Chapter 15: The Special Case of Franchising
CHAPTER 15
FRANCHISING
LEARNING OBJECTIVES
1. Explain what franchising is and how it differs from other forms of business
ownership.
2. Describe the differences between a product and trademark franchise and a business
format franchise.
3. Explain the differences among an individual franchise agreement, an area
franchise agreement, and a master franchise agreement.
4. Describe the advantages of setting up a franchise system as a means of firm
growth.
5. Identify the rules of thumb for determining when franchising is an appropriate
form of growth for a particular business.
6. Discuss the factors to consider in determining whether owning a franchise is a
good fit for a particular person.
7. Identify the costs associated with buying a franchise.
8. Discuss the advantages and disadvantages of buying a franchise.
9. Identify the common mistakes franchise buyers make.
10. Describe the purpose of the Uniform Franchise Offering Circular.
CHAPTER OVERVIEW
This chapter focuses on franchising. The chapter begins by discussing what franchising
is and how it works. The distinction between a product and trademark franchise and a
business format franchise is explained. The different types of franchise agreements (i.e.,
individual franchise agreement, area franchise agreement, master franchise agreement)
are also explained and discussed.
The middle portion of the chapter looks at franchising from both the franchisor and the
franchisee’s point of view. An emphasis is placed on when franchising represents an
appropriate growth strategy and the steps to franchising a business. An emphasis is also
placed on how an individual knows if franchising is a good choice for him or her. The
common misconceptions about franchising are also discussed.
The chapter ends by talking about the legal aspects of franchising and the future of
franchising in the U.S. and abroad.
CHAPTER OUTLINE
I. What is Franchising and How Does It Work?
A. What is Franchising?
135
,Chapter 15: The Special Case of Franchising
B. How Does Franchising Work?
II. Establishing a Franchise System
A. When to Franchise
B. Steps to Franchising a Business
C. Selecting and Developing Effective Franchisees
D. Advantages and Disadvantages of Establishing a Franchise System
III. Buying a Franchise
A. Is Franchising Right for You?
B. The Cost of a Franchise
C. Finding a Franchise
D. Advantages and Disadvantages of Buying a Franchise
E. Steps in Purchasing a Franchise
F. Watch Out! Common Misconceptions About Franchising
IV. Legal Aspects of the Franchise Relationship
A. Federal Rules and Regulations
B. State Rules and Regulations
V. More About Franchising
A. Franchise Associations
B. Franchise Ethics
C. International Franchising
D. The Future of Franchising
CHAPTER NOTES
I. What is Franchising, and How Does It Work?
1. Franchising is a form of business organization in which a firm that already
has a successful product or service (franchisor) licenses its trademark and
method of doing business to another business (franchisee), in exchange for an
initial franchise fee and an ongoing royalty.
2. Some franchises are established firms, while others are first-time enterprises
being launched by entrepreneurs.
A. What is Franchising?
1. The word “franchise” comes from an old dialect of French, and means
“privilege” or “freedom.”
2. Many of the most familiar franchises in the United States, including
Kentucky Fried Chicken (1952), McDonald’s (1955), and H&R Block
136
, Chapter 15: The Special Case of Franchising
(1958), started in the post-World War II era of the 1940s and 1950s.
B. How Does Franchising Work?
1. There is nothing magical about franchising. It is a form of business growth
that allows a business to get its products or services to market through the
efforts of business partners, or “franchisees.”
2. There are two distinctly different types of franchise systems: the product
and trademark franchise and the business format franchise.
a. A product and trademark franchise is an arrangement under which the
franchisor grants to the franchisee the right to buy its products and use
its trade name.
b. The second type of franchise, the business format franchise, is by far the
more popular approach to franchising, and is more commonly used by
entrepreneurial firms. In a business format franchise, the franchisor
provides a formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
i. Fast-food restaurants, convenience stores, and consulting services
are well-known examples of business format franchises.
