farnchisee

Franchising

• Franchising– A marketing system revolving around a two-party

agreement, whereby the franchisee conducts business according to the terms specified by the franchisor

• Franchisee– An entrepreneur whose power is limited by a

contractual agreement with a franchisor• Franchisor

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

Definition of 'Franchisee'

• The party in a franchising agreement that is purchasing the right to use a business's trademarks, associated brands and other proprietary knowledge in order to open a branch. In addition to paying an annual franchising fee to the underlying company, the franchisee must also pay a portion of its profits to the franchisor.

• One of the benefits of being a franchisee is that the franchisor provides all the information that is needed for running the business (such as, training and suppliers). Furthermore, a franchisee is also usually given an exclusive area, where no other franchises belong to the same underlying business can set up shop in order to prevent internal competition.

What is a FRANCHISE?A form of business where the franchisor sells or provides to a franchisee:

• the right to do business under a particular trade name or brand • the right to use/sell a proprietary product, process, or service

• training and assistance in setting up the business

• a business and marketing plan

• economies of scale for purchasing and marketing

• a financial (accounting) system

• regular inspection and quality checks once the business is established

Top 20 Franchises for 2011

• Jan-Pro Franchising Intl• Hardee’s• Pizza Hut Inc• Kumon Math & Reading

Cntrs• Dunkin’ Donuts• KFC Corp• Jazzercise Inc• Anytime Fitness• Matco Tools• Stratus Building Solutions

• Hampton Hotels• ampm• McDonalds• 7-Eleven Inc• Supercuts• Days Inn• Vanguard Cleaning Syst• Servpro• Subway• Denny’s IncSource: Entrepreneur.com, Top Franchises for 2011

Source: Entrepreneur.com “Top Low-Cost Franchises in 2011”

The 20 Fastest-Growing Franchises - 2011

1. Stratus Building Solutions

2. Jan-Pro Franchising International

3. Subway

4. CleanNet USA Inc

5. Anago Cleaning Systems

6. Pizza Hut

7. Liberty Tax Service

8. Vanguard Cleaning Systems

9. Bonus Building Care

10. System4

11. Chester’s

12. McDonalds

13. Anytime Fitness

14. Coldwell Banker Real Estate LLC

15. Jimmy John’s Sandwich Shops

16. ampm

17. 7-Eleven Inc

18. Choice Hotels Intl

19. Cruise Planners/Amer Express

20. Sears Home & Bsns Franchises Inc

Source: Entrepreneur.com, 2011 Fastest-growing franchises

The Pros and Cons of Franchising

• Advantages

– Probability of success• Proven line of business• Pre-qualification of franchisee• Overall lower failure rates

– Training• Franchisor-provided

– Financial assistance• Loans & loan guarantees

– Operating benefits• Location feasibility study• Marketing assistance• Quick start-up time

• Limitations

– Franchise costs• Initial franchise fee• Investment costs• Royalty payments• Advertising costs

– Restrictions on business operations

• Products sold• Hours of operation• Restrictions on expansion/growth• Franchisor only source of supplies

– Loss of independence

– Lack of franchisor support• Termination/renewal clauses

Franchisor Controls on Franchisees

• Restricting of sales territory• Requiring site approval and imposing requirement on

the outlet’s appearance• Restricting the goods/

services that can be sold• Requiring specific

operating hours• Controlling advertising

An Attractive Franchise Opportunity Includes: - 1

• Registered trademarks

• Successful prototype stores with a track record of profitability and a positive reputation

• A business that can be systematized so that it can be easily replicated.

• A product or service that can be successful in many different geographic regions.

An Attractive Franchise Opportunity Includes: - 2

• An operations manual that specifies all the functions of the business and their associated policies

• A training and support system

• Site selection criteria and architectural standards

• A detailed prospectus that spells out the franchisee’s rights, responsibilities, and risks.

The Federal Trade Commission requires disclosure...Uniform Franchise Offering Circular [UFOC]

Franchise Disclosure Requirements

• A document accepted by the Federal Trade Commission as satisfying its franchise disclosure requirements

– Litigation and bankruptcy history

– Investment requirements

– Conditions that would affect renewal, termination, or sale of the franchise

Franchising Arrangements• Trade name franchise

– agreement that provides to the franchisee the right to use the franchisor's trade name and/or trademarks

• Product distribution franchise– agreement that provides specific brand name products which are resold

by the franchisee in a specific territory• Business format franchise

– agreement that provides a complete business format, including trade name, operating procedures, marketing, and products or services for sale

• Piggyback Franchise– A retail franchise operation within the physical facilities of a host store

• Area Developer/Master Licensee– Firms or Individuals that obtain the legal right to open several franchised outlets

in a given area

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ASK QUESTIONS

Before Buying a Franchise

Questions to Ask Before Buying a Franchise

• Does the franchisor have an excellent reputation in the industry?

