Franchise Recruitment Manual Section 1: An Introduction to Franchising What is Franchising?
Franchising has become a driving force to the Canadian economy and economies around the world, offering proven business structures for entrepreneurs to deliver goods and services locally with the strength of national brand names and the processes behind them. A franchise organization combines the drive and ambition of independent business owners with the experience and expertise of a larger company. The result can lead to a rewarding partnership for both participants.
A Basic Understanding of Franchising It helps to begin with an understanding of what ‘franchising’ really means. In basic terms, franchising is a form of distribution or marketing.
· It is a marketing system for creating an image in the eyes of current and future customers about how the company’s products and/or services can satisfy their needs.
· It is a method of doing business by which the franchisee is granted the right to offer, sell or distribute goods or services under a marketing plan or system prescribed in substantial part by the franchisor.
· It is a strategy for successfully penetrating, developing, dominating and achieving a disproportionately large market share.
The power of franchising is created when the franchisor and franchisees work together as a team with mutual commitment to market share.
What is a Franchise?
A franchise is the agreement or license between two legally independent parties which gives:
· A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)
· The franchisee the right to use the product or service using the operating methods of the franchisor · The franchisee the obligation to pay the franchisor fees for these rights · The franchisor the obligation to provide rights and support to franchisees The franchisor is the company that owns and controls the franchise system and grants the license to operate the franchise according to a certain method, and with the products and/or services that have been developed by the franchisor.
The franchisee is the company or person who pays the franchisor for the franchise and the right to use the system.
The franchise is the right to use the trademarks and systems, and to promote the products and/or services.
Types of Franchises The term “franchise” is used to describe several different types of agreements, although its current definition places the emphasis on the continuing relationship between the franchisor and the franchisee.
There are two main types of franchises:
Product Distribution Business Format Product Distribution Early franchises were generally “Trade Name” franchises. The franchisor allowed the franchisee to distribute goods utilizing the franchisor’s trademark. This type of licensing arrangement includes such business as car and truck dealers, soft drink bottlers, home entertainment stores and service stations.
Generally, the franchisee was required to conform to certain standards relating to the quality of the product or service, but apart from that he or she was free to carry on business without any control or guidance from the franchisor.
Although product distribution franchising represents the largest percentage of total retail sales, most franchises available today are business format opportunities.
Business Format Business format franchising on the other hand not only uses the franchisor’s product, service and trademark, but also provides the complete method for running the business itself, such as the marketing plan and operations manuals.
USA TODAY reported that the ten most popular franchise opportunities are in these industries; Ø Fast Food Ø Service Ø Restaurants Ø Building and Construction Ø Business Services Ø Retail Ø Automotive Ø Maintenance Ø Retail - Food Ø Lodging Fast food franchises often combine product and business-format franchising. In fact, most of today’s franchises combine product and business formats.
Types of Franchise Arrangements Because so many franchisors, industries and range of investments are possible, there are different types of arrangements available to a business owner.
There are essentially two types of franchising arrangements:
· Single-Unit (direct) franchise · Multi-Unit franchise § Area Development § Master Franchising (Sub-Franchising)
Single-Unit Franchises A Single-Unit (direct) franchise is an agreement where the franchisor grants a franchisee the rights to own and operate one franchise unit. This is the simplest and most common type of franchise. It is possible, however, for a franchisee to purchase additional single-unit franchises once the original franchise unit begins to prosper. This would then be considered a multiple single-unit franchise.
Area Development Franchises Under an area development franchise, a franchisee has the right to open more than one unit during a specific time-frame, within a specified area. For example, a franchisee might agree to open 10 units in a five year time frame within a specified territory.
Master Franchise Agreements A master franchise agreement gives the franchisee more rights and more obligations than an area development agreement. I addition to having the right to open and operate a certain number of units in a defined area, the master franchisee also has the right to sell franchises to other people within the territory, know as sub-franchises. The master franchisee takes over many of the tasks, duties and benefits of the franchisor, such as providing training and support and receives a portion of the fees and royalties.
Conversion Franchising Conversion franchising is simply a different form of business-format franchising. This type of franchising is most commonly applied in industries where many independent businesses are firmly established in the marketplace e.g. real estate and travel agencies.
