20140829084355_topic 4 franchising

STUDY GUIDE BMSB5103 Small Business Management

34

Topic 4: Franchising

Learning Outcomes

By the end of this topic, you should be able to:

1. Define the concept of franchising;

2. Identify franchise options;

3. Understand the pros and cons of franchising and the structure of the industry;

4. Describe the process for evaluating a franchise opportunity; and

5. Explain the right way to buy a franchise.

Topic Overview

The franchise business has been around for a long time in various forms and become an increasingly popular form of business system in Malaysia over the last 20 years. Despite the fact that franchising business has been in existence for some time already, it is still relatively new in some other industries. No doubt that franchise business provides one of the business options for new entrepreneurs who wish to get involved in small business and become entrepreneurs. Nowadays, franchise businesses exist in a wide range of fields including food and beverages, fast food, petrol retailing, motor vehicle distribution, real estate sales, personal services and professional practices.


35

Focus Areas and Assigned Readings

Focus Areas Assigned Readings

4.1 Define the concept of franchising

4.2 Advantages and disadvantages of franchising

4.3 Franchising Options and different types of franchising

4.4 Explain the right way to buy a franchise

4.5 Franchising from a viewpoint of franchisee

Moore et al. (2010) Chapter 4, pp 94-95. Extra Readings: Scarborough (2012), Chapter 4, pp 112-113;

Moore et al. (2010) Chapter 4, pp 97,102 Extra Readings: Scarborough (2012), Chapter 4, pp 113-121; Schaper et al. (2011), Chapter 5, pp117-118.

Moore et.al (2010). Chapter 4, pp.95-96 Extra Readings: Scarborough (2012), Chapter 4, pp 113.

Moore et.al (2010). Chapter 4, pp.113-110 Extra Readings: Scarborough (2012), Chapter 4, pp 126-131.

Moore et al. (2010) Chapter 4, pp 95-97 Extra Readings: Schaper et al. (2011), Chapter 5, pp118-120.

Other Sources

1. Small Business School video www.moschowder.com

2. Kerry Miller, “The Restaurant-Failure Myth,” Business Week (Small Business Edition), April 16, 2007 www.businessweek.com/smallbiz/content/apr2007/sb20070416_296932.htm

3. S.C.O.R.E., a small business counselling site www.score.org/template_gallery.html

4. Small Business Association www.sba.gov/sbdc

5. Wall Street Journal site for entrepreneurs www.start-upjournal.com


36

Content Summary

4.1 What Is Franchising?

Franchising – A marketing system involving a legal agreement, whereby the franchisee conducts business according to terms specified by the franchisor.

Franchisor – The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party.

Franchisee – An entrepreneur whose power is limited by a contractual relationship with a franchisor.

4.2 Advantages and Disadvantages of Franchising for Franchisee

Advantages:

(a) Probability of success

(b) Proven line of business

(c) Pre-qualification of franchisee

(d) Training

(e) Franchisor-provided

(f) Financial assistance

(g) Franchisor assistance

(h) Operating benefits

(i) Franchisor-aided

(j) Business SOP etc.

Disadvantages:

(a) Franchise costs

(b) Initial franchise fee

(c) Investment costs

(d) Royalty payments

(e) Advertising costs

(f) Restrictions on business operations

(g) Loss of independence

(h) Lack of franchisor support


37

The major advantages and disadvantages of franchising from the viewpoint of a potential franchisee are as follows:

Advantages Limitations

1. Formal training 1. Cost of a franchise

2. Financial assistance 2. Restrictions on business operations

3. Operating benefits 3. Loss of independence

The major advantages and disadvantages of franchising from the viewpoint of a potential franchisor are as follows:

Advantages Limitations

1. Reduced capital requirements 1. Reduction in control

2. Increased management motivation 2. Sharing of profits

3. Speed of expansions 3. Increasing operational costs

4.3 Types of Franchising

Trade name franchising

Product distribution franchising

Pure or comprehensive business system/format franchising

4.4 Franchising Options

Legal aspects vital and must be understood

Franchise contract – The legal agreement between franchisor and franchisee

Franchise – The privileges conveyed in a franchise contract

Product and trade name franchising – A franchise agreement granting the right to use a widely recognised product or name

Business format franchising – A franchise arrangement whereby the franchisee obtains an entire marketing and management system geared to entrepreneurs

Master licensee – An independent firm or individual acting as a sales agent with the responsibility of finding new franchisees within a specified territory

Multiple-unit ownership – Ownership by a single franchisee of more than one franchise from the same company

Area developers – Individuals or firms that obtain the legal right to open several franchised outlets in a given area


38

Piggyback franchising – The operation of a retail franchise within the physical facilities of a host store

Multi-brand franchising – The operation of several franchise organisations within a single corporate structure

Co-branding – Bringing two franchise brands together under one roof

Trade Names and Trademarks – Success results from intellectual property such as the names that are well known to prospective customers

Operations Manual – Well-developed and thoroughly tested methods of marketing and management

Management Support – Provides a proven track record leading to a probability of success; training programmes may be excellent or poor and should be carefully considered

4.5 Right Way to Buy Franchising

Evaluate personal goal

Research the market

Consider the franchise options

Get a copy of franchisor’s agreement and study it

Talk to existing franchisees

Ask some franchisors deep and serious questions

4.6 Franchisee’s Viewpoint: How to Evaluate a Franchisor

Background of the franchisor

Product/services produced/offered

Management aspects

Territorial right

Existing franchisees

Environmental trends/changes

Study Questions

1. What personality types are best suited to the start-up, purchasing and franchising options, respectively?

2. Identify and describe the parties in a franchising system.


39

3. Discuss the advantages and limitations of franchising from the viewpoints of the potential franchisee and the potential franchisor.

4. Should a prospective franchisee investigate before investing in a franchise? If so, how and in what areas?

5. Based on this case study, answer the questions that follow.

(a) What advice will you give to Noman? Explain your reason.

(b) Do a SWOT analysis of the option you have advised Noman to take.

(c) Should you recommend a franchise, discuss the necessary steps for Noman to follow prior to making the investment.

Start-up or solo franchise?

Noman is 28 years old and is currently at university in his final year of a business degree, majoring in marketing and IT. He has worked in a variety of jobs, including working for a large firm and in a franchised operation, and has spent time overseas. He is engaged and his fiancé is pregnant with their first child. They have recently purchased their first house. You are a business start up consultant and Noman has come to you for guidance, as he is contemplating working for himself after he completes his degree.

Noman tells you that he is interested in two prospective business opportunities. The first one involves purchasing the franchise licence for a home maintenance business that has been operating in his local area for the past five years. Noman knows the current owner (48-year-old Daud), as Noman has worked for him as a part-timer. Noman is interested in this opportunity because Daud has told him that he never invested as much time and money in the franchise as he might have.

The second opportunity Noman tells you about involves him starting up a new business with two fellow university students. Mamat and Lela have invited Noman to be part of their start-up team for a street clothing business. They have already attracted an angel investor and want to launch both a retail and an online store.

Noman has come to you for advice prior to assessing the financial dimensions of each opportunity. He wants to primarily be guided by your assessment of which opportunity best fits his skills and background, as well as his current personal circumstances.

Source: Adapted from Schaper et al (2011)

20140829084355_topic 4 franchising

Documents