• Is the franchisor in partnership or any other legal relationship with another franchisor? If so, how will the franchisee be protected should that relationship fail?

• Is the franchisee required to do anything that appears questionable from a legal or ethical perspective?

• Under what circumstances can the franchisee or franchisor terminate the franchise agreement and what are the consequences to either party?

• Will the franchisor grant an exclusive territory? Is that area subject to reduction or modification? If so, under what conditions?

Questions to Ask Before Buying a Franchise - 2

• Will the franchisor reveal the certified financial figures for one of its franchises and can those figures be verified with the franchisee?

• Will the franchisor provide a management training program, an employee training program, public relations and advertising support, or credit?

• Does the franchisor assist in finding a suitable location?

• What is the financial health of the franchisor? Can financial statements be verified?

Questions to Ask Before Buying a Franchise - 3

• What is the track record of the franchise?

• Does the franchisor conduct an in-depth investigation of the franchisee to assure that he or she has the necessary skills and financial requirements to operate the business successfully?

• How much capital will be required to start and operate the business to a positive cash flow? Does the initial fee include an opening inventory of products and supplies? What do royalties pay for and how are they calculated?

Questions to Ask Before Buying a Franchise - 4

• Can you transfer your franchise license to someone else? When and how?

• How can you terminate the contract? Under what circumstances can this be done?

• Can the franchisor terminate the contract? Under what kind of conditions?

• What disclosures are you required to make? What disclosures is the franchisor required to make?

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Franchise Agreements and Management Contracts

A business strategy allowing one party (the brand) to use the logo, trademarks and operating systems of another business entity in exchange for a fee

The Hotel Franchise Relationship

A network of interdependent business relationships allowing a number of people 1) to share brand identification, 2) to develop a successful method of doing business, and 3) to establish a strong marketing and distribution system.

For the franchisee, franchising helps reduce risk -Proven operational methods are usedFranchisees and their financial capital expand the brand faster than franchiser could do solo

Franchise benefits

What is franchising?

History of hotel franchising is relatively short

- First significant hotel franchising arrangement began in 1950s with Kemmons Wilson and his Holiday Inn chain

Today hotel owners increasingly affiliate their hotels with other hotels under a common brand name.

Hotel Franchising: Origin & Structure

Company administering and directing the brand itself is not an owner of hotels, but rather a franchise company.

Majority of franchise companies do not actually own the hotels operating under their brand names.

-Those companies have right to sell brand name & determine brand standardsConflict can arise between hotel owners and brand managers- G.M. should balance legitimate interests of hotel and brand

Brand Properties Rooms

1. Best Western International 4,008 304,664

2. Holiday Inn 1,576 295,252

3. Days Inn Worldwide 1,947 164,023

4. Marriott Hotels, Resorts & Suites 433 160,540

5. Comfort Inns and Comfort Suites 2,065 159,619

6. Sheraton Hotels & Resorts 399 133,200

7. Super 8 Motels 2,092 127,533

8. Ramada Franchise Systems 971 118,114

9. Hampton Inn / Hampton Inn and Suites 1,175 120,589

10.Holiday Inn Express 1,351 109,186

Figure 12.1: Ten Largest Brands

Hotel Franchising:Origin & Structure (continued….)

Supply potential franchisees with disclosure document at either the first face-to-face meeting or ten business days before any money is paid by franchisee to franchiser

Franchise Rule requires that franchisers:

Regulations Related to Franchises

Provide evidence, in writing, of any earning claims or profit forecasts made by franchiser

Disclose number and % of franchisees achieving earnings rates advertised in any promotional ads that include earnings claims

Provide potential franchisees with copies of basic franchise agreement used by franchiser

Refund promptly any deposit monies legally due to potential franchisees who elected not to sign a franchise agreement with franchiser

Do not make claims orally or in writing that conflict with written disclosure documents provided to franchisee

Name of franchiser and type of franchise it offers for saleBusiness experience of franchise company’s officersFees & royalties that must be paidInitial investment requirementsRights & obligations of franchiser & franchiseeTerritorial protection offered by franchiserRequired operating policiesRenewal, transfer, and termination proceduresEarnings claimsA sample franchise agreementSpecific info required by each state in which FOC is to be filedName and address of legal representative of franchiser

Franchise Offering Circular (FOC) include

Hotel Franchising:Regulations Related to Franchises

Franchise agreement: legal contract between local owners (franchisee) and brand managers (franchiser), which describes duties & responsibilities of each in the franchise relationship

The Franchise Agreement

A franchise relationship exists with a franchise agreement.

