To Follow to Improves the Odds of Franchising SuccessVII. The Franchise ContractVIII. Benefits of the Plural FormIX. Franchising ConcernsX. Ongoing ChallengesSlide 15Franchising as a Marketing ChannelMajor TopicsI.Why?II.Before you sign upIII.Franchise Contract*IV.The Plural Form*V.Concerns and ChallengesFranchising12 - 3A system of marketing and distribution where an independent businessperson (the franchisee) is granted the right to market the goods and services of another (the franchisor)©McGraw-Hill Companies, Inc. 2002I. Major Challenges in Service Businesses1. Intangibility of Services: Differentiation through customer contact, decor, atmosphere, and other tangible cues.2. Discretionary nature of service purchases: Convenience by location and hours of operation3. Labor Intensity: Interaction with customer4. Quality control: 5. Focus on operational issues6. Small Size of many service firmsII. How Franchising Addresses These challenges1. Capital generation and higher motivation2. Multiple locations3. Standard systems and procedures4. Training improves labor and management skills5. Marketing is centralized and promotion is system-wide6. Service tangibility is increased.III. Types of Franchising•Product/trade name•Business format12 - 6©McGraw-Hill Companies, Inc. 2002Franchising is Unique12 - 7Combination of Three Relationships:LegalNonbusinessBusiness©McGraw-Hill Companies, Inc. 2002IV. Why Become a Franchisee?12 - 8©McGraw-Hill Companies, Inc. 2002I. The Start-Up PackageI. Site SelectionII. Facility DesignIII. Lease NegotiationIV. Operational ManualsV. Management TrainingVI. Employee TrainingII. Ongoing SupportsI. Field SupervisionII. Management ReportsIII. Merchandising and Promotional MaterialsIV. National AdvertisingV. Auditing and Record KeepingV. A Check List Before Signing Up•Local market conditions•Self-evaluation•Investigating the franchise•Studying the disclosure document•Checking out the disclosures•Questioning earnings claims•Obtaining professional advice•Knowing your legal rights12 - 9©McGraw-Hill Companies, Inc. 2002VI. Four Steps To Follow to Improves the Odds of Franchising Success12 - 10• Nail the Numbers. Franchisors should give franchisees a detailedstatement of financial conditions and expectations no later than twoweeks before any money is scheduled to change hands. • Measure Management. Franchisees should seek and scrutinize disclosure forms that describe at least the last 10 years of work historyof each of the franchisor’s officers and key managers.• Cross-Examine Current Franchisees. Prospective franchisees should obtain a list of all franchisees, including those who have recently left. Randomly calling and visiting several will keep prospects from being steered toward franchisor favorites. Serving several days as an apprentice in one or two stores will yield tremendous insights.• Comb the Contract. Franchise agreements establish control over most aspects of the business. Attorneys with franchising experience should look for inequities in the agreements and help franchisees secure a better deal.©McGraw-Hill Companies, Inc. 2002VII. The Franchise Contract12 - 11©McGraw-Hill Companies, Inc. 2002I. Rights and Responsibilities  Giving and Taking HostagesII. The Payment System: Two-part systemIII. Who will be the Landlord?IV. TerminationVIII. Benefits of the Plural Form12 - 12©McGraw-Hill Companies, Inc. 20021. Modeling2. Socialization3. Ratcheting4. Mutual LearningIX. Franchising Concerns•Franchisees:–Belief in guaranteed profit–Loss of franchise–Encroachment–Loss of independence–Conditions in franchise agreement–Spending promotional dollars–Pricing structures•Franchisors:–Profits–Franchisees that “sit on a market”–Accurate reports of gross sales–Franchisees that reveal trade secrets, strategies, etc.12 - 13©McGraw-Hill Companies, Inc. 2002X. Ongoing Challenges1.Survival2.Gaining and Keeping Cooperative Atmosphere3.Inherent Goal Conflict: Sales Focus versus Profit Focus*TYPICAL SALES-TO-PROFIT RELATIONSHIPS FOR FRANCHISORS AND FRANCHISEESProfitsSa lesFra nchisorFra nchiseeS*B*Adapted from Carmen and Klein