In this form of franchising, the franchisor seeks out an existing independent operator and offers that operator an opportunity to use its trade name and become part of a larger (National or regional) network. The franchisee benefits from such areas as:
· Increased consumer recognition · Staff training programs · Purchasing power · Corporate referrals · Ongoing support and assistance The Alternatives to Franchising Licensing Licensing allows a licensee to pay for the rights to use a particular trademark. The primary difference between simple trademark licensing and package franchising is in the type and degree of control exercised by the franchisor and licensor. The trademark licensor is interested in the quality of the final goods produced by the licensee, not in the licensee's method of operation. The kind of control he exercises is thus likely to be limited to "passive" control such as inspection of produced goods and testing to insure that quality standards are being met.
Package (or "business format") franchising, on the other hand, involves active control over the franchisee's "method of operation": The location of the business, the hours of operation, the management of the business, and other business matters.
Franchising systems are designed to enhance the goodwill (value) of the franchised product or service. A trademark licensed to numerous franchisees is hopefully enhanced by multiplied sales of the products or services, wide-spread common advertising and the other beneficial characteristics that result in increased name recognition. In order to insure that the increased name recognition is accomplished in a positive manner, it is necessary to establish controls over the operations of the licensee and the quality of the service or product. In doing so, there are basically two choices:
(1) Control only the quality of the product or service; or (2) Control that quality and also establish controls on the operation of the licensee's business.
If only the quality of the product or service is controlled, the arrangement is a license, and not subject to the franchise rules.
Distributorship In a distributorship, arrangement, the manufacturer supplies the distributor with products at a wholesale price. The distributor then resells the products to dealers, or retails them directly to the general public.
A distributor differs from a franchise in that royalties are not normally paid to the manufacturer as a percentage of gross sales. The manufacturer does not prescribe the method for doing business, but may provide training to improve selling techniques and product knowledge, and may also give advertising assistance in the form of cooperative advertising allowances.
Dealership A dealership is similar to a distributorship, except that the dealer normally only sells directly to the general public. The dealer is not usually restricted to carrying one product line, as is often the case in franchising or distribution.
Distribution and dealership agreements are traditionally shorter than franchise agreements. They are typically a year, compared to franchise agreements which are normally a minimum of five years, and are renewed by mutual agreement.
The Pros and Cons of Buying a Franchise Pros of Franchising Reduced Risk Franchising does not guarantee success, but a good franchise should help reduce the chances of failure.
A Proven System With a tried and tested operating system, the franchisee loses the obstacles and gains the opportunities. A franchisee should receive a completely proven system that includes initial training, opening assistance, accounting systems, established suppliers, manuals and use of the trademarks. The all important "learning curve" helps prevent the franchisee from repeating previous mistakes and provides information on inventory levels, store design, competition, pricing structure and operational data drawn from the entire system.
Easier Access to Financing and Reduced Cash Requirements Financial institutions prefer to lend to established franchised systems because of their higher success rate. The consumer awareness created by national or regional name recognition can reduce the costs of grand-opening promotional activity and advertising start-up. As well, the purchasing power of the franchisor can reduce the franchisee's initial outlay for equipment and supplies.
Purchasing Power Collective purchasing power on products, supplies, extended health and insurance benefits, equipment and advertising can easily offset any ongoing royalties paid by the franchisee.
Pre-Opening Support Franchises offer important pre-opening support in several areas including:
· Site Selection · Assistance with lease negotiation · Design and construction · Financing (in some cases)
· Training · Grand Opening Promotion Ongoing Support Franchisors offer ongoing support in such areas as:
· Training · National and regional advertising · Ongoing supervision and management support · Access to bulk purchasing Site Selection Assistance Franchisors can provide expert site selection assistance based on their operating experience and demographic knowledge. Landlords and developers prefer to deal with someone who has an established track record. This enables franchisees, as part of an established franchise system to obtain locations in major malls and other developments that otherwise would not be available to them as an independent operator.
