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Licensing and Franchising
- 1. L I CE N S I N G O R F R A N C H I S I N G K H A L E D O M A R A L Y A B D E L M O N E I M A L A A A B D E L M O N E I M I N T E R N A T I O N A L B U S I N E S S & G L O B A L S T R A T E G Y
- 2. AGENDA • Licensing • Whatis a license agreement • Licensor VS Licensee • Licensing Pros and Cons • Top 5 Licensors • Franchising • Franchisor VS franchisee • Franchising Pros and Cons • Top 7 Franchisors • Licensing or Franchising
- 3. IN ORDER TOUNDERSTAND THE DIFFERENCE, IT IS NECESSARY TO UNDERSTAND EXACTLY WHAT A LICENSE AND A FRANCHISE ARE.
- 4. LICENSING • The grantingof permission to use intellectual property rights, such as trademarks, patents, or technology, under defined conditions. • A License allows the licensee to use, make and sell an idea, design, name or logo for a fee. They are advantageous for licensors because they allow them to expand their business without having to invest in new locations or distribution networks. • Licensing is anther way to enter a foreign market with a limited degree of risk. Under international licensing, a firm in one country permits a firm in other country to use its intellectual property (Patents, trademarks, etc..)
- 5. WHAT IS ALICENSE AGREEMENT? • A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. In a typical licensing agreement, the licensor grants the licensee the right to produce and sell goods, apply a brand name or trademark, or use patented technology owned by the licensor.
- 6. LICENSOR V.S LICENSEE •The licensor owns the rights being licensed and grants the limited right to use them to the licensee. • Disney is the licensor and Hasbro is the licensee. • The NFL is the licensor and Nike is the licensee. • The licensee generally pays royalties to the licensor.
- 7. EXAMPLE OF LICENSING ACOMPANY USING THE DESIGN OF POPULAR CHARACTER LIKE MICKEY MOUSE ON THEIR PRODUCTS.
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- 9. Pros Cons Quick, easyentry into foreign markets. You will have only a low level of control. You get your product to market with very little or no capital investment You may lose intellectual property. potential for large return on investment (ROI). Poor quality management can damage your brands reputation in other license territories. The licensee’s market knowledge and experience will lower the risk on the product’s performance Your licensee may become a competitor. LICENSOR
- 10. Pros Cons Lower upfrontcosts The licensor could license the same Product to one or more of the licensee's competitors. low risk, since you enter with an established product and you take fewer financial and legal risks. The license period is usually limited. little access to the knowledge source. Your licensor origin country or technology can increases your market share. The licensor could fail to maintain or update the Product, thereby diminishing its value. The licensor could use its leverage to negotiate better terms. LICENSEE
- 11. THE MAJOR DRAWBACKOF LICENSING IS THE PROBLEM OF CONTROLLING THE LICENSEE DUE TO THE ABSENCE OF DIRECT COMMITMENT FROM THE INTERNATIONAL FIRM GRANTING THE LICENSE. AFTER FEW YEARS, ONCE THE KNOW-HOW IS TRANSFERRED, THERE IS A RISK THAT THE FOREIGN FIRM MAY BEGIN TO ACT ON ITS OWN AND THE INTERNATIONAL FIRM MAY THEREFORE LOSE THAT MARKET.
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- 13. • Walt Disneyarrived in California in the summer of 1923 with a lot of hopes. • He had made a cartoon called Alice’s Wonderland. • He decided that he could use it as his “pilot” film to sell a series of these “Alice Comedies” to a distributor. • A distributor in New York, M. J. Winkler, contracted to distribute the “Alice Comedies” on October 16, 1923, and this date became the start of the Disney company. • To star in this new series, he created a character named Oswald the Lucky Rabbit. Within a year, Walt made 26 of these Oswald cartoons, but when he tried to get some additional money from his distributor for a second year of the cartoons, he found out that the distributor had gone behind his back and signed up almost all of his animators, hoping to make the Oswald cartoons in his own studio for less money without Walt Disney. On rereading his contract, Walt realized that he did not own the rights to Oswald-the distributor did. It was a painful lesson for the young cartoon producer to learn. From then on, he saw to it that he owned everything that he made. 1- Disney Consumer Products
- 14. • In 1926moved his staff to the new facility in Hollywood. • It was at the Hyperion Studio, after the loss of Oswald, that Walt had to come up with a new character, and that character was Mickey Mouse. • He animated two Mickey Mouse cartoons, but Walt was unable to sell them because they were silent films, and sound was revolutionizing the movie industry. • So, they made a third Mickey Mouse cartoon, this time with fully synchronized sound, and Steamboat Willie opened to rave reviews at the Colony Theater in New York November 18, 1928. A cartoon star, Mickey Mouse, was born. The new character was immediately popular, and a lengthy series of Mickey Mouse cartoons followed. • After Disney purchased the rights for Winnie the Pooh at 1966 to make animated short film, the company conceded to a broad licensing agreement with Sears, Roebuck & Co… • In 1979, the Intergovernmental Philatelic Corporation of New York was licensed by Walt Disney Productions to make Disney character stamps for several countries.