3. For both product and trademark franchises and business format franchises,
the franchisor-franchisee relationship takes one of three forms of a
franchise agreement.
a. Individual franchise agreement. The most common type of franchise
agreement is an individual franchise agreement. This type of
agreement involves the sale of a single franchise for a specific
location.
b. Area franchise agreement. An area franchise agreement allows a
franchisee to own and operate a specific number of outlets in a particular
geographic area.
c. Master franchise agreement. Finally, a master franchise agreement is
similar to an area franchise agreement, with one major difference. A
master franchisee, in addition to having the right to open and operate
a specific number of locations in a particular area, also has the right
to offer and sell the franchise to other people in the area.
4. An individual who owns and operates more than one outlet of the same
franchise is referred to as a multiple-unit franchisee.
137
, Chapter 15: The Special Case of Franchising
II. Establishing a Franchise System
1. Establishing a franchise system should be approached carefully and
deliberately. An entrepreneur should be aware that, over the years, a
number of fraudulent franchise organizations have come and gone and
left financially ruined franchisees in their wake.
2. Because of this, franchising is a fairly heavily regulated form of business
expansion.
3. Despite these challenges, franchising is a popular form of expansion.
A. When to Franchise
1. In order for a company to grow, it has at least two options. One alternative
is to build company-owned outlets. However, this choice presents a
company with the challenge of raising the money to fund its expansion.
2. Franchising is another growth alternative available to firms. Franchising
is perhaps especially attractive to young firms, in that the majority of the
money needed for expansion comes from the franchisees.
3. In some instances, franchising is simply not appropriate. For example,
franchising works for Burger King, but would not work for Wal-Mart,
B. Steps to Franchising a Business
1. The steps to franchising a business are shown in Figure 15.1 in the
textbook. These steps include:
Step 1: Develop a franchise business plan;
Step 2: Get professional advice;
Step 3: Conduct an intellectual property audit;
Step 4: Develop franchise documents;
Step 5: Prepare operating manuals;
Step 6: Plan an advertising strategy and a franchise training program;
Step 7: Put together a team for opening new franchise units;
Step 8: Plan a strategy for solicitating prospective franchisees;
Step 9: Help franchisees with site selection and the grand openings of
their franchise outlets.
C. Selecting and Developing Effective Franchisees
1. Table 15.1 in the textbook contains a list of the qualities that franchisors
look for in prospective franchisees, and the steps that franchisors can take
to
138
CHAPTER 15
FRANCHISING
LEARNING OBJECTIVES
1. Explain what franchising is and how it differs from other forms of business
ownership.
2. Describe the differences between a product and trademark franchise and a business
format franchise.
3. Explain the differences among an individual franchise agreement, an area
franchise agreement, and a master franchise agreement.
4. Describe the advantages of setting up a franchise system as a means of firm
growth.
5. Identify the rules of thumb for determining when franchising is an appropriate
form of growth for a particular business.
6. Discuss the factors to consider in determining whether owning a franchise is a
good fit for a particular person.
7. Identify the costs associated with buying a franchise.
8. Discuss the advantages and disadvantages of buying a franchise.
9. Identify the common mistakes franchise buyers make.
10. Describe the purpose of the Uniform Franchise Offering Circular.
CHAPTER OVERVIEW
This chapter focuses on franchising. The chapter begins by discussing what franchising
is and how it works. The distinction between a product and trademark franchise and a
business format franchise is explained. The different types of franchise agreements (i.e.,
individual franchise agreement, area franchise agreement, master franchise agreement)
are also explained and discussed.
The middle portion of the chapter looks at franchising from both the franchisor and the
franchisee’s point of view. An emphasis is placed on when franchising represents an
appropriate growth strategy and the steps to franchising a business. An emphasis is also
placed on how an individual knows if franchising is a good choice for him or her. The
common misconceptions about franchising are also discussed.
The chapter ends by talking about the legal aspects of franchising and the future of
franchising in the U.S. and abroad.
