Chapter 8 Franchising Flashcards
Define franchising
FASA defines franchising as an arrangement between two parties, where one is selling or granting a privilege and the other is purchasing or receiving the privilege to do business using the name and idea of the first party.
Types of franchising
Business-format franchise
- The franchisor offers the franchisee a clearly defined package of deliverables and services, including a corporate identity, a fully functioning system to conduct business at optimal efficiency, hands on assistance.
E.g.
Quick service restaurants
Automotive services
Home repair services
Types of franchising
Product and trade name franchising
- this is an arrangement in which a supplier supplies a product family to a dealer who may also take on the identity of the franchisor
Franchising models
The development model
-The expansion of the franchisor network
Company-owned unit
- franchises retain at least one unit indefinitely to test market acceptance and iron out all possible glitches
Joint venture
- business set up at arms length with prospective franchisees.
Good for BEE
Advantages of being a franchisee
On going advise, training, research and development.
Reduced capital outlay with increased profits
Brand awareness
Buying power
Infrastructure
Business synergy
Increased success rate
Exit strategy
Disadvantages of being a franchisee
Not completely independent
Restrictions of p/s on offer including price and geographical territory
Payment of ongoing royalties
Maintaining balance of management of restrictions and support between franchisee and franchisor
A damaged, system wide image can result in all franchisees performing badly
The term of franchise agreement is limited and usually not negotiable
Expensive and sometimes non existent franchisor services
Finding most suitable franchisee
FASA
Advertisements
Personal referrals
International franchise and Entrepreneur expo
Evaluating a franchising opportunity
Initial screening
-compile list and familiarize yourself with product and history
Assess the franchises history
- how many sold? Hoe long have they been in operation? Talk to existing franchisees
The product or service
Financial aspects
-is it financially stable ? Investigate
Market research
Change of ownership
Franchisee support
-Determine amount of support available
Franchisee can expect
Operations and procedures manual
Assistance in finding the right franchisee facility
Guidance during establishment of new unit
Franchising a business
- preliminary planning
has the business been profitable for at least one year ?
Are there clearly defined operating procedures and manuals
Business processes have been standardized and simplified
Establish network potential
- identifying target areas for expansion
Financial projections
- dev pro forma financial statements
Setting up franchising fees
- upfront fee
- renewal fee
- ongoing fee ( management service fee or royalty)
5 step franchising recruitment approach
Generate enquiries
-introduce and present yourself at seminars and expos
Set up follow up procedures
Invitation to a meeting
Enter into concrete negotiations
Formal agreement
The franchise package
The disclosure document
The franchise agreement
Operations and procedures manual
Cooling off period
The disclosure document
- FASA requires prospective franchisees to be issuer with a DD.
- responsibility of franchisor to issue but in self interest of the prospective franchisee
- contains:
Directors and executives business experiences
Company’s track record
Description of franchise
Initial investment required
Ongoing payments due
Number of existing franchisees and their success rate
Franchise agreement
The founding document in terms of which the franchisee is licensed to operate the franchised business in accordance to a predetermined business system.
Contains : the parties involved (signatories)
Period of agreement
Set up requirements such as obtaining finance
The rights to sell or transfer ownership
Obligations to franchisor
Terms and conditions to termination of contract
Precise price, rental fees, commissions involved
Operations and procedures manual
The document that ensures operational consistency throughout the network
Should include:
- an introduction to the franchise (general business)
- step-by-step guidelines
- the production equipment
- all details regarding stockholding, systems and controls
- the business operation where the franchisee must meet specific operational requirements
- the accounting and administration system to be used
- the duties of franchisor
- industrial relations
COOLING OFF PERIOD
A cooling off period of 14 days must elapse between the day the Prospective franchisee receives the disclosure document and copy of franchisee agreement and the day on which the binding agreement can be entered into or which franchisor accepts any payment of franchisee .
Favors both franchisee and franchisor as it helps eliminate people who have not planned properly and helps the franchisee by eliminating pressure to buy.