Advertising Clout Most independent businesses cannot afford the services of advertising and promotional experts. Consequently, their advertising is often poorly conceived and inconsistent. They also cannot afford to invest in the level of advertising required to maintain a commanding presence in the marketplace. In a franchise system, the advertising cost is spread over many units enabling the franchisor to achieve economies of scale. This also allows the franchisee to create well-conceived promotional campaigns and place the advertising in the most effective medium.
Building Equity Because of the national or regional name recognition, and territorial exclusivity, a franchised business should sell faster and for a higher value than an independent business. A buyer is often motivated to buy the franchised business for the same reasons as the original franchisee and may perceive a higher value associated with a recognized name and system.
Stress Reduction The ability to operate more effectively and efficiently can relieve many pressures of business. Systems that control job scheduling, cash flow and inventory levels allow the franchisee to run the business instead of the business running them.
Cons of Franchising Loss of Independence The loss of independence can be viewed negatively by some franchisees. Although most franchisees invest in a franchise because they want the guidance of the franchisor, the moment they enter the franchise system they want to make changes. Unless you are capable of working within a system and can accept a certain amount of regimentation, you should think long and hard before entering into a franchise relationship. One of the greatest strengths of franchising is consistency amongst units, and with consistency must come compliance.
Franchisor's Failure to Perform Some franchisors don't deliver what they promise for a couple of reasons. A common reason for failure is the franchisor’s shortage of available capital, which can be caused by:
(a) The franchisor’s unrealistic franchise sales projections; (b) The franchisor underestimating the expenses associated with the development of the franchise system;
(c) The franchisor’s failure to meet franchise sales projections, or (d) High franchisee attrition.
Alternatively, it could be that the franchisor is just not capable of providing the support and assistance, or does not possess the ability to operate a franchise organization.
Misunderstanding the Franchise Agreement Confusion over the interpretation of certain aspects of the franchise agreement can result in a problem with either the franchisor or the franchisee. A potential franchisee has probably never encountered a document anywhere near similar to a franchise agreement. A franchise agreement requires careful explanation and scrutiny.
Misrepresentation by the Franchisor Misrepresentation by the franchisor can be intentional or unintentional. Projections of income and expense can be provided to the franchisee in good faith, but may turn out to be inappropriate for the location because of the franchisor's inexperience or unfamiliarity with the area's demographics. Conversely, the figures may be total fabrications simply to get the franchisee to sign on the dotted line and hand over the initial franchise fee.
Caveat Emptor (let the buyer beware), applies to franchising as it does to any consumer purchase or investment; however, consumers are often their own worst enemy, choosing to ignore cautionary advice and warning signals, and basing their investment decision on emotion without balancing it with logic.
Payment of Fees The franchisee typically pays an initial fee for being granted the franchise, using the system, and receiving initial training. Typically, single-unit franchise fees are in the range of $25,000 to $35,000. The initial fee is paid only once during the term of the agreement; however, franchisors may charge a nominal renewal fee at the commencement of each new term of the agreement. The typical term for a franchise agreement is 5 or 10 years but may vary to coincide with the terms of a lease. Franchisors sometimes charge a site selection fee of $5,000 or more, in addition to the initial fee, which offsets their costs of site selection and lease negotiation.
In addition to the initial fee, some form of ongoing royalty is paid by the franchisee to the franchisor. In most instances, the royalty is based on a percentage of the Franchisee’s gross sales, which vary from1% to10%, or even higher, with a median range of 3% to 6%; however, units with high sales volumes often pay 1% or 2% less.
Franchisees are often also required to contribute to a national or regional advertising fund, which is in addition to any requirement that the franchisee invests a minimum amount on local advertising.
Franchising in Canada · Canada has the second largest franchise industry in the world, led only by the U.S.
· Franchising represents over $100 billion in sales annually and continues to grow.
· Franchising employs over 1.5 million people in Canada.
· A Canadian franchise opens every 2 hours 365 days a year.
· Total franchise units: 75,809 · Average franchise fee: $25,000
· Average franchisee investment: $166,600
· Of all the franchises opened in Canada within the last 5 years, 86% are under the same ownership and 97% are still in business.
To learn more about Canadian Franchise Opportunities visit www.betheboss.ca
Franchise Recruitment Manual: An intro to franchising - To learn more about this author, visit Rob Lancit's Website.
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