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Flashcards in Chapter 4 Packet Notes Deck (32):

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



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



An entrepreneur whose power is limited by a contractural agreement with a franchisor.



The legal agreement between franchisor and franchisee.

Franchise Contract


The privileges conveyed in the franchise contract.



  • The economic significance of franscising is greater than indicated by the activity of franchised businesses alone.
  • Stimulates still more activity and supports the growth of many nonfrancised businesses 

Economic Activity Because of Franchised Businesses


  • Probability of success
    • proven line of business
    • pre-qualified of franchisee
  • Training
    • Franchisor-provided
  • Financial Assistance
    • franchisor assistance
  • Operating Benefits
    • Franchisor-aided

Advantages of Francising


  • Franchise costs
    • initial franchise fee
    • inventment costs
    • royalty payments
    • Advertising costs
  • Restrictions on business operations
  • Loss of independence
  • Lack of francisor support

Limitations of Franchising


  • Reduced risk of failure
  • Going into business for yourself, but not by yourself
  • Use of valuable trade name and trademark
  • Access to a proven business system
  • Management provided by the franchisor
  • Immediate economies of scale
  • A way for an existing business to diversify

Advantages of the Franchise Model


  • Misleading or exaggerated earnings claims by franchisors
  • Opportunity behavior by which the franchisor becomes a competitive threat to franchisees
  • Restrictions on franchisees who desire to liquidate their holdings in favor of alternative investment opportunities.
  • Conflicts of interest, such as when a franchisor forces franchisees to be captive outlets for their other suppliers own by the franchisor.
  • Churning
  • Encroachment
  • Imposing noncomplete clauses on franchisees
  • One-sided contracts devised by franchisors
  • The imposition of new restrictions as a requirement of contract renewal
  • Franchisor intimidation of franchisees who attempt to form franchisee associations, seek alternative sources for products, or make other efforts to create a more level playing field.

Government Concerns About Franchising


Terminating a successful franchise operation in order to resell and gain additional franchise fees.



Locating a new outlet or point of distribution too close to an existing franchisee, causing a material loss of sales.



  • Restricting of sales territory
  • Requiring site approval and imposing requirements on the outlet's appearance
  • Restricting the goods/services that can be sold.
  • Requiring specific operating hours.
  • Controlling advertising.

Franchisor Controls on Franchisees


  • Selecting a franchise
  • Investigating the potential franchise

Evaluating Franchise Opportunities


  • Personal Observation
  • Advertisements

Selecting a Franchise


Information sources:

  • Independent, third-party sources
  • Franchisors themselves
  • Existing and previous franchisees

Information Sources


  • Federal Trade Commission 
  • Internet
  • Franchise consultants

Independent, Third-Party Sources


Disclosure documents

Franchisors Themselves


  • Is the franchisor dedicated to a franchise system as its primary mechanism of product and service distribution?
  • Does the franchisor produce and market quality goods and services for which there is an established market demand?
  • Does the franchisor enjoy a favorable reputation and broad acceptance in the industry?
  • Will the franchisor offer an established, well-designed marketing and business plan and provide substantial and complete training to franchisees?
  • Does the franchisor have good relations with its franchisees, and doe the franchisees have a strong franchisee organization that has negotiating leverage with the franchisor?
  • Does the franchisor have a history of attractive earnings by its franchisees?

Evaluating Franchise Opportunities


  • The busines Model
  • Financial Considerations
  • requird assistance
  • Operations manual development
  • Governmental regulations
  • Adding long-term value

Franchisor Considerations


Is your business replicable?

The business model


How will you finance the growth of the company?

Financial Considerations


What expert assistance will you need to become a franchiser?

Required Assistance


What will go into your operations manual?

Operations Manual Development


Are you willing to satisfy the governments disclosure requirements?

Government Regulations


Can you add value for your franchisees year after year?

Adding Long-Term Value


  • Reduction of capital requirements
  • Increase in management motivation
  • Speed of expansion

Benefits- Becoming a franchisor


  • Reduction in control
  • Sharing of profits
  • Increase in operational support costs

Drawbacks-Becoming a Franchisor


  • The franchising contract
  • Rule 436 of the FTC

Legal Issues in Franchising


  • Signed with legal counsel present
  • Contains a termination and transfer provision
  • Contains statement of rights to renew contract
  • Franchise disclosure requirements

The Franchising Contract


A rule that prescribes that the franchisor must disclose certain information to prospective franchisees.

Rule 436 of the FTC


A document accepted by the FTC as satisfying its franchise disclosure requirements.

  • Investment requirements
  • Conditions that would affect renewal, termination, or sale of the franchise.

Franchise Disclosure Document (FDD)