22 - Why franchise? Flashcards
What is a franchise?
A franchise is a right granted to an individual or group to market a company’s goods or services within a certain territory or location.
The franchisor grants the right and the franchisee acquires the right under a detailed contract.
What does the franchisee receive from the franchisor?
The franchisee receives an operating manual, extensive training, operational guidance, brand awareness, and support in the early days.
In return for a franchise sale fee.
What are the initial investment costs for a franchisee?
Investment costs can range from under US $25,000 for a cleaning franchise to over $1.5 million for a stand-alone fast food location.
Costs include leasehold premises, shop conversion, equipment, and working capital.
True or False: Franchisees have to raise their own start-up and working capital.
True.
Franchisees often find it easier to raise capital by presenting their business as a franchise.
What is the role of the franchisor in a franchise system?
The franchisor sells a proven business model and provides support while the franchisee operates the business.
The franchisor also earns ongoing royalty fees.
What is meant by ‘OPM’ in franchising?
‘OPM’ stands for Other People’s Money, referring to how franchise systems enable vendors to expand quickly without needing to raise additional capital themselves.
What is a key risk for franchisors in franchise systems?
Franchisors must ensure brand protection from poor or dishonest operators and manage compliance checks.
This includes regular visits to assess franchisee performance.
What are exclusive territories in a franchise agreement?
Exclusive territories grant a franchisee the right to market in a defined area without competition from other franchisees.
Fill in the blank: Franchisors cannot make claims about the potential _______ of a franchise opportunity.
profitability.
What is the purpose of the Franchise Disclosure Document?
To provide full disclosure of all pertinent facts about the franchise opportunity to potential franchisees.
This is mandated by legislation, such as the Federal Trade Commission in the US.
Why is the contract important in franchise systems?
The entire relationship between franchisors and franchisees is governed by contract, detailing rights, obligations, and operational standards.
What are two ways a franchisor can exit from a franchise channel?
- Agreeing to a compensation payment with each franchisee.
- Buying up the franchisees and operating them as a company-owned channel.
What are company-owned stores used for in franchise systems?
- Establishing the franchisee business model
- Fine-tuning operating processes
- Demonstrating best practices
- Testing new products
- Providing early franchisee applicants with proven businesses.
What types of business models are more suited to franchising?
Certain models are better suited to franchising, but specifics are not detailed in the content provided.
What is a potential consequence of having unhappy franchisees?
Unhappy franchisees can lead to reduced sales, negative brand perception, and difficulty in attracting new franchisees.
True or False: The assessment process for franchisees is focused on skills and experience.
False.
It focuses on business acumen, entrepreneurial drive, and willingness to conform to the brand.
What is the primary purpose of a company-owned store in Subway?
Used for research and development purposes
Subway has only one company-owned store among its 33,000-plus stores.
What are some sectors where franchised systems operate?
Franchised systems operate in a variety of sectors
The complete list can be found in Figure 22.2.
What is a critical characteristic of a franchise-ready business?
Consistency of offering is critical to the brand
Consistent customer experience is essential for brand reliability.
Give an example of a franchise that relies on a consistent offering.
McDonald’s
Customers expect the same food and service quality at every location.
What does it mean for a franchise to not depend on advanced skills?
Most franchised operations can be run with basic skills
Many franchises advertise ‘no prior experience required’.
What is the typical duration of initial training courses for franchisees?
Two to four weeks
Skills can be learned quickly through training and repetition.
What is essential for scaling a business through franchising?
A strong sustainable demand for the concept
Core offerings must be in high demand.
What are the three key dimensions of a successful franchise business model?
- Profitable net profit after costs
- Positive cash flow from operations
- Quick payback of the original investment
These dimensions ensure the viability of the franchise.
