Lesson 1 FRANCHISING Introduction Converted 1

Introduction
 What is a franchise?
 What are common franchise terms?
 What are the alternatives to franchising?
 What are the advantages and disadvantages
of owning a franchise?
 What are the legal issues in franchising?
 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 has the right to market a product
or service using the operating methods of the
franchisor
• the franchisee has the obligation to pay the
franchisor fees for these rights
• the franchisor has the obligation to provide
rights and support to franchisees
 Product distribution franchises simply sell the franchisor’s products and
are supplier-dealer relationships.
 In product distribution franchising, the franchisor licenses its trademark
and logo to the franchisees but typically does not provide them with an
entire system for running their business. The industries where you most
often find this type of franchising are soft drink distributors, automobile
dealers and gas stations.
 Some familiar product distribution franchises include:
 ✔ Pepsi ✔ Ford Motor Company ✔Apple ✔Shell Gasoline
 A manufacturer grants a franchisee the rights to sell its products, but
with no method of doing business.
 Although product distribution franchising represents the largest
percentage of total retail sales, most franchises available today are
business format opportunities.
 Business format franchises, on the other hand, not only use a
franchisor’s product, service and trademark, but also the complete
method to conduct the business itself, such as the marketing plan and
operations manuals. Business format franchises are the most common
type of franchise.
 The 10 most popular franchising opportunities are in these industries:

◆ fast food
◆ retail
◆ service
◆ automotive
◆ restaurants
◆ maintenance
◆ building and construction
◆ retail—food
◆ business services
◆ lodging
 Because so many franchisors, industries and range of
investments are possible, there are different types of
franchise arrangements available to a business owner
Two types of franchising arrangements:

✔ single-unit (direct-unit) franchise
✔ multi-unit franchise:
• area development
• master franchise (sub-franchising)
 A single-unit (direct-unit) franchise is an agreement where
the franchisor grants a franchisee the rights to open 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 is then considered a multiple, single-unit
relationship.
 A multi-unit franchise is an agreement where the franchisor grants a franchisee the rights to
open and operate MORE THAN ONE unit.
There are two ways a multi-unit franchise can be achieved:
✔ an area development franchise or

✔ a master franchise.
Under an area development franchise, a franchisee has the right to open more than one unit
during a specific time, within a specified area. For example, a franchisee may agree to open 5
units over a five year period in a specified territory.
A master franchise agreement gives the franchisee more rights than an area development
agreement. In addition to having the right and obligation 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, known as sub-franchises. Therefore, the master franchisee
takes over many of the tasks, duties and benefits of the franchisor, such as providing support
and training, as well as receiving fees and royalties.
 business format franchise – this type of franchise includes not
only a product, service and trademark, but also the complete
method to conduct the business itself, such as the marketing
plan and operations manuals
 disclosure statement – also known as the UFOC, or Uniform

Franchise Offering Circular, the disclosure document provides
information about the franchisor and franchise system
 franchise – a license that describes the relationship between

the franchisor and franchisee including use of trademarks,
fees, support and control
 franchise agreement – the legal, written contract between the

franchisor and franchisee which tells each party what each is
supposed to do
 franchisee – the person or company that gets the right from the franchisor to do
business under the franchisor’s trademark or trade name
 franchising – a method of business expansion characterized by a trademark

license, payment of fees, and significant assistance and/or control
 franchisor – the person or company that grants the franchisee the right to do
business under their trademark or trade name
 product distribution franchise – a franchise where the franchisee simply sells the
franchisor’s products without using the franchisor’s method of conducting
business
 royalty – the regular payment made by the franchisee to the franchisor, usually
based on a percentage of the franchisee’s gross sales
 trademark – the franchisor’s identifying marks, brand name and logo that are
licensed to the franchisee
 UFOC – the Uniform Franchise Offering Circular, UFOC, is one format for the
disclosure document which provides information about the franchisor and
franchise system to the prospective franchisee
 Royalties - Franchise royalties are usually collected by your franchisor on a

monthly basis. Like marketing fees, these fees are based on a percentage of your
revenue. But there's one major difference; the percentages are higher.
Franchise royalties range from 4% of your revenue all the way up to 12% or more
 In addition to franchising, there are two other popular
methods by which businesses expand their market and
distribution channels:
 ✔ distributorships
 ✔ licensing
 has a contractual relationship with the supplier
 buys from the supplier in bulk and sells in smaller
quantities
 is familiar with local markets and customers
 may do business with many companies, more than just the
supplier/producer
 may not receive contractual support and training from the
supplier/producer like a franchisee
Some distribution arrangements are similar to franchises,

and vice versa. A franchisee with a great deal of leeway in
how to run the business may look like an independent
distributor. A distributor may be subject to many controls
by the supplier/producer and begin to resemble a
franchise.
 Allows a licensee to pay for the rights to use
a particular trademark. Unlike franchises, in
which the franchisor exerts significant control
over the franchisee’s operations, licensors are
mainly interested in collecting royalties and
supervising the use of the license rather than
influencing the operations of the business
The many advantages and disadvantages of owning a franchise should
be carefully evaluated before deciding to purchase one.
Advantages:
 ✔ “Owning a franchise allows you to go into business for yourself, but

not by yourself.”
 ✔ A franchise provides franchisees with a certain level of independence

where they can operate their business.
 ✔ A franchise provides an established product or service which already

enjoys widespread brand name recognition. This gives the franchisee the
benefits of customer awareness which would ordinarily take years to
establish.
 ✔ A franchise increases your chances of business success because you

are associating with proven products and methods.
 ✔ Franchises may offer consumers the attraction of a certain level of

quality and consistency because it is mandated by the franchise
agreement.
✔ Franchises offer important pre-opening support:
• site selection
• design and construction
• financing (in some cases)
• training
• grand-opening program
✔ Franchises offer ongoing support