CHAPTER OUTLINE
I. What is Franchising and How Does It Work?
A. What is Franchising?
135
,Chapter 15: The Special Case of Franchising
B. How Does Franchising Work?
II. Establishing a Franchise System
A. When to Franchise
B. Steps to Franchising a Business
C. Selecting and Developing Effective Franchisees
D. Advantages and Disadvantages of Establishing a Franchise System
III. Buying a Franchise
A. Is Franchising Right for You?
B. The Cost of a Franchise
C. Finding a Franchise
D. Advantages and Disadvantages of Buying a Franchise
E. Steps in Purchasing a Franchise
F. Watch Out! Common Misconceptions About Franchising
IV. Legal Aspects of the Franchise Relationship
A. Federal Rules and Regulations
B. State Rules and Regulations
V. More About Franchising
A. Franchise Associations
B. Franchise Ethics
C. International Franchising
D. The Future of Franchising
CHAPTER NOTES
I. What is Franchising, and How Does It Work?
1. Franchising is a form of business organization in which a firm that already
has a successful product or service (franchisor) licenses its trademark and
method of doing business to another business (franchisee), in exchange for an
initial franchise fee and an ongoing royalty.
2. Some franchises are established firms, while others are first-time enterprises
being launched by entrepreneurs.
A. What is Franchising?
1. The word “franchise” comes from an old dialect of French, and means
“privilege” or “freedom.”
2. Many of the most familiar franchises in the United States, including
Kentucky Fried Chicken (1952), McDonald’s (1955), and H&R Block
136
, Chapter 15: The Special Case of Franchising
(1958), started in the post-World War II era of the 1940s and 1950s.
B. How Does Franchising Work?
1. There is nothing magical about franchising. It is a form of business growth
that allows a business to get its products or services to market through the
efforts of business partners, or “franchisees.”
2. There are two distinctly different types of franchise systems: the product
and trademark franchise and the business format franchise.
a. A product and trademark franchise is an arrangement under which the
franchisor grants to the franchisee the right to buy its products and use
its trade name.
b. The second type of franchise, the business format franchise, is by far the
more popular approach to franchising, and is more commonly used by
entrepreneurial firms. In a business format franchise, the franchisor
provides a formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
i. Fast-food restaurants, convenience stores, and consulting services
are well-known examples of business format franchises.
3. For both product and trademark franchises and business format franchises,
the franchisor-franchisee relationship takes one of three forms of a
franchise agreement.
a. Individual franchise agreement. The most common type of franchise
agreement is an individual franchise agreement. This type of
agreement involves the sale of a single franchise for a specific
location.
b. Area franchise agreement. An area franchise agreement allows a
franchisee to own and operate a specific number of outlets in a particular
geographic area.
c. Master franchise agreement. Finally, a master franchise agreement is
similar to an area franchise agreement, with one major difference. A
master franchisee, in addition to having the right to open and operate
a specific number of locations in a particular area, also has the right
to offer and sell the franchise to other people in the area.
4. An individual who owns and operates more than one outlet of the same
franchise is referred to as a multiple-unit franchisee.
137
, Chapter 15: The Special Case of Franchising
II. Establishing a Franchise System
1. Establishing a franchise system should be approached carefully and
deliberately. An entrepreneur should be aware that, over the years, a
number of fraudulent franchise organizations have come and gone and
left financially ruined franchisees in their wake.
2. Because of this, franchising is a fairly heavily regulated form of business
expansion.
3. Despite these challenges, franchising is a popular form of expansion.
A. When to Franchise
1. In order for a company to grow, it has at least two options. One alternative
is to build company-owned outlets. However, this choice presents a
company with the challenge of raising the money to fund its expansion.
2. Franchising is another growth alternative available to firms. Franchising
is perhaps especially attractive to young firms, in that the majority of the
money needed for expansion comes from the franchisees.
3. In some instances, franchising is simply not appropriate. For example,
franchising works for Burger King, but would not work for Wal-Mart,
B. Steps to Franchising a Business
1. The steps to franchising a business are shown in Figure 15.1 in the
textbook. These steps include:
Step 1: Develop a franchise business plan;
Step 2: Get professional advice;
Step 3: Conduct an intellectual property audit;
Step 4: Develop franchise documents;
Step 5: Prepare operating manuals;
Step 6: Plan an advertising strategy and a franchise training program;
Step 7: Put together a team for opening new franchise units;
Step 8: Plan a strategy for solicitating prospective franchisees;
Step 9: Help franchisees with site selection and the grand openings of
their franchise outlets.
C. Selecting and Developing Effective Franchisees
1. Table 15.1 in the textbook contains a list of the qualities that franchisors
look for in prospective franchisees, and the steps that franchisors can take
to
138