Names of parties signing agreement-Name of legal entity representing the brand as well as corporation, partnership, or sole proprietor owning hotel

Franchise agreement includes:

The Franchise Agreement: Major Elements

Detailed definitions- Any definitions subject to misinterpretation by parties to the agreement are defined.

License grant- Description of how the owner is allowed to use the brand’s logo, signage, and name in operating the hotel.

Term (length of agreement)- The most common franchise agreements are written for 20 years.- Also include windows at fifth, tenth, & fifteenth years with early outs.

Fees- Affiliation fees / royalty fees / marketing fees / reservation fees

Franchise agreement includes: (continued….)

The Franchise Agreement: Major Elements

Reports- Room revenue generated, occupancy levels, & occupancy taxes & ADR

Responsibilities of franchiser- Inspection schedules, marketing efforts, & brand standards enforcement

Responsibilities of the franchisee- Signage requirements, operational standards & payment schedules

Assignment of agreement- Ownership transfer & its affect upon the agreement

Termination or default- Events that permit a termination, or define a default, by either party

Franchise agreement includes: (continued….)

The Franchise Agreement: Major Elements

Insurance requirements- Owner should provide types & amounts of required insurance- Proof of general indemnification policies, automobile insurance, & mandatory workers’ compensation insurance

Requirements for alteration- Rights of the franchiser to change the agreement

Arbitration and legal fees- Responsibilities of each party related to legal disputes

Signature pages-Authorized representative of the brand & owners of the hotel will sign the franchise agreement

Advantages to franchisee

The Franchise Agreement: Advantages to the Franchisee / Franchiser

Allowing hotel owners to acquire a brand name with regional or national recognitionConnecting the hotel to the GDSIncreasing hotel’s sales, thus its profitabilityAffecting ability of hotel’s owner to secure financingAssistance with on-site training, advice on purchasing furnishings & fixtures, reduced operating costs, & free interior design assistance

Advantages to franchiser

Increasing fee payments to the brandGrowing the business (brand spread)Helping pay for fixed overhead of operating that brand

Quality and experience of the brand managers- Hotel owners, not brand managers, bear financial risk of poor brand management

Basic considerations for a selecting a franchise brand:

The Franchise Agreement: Selecting a franchiser

Perceived quality / service level of the brand-Travelers associate some brands with higher quality, service levels, and costs, than other brands.-Franchisers offer brands at a range of quality and guest services

The amount of fees paid to franchiser- Fees paid to a franchiser are a negotiable part of franchise agreement

Direction of the brand

1. Application fees2. Area of protection3. Recurring fees4. Standards5. Mandatory service programs6. Operating performance7. FOC8. Fair franchising9. Financing assistance10. Termination

Note :A franchise disclosure document (FDD) is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process in the United States. It was originally known as the Uniform Franchise Offering Circular (UFOC) (or uniform franchise disclosure document).

Contents in franchiser questionnaire

Selecting a Franchiser: Franchiser Questionnaire

Conversion will always require some facility modification.When a potential franchiser inspects a hotel property whose owners are interested in a conversion, a PIP (product improvement plan) will be prepared.Estimating expenses to implement PIP is the hotel owners’ job.

A brand conversion = reflagging

Process of changing a hotel’s flag from one franchiser to another

Selecting a Franchiser(Spl. in Hotel): The Product Improvement Plan (PIP)

PIP: document detailing property upgrades and replacements required if a hotel is to be accepted as one of a specific brand’s franchised properties.

Franchise agreement is negotiable.

Franchise agreement tends to be written in franchiser's favor.

Owners should evaluate all components of proposed franchise agreements.

Hotel owners have demanded that impact studies, prepared by an independent party, be undertaken and paid for, when appropriate, by franchiser.

G.M.s must become adept at operating hotels in best interests of their owners, as well as in compliance with their owners’ franchise agreement.

Selecting a Franchiser: Negotiating the Franchise Agreement