• training
• national and regional advertising
• operating procedures and operational assistance
• ongoing supervision and management support
• increased spending power and access to bulk purchasing
(in some cases)
The franchisee is not completely independent. Franchisees are required
to operate their businesses according to the procedures and restrictions
set forth by the franchisor in the franchise agreement. These restrictions
usually include the products or services which can be offered, pricing
and geographic territory. For some people, this is the most serious
disadvantage to becoming a franchisee.
✔ In addition to the initial franchise fee, franchisees must pay ongoing

royalties and advertising fees.
✔ Franchisees must be careful to balance restrictions and support

provided by the franchisor with their own ability to manage their
business.
✔ A damaged, system-wide image can result if other franchisees are

performing poorly or the franchisor runs into an unforeseen problem.
✔ The term (duration) of a franchise agreement is usually limited and the

franchisee may have little or no say about the terms of a termination.
 A good relationship between the franchisor and franchisee is critical for
the success of both parties. Since franchising establishes a business
relationship for years, the foundation must be carefully built by having a
clear understanding of the franchise program. Unfortunately,
understanding the legal language of franchising can be daunting. The
advice of an experienced franchise attorney should be sought to help a
prospective franchisee understand the legal issues and to protect them
from making costly mistakes.
 Franchising is governed by federal and state laws that require

franchisors to provide prospective franchisees with information that
describes the franchisor-franchisee relationship.
✔ the Disclosure Document, which may be
in the format known as the UFOC.
✔ franchise agreement
 The UFOC The purpose of the UFOC is to provide
prospective franchisees with information about the
franchisor, the franchise system and the agreements
they will need to sign so that they can make an
informed decision.
 In addition to the disclosure part of the document,

the UFOC includes the actual franchise agreement as
well as other agreements the franchisee will be
required to sign, along with the franchisor’s financial
statements.
 The UFOC is designed to give you some of the

information you need in order to make an informed
decision about investing in a particular franchise.
 ✔ the franchisor
 ✔ the company’s key staff
 ✔ management’s experience in franchise management
 ✔ franchisor’s bankruptcy and litigation history
 ✔ initial and ongoing fees involved in opening and running the
franchise
 ✔ required investment and purchases
 ✔ territory rights
 ✔ responsibilities of the franchisor and franchisee
 ✔ other franchisees in the system with contact information
Receipt of the UFOC is governed by the “ten-day rule.” This is a

cooling-off period in which franchisors must give prospective
franchisees 10 business days to think about their decision before
they are allowed to sign the franchise agreement.
The franchise agreement is more specific than the
UFOC about the terms of the relationship between the
franchisor and franchisee. A typical franchise
agreement may include specifics about:
✔ the franchise system, such as use of trademarks

and products
✔ territory
✔ rights and obligations of the parties: standards,
procedures, training, assistance, advertising, etc.
✔ term (duration) of the franchise
✔ payments made by the franchisee to the
franchisor
✔ termination and/or the right to transfer the
franchise
In the agreement, it includes:
• Terms of agreement
• Renewal
• Investment amount and fees
• Training and support
• Territory
• Termination
 The franchise agreement is the legal, written document that governs the relationship
and specifies the terms of the franchise purchase. Like the UFOC, the franchise
agreement also enjoys a “cooling off” period. Prospective franchisees are legally entitled
to have the final franchise agreement for at least 5 business days before they are
allowed to sign. This gives them time to review and consider the terms of the
agreement.
 Working with the franchising system
 The risk
 False expectations
 Managing the business

If you own a small Chinese fast food business
in your subdivision area were you reside,
selling noodles and dumplings. Will you opt
to have it franchised? Explain your answer.
Thank you for your
attendance today.

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Introduction

 The 10 most popular franchising opportunities are in these industries:

Two types of franchising arrangements:

There are two ways a multi-unit franchise can be achieved:

✔ an area development franchise or

 disclosure statement – also known as the UFOC, or Uniform

 franchise – a license that describes the relationship between

 franchise agreement – the legal, written contract between the

 franchising – a method of business expansion characterized by a trademark

 Royalties - Franchise royalties are usually collected by your franchisor on a

Some distribution arrangements are similar to franchises,

 ✔ “Owning a franchise allows you to go into business for yourself, but

 ✔ A franchise provides franchisees with a certain level of independence

 ✔ A franchise provides an established product or service which already

 ✔ A franchise increases your chances of business success because you

 ✔ Franchises may offer consumers the attraction of a certain level of

✔ Franchises offer ongoing support

✔ In addition to the initial franchise fee, franchisees must pay ongoing

✔ Franchisees must be careful to balance restrictions and support

✔ A damaged, system-wide image can result if other franchisees are

✔ The term (duration) of a franchise agreement is usually limited and the

 Franchising is governed by federal and state laws that require

 In addition to the disclosure part of the document,

 The UFOC is designed to give you some of the

Receipt of the UFOC is governed by the “ten-day rule.” This is a

✔ the franchise system, such as use of trademarks

• Investment amount and fees

• Training and support

 Managing the business

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