- 15. • The firstDisney Store opened in Glendale, California on March 28, 1987. On October 12, Disney agreed to a licensing contract with Mattel for a Disney Character infant and preschool toy line. • DCP purchased Childcraft Education Corp., maker of children's furniture and equipment, retail stores and catalog sales, from Grolier Inc. in April 1988. • In April 1990, the 50th store was opened in Montclair, California. • DCP licensing peak in 1997 with 749 Disney Stores worldwide, operating income of $893 million and 4,200 licensees for mostly Winnie the Pooh and Mickey Mouse product plus some top animated movies. • Disney's and McDonald's cross-promotional agreement began on January 1, 1997. • By 1998, Pooh outsold Mickey Mouse $316 million to $114 million through November of that year in just-licensed-toy sales. By replacing Sears with 100 licensees, DCP has since increased Pooh product lines from $390 million to $3.3 billion.
- 16. • In fiscal2015, global retail sales of licensed product reached a new high of $52.5 billion • Star Wars: The Force Awakens, which continues to redefine the scope and power of entertainment licensing. Hundreds of products launched on Sept. 4, 2015, with a global event dubbed Force Friday that drew more than 130,000 fans standing in line for midnight store openings. Despite launching later in the year, Star Wars was the number one toy brand of 2015 and won property of the year at the Toy of the Year Awards.
- 17. 3- Phillips-Van Heusen– $18B 2-MEREDITH – $20.1B 4- ICONIX Brand Group - $13 B 5- Warren Brothers - $6 B
- 18. BEST WAY TOLICENSE ANOTHER COMPANY'S Large companies like WB, DreamWorks, Pixar and Disney have their own trademark licensing departments, although some also use licensing agencies. A visit to their website will point you in the direction of the contact. It's not about connections as much as it's about the value your product brings to the brand. It has to be compelling and add value or there will likely be little interest.
- 19. ACCORDING TO LICENSINGMAGAZINE THE TOP 10 BRAND LICENSING AGENCIES ARE: • IMG • Equity Management • Leveraged marketing • The Beanstalk Group • The Licensing Company • United Media • Copyright Promotions Licensing Group (Cookie Jar) • Joester Loria Group • Brand Sense Partners (bsp) • Brand Central
- 21. FRANCHISING US department ofcommerce defines franchising according to the Federal Trade Commission Rule (FTC) 436 as: • Franchising is an ongoing business relationship between franchisor and franchisee that includes not only the product, service and trademark, but the entire business concept itself - a marketing strategy and plan, operating manuals and standards, quality, in return the continuing process of assistance and guidance, in return the franchisee is required to pay the franchisor, as a condition of obtaining or commencing the franchise operation, franchise fees, royalties or other expenses (FTC Rule 436)
- 22. The international franchiseassociation (IFA), defines franchising as: • franchising is continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing, training, merchandising and management, in return for a consideration from the franchisee. (Kolte, 2003, P.391-393) said: • "A company can enter a foreign market through franchising, which is more complete form of licensing. The franchisor offers a complete brand concept and operating system. In return the franchisee invest in and pays certain fees to the franchisor"
- 23. FRANCHISING AGREEMENT • Thefranchise agreement is essentially a legal document between the franchisor and the franchisee. It is a legal binding agreement. It explains in detail what the franchisor expects from you, as a franchisee, in the way you operate every fact of the business. • There is no standard form of franchise agreement because the terms, conditions, and the methods of operations of various franchises vary widely depending on the type of business.
- 24. FRANCHISOR V.S FRANCHISEE Franchisor •is the entity or person owning the rights of the business, that garnet to other people to manufacture or distribute his products. Franchisee • Is the party in franchising agreement that is purchasing the rights to use business trademarks, operating system, tools, skills & other proprietary knowledge in order to open branch.
- 25. 10 FUNDAMENTAL PROVISIONSOUTLINED IN SOME FORM IN EVERY FRANCHISE AGREEMENT: 1-Location 2-Operations 3-Training and ongoing support 4-Duration 5-Franchise fee/investment 6-Royalties/ongoing fees 7-Trademark/patent/signage 8-Advertising/marketing 9-Renewal rights/termination/cancellation policies 10-Exit strategies
- 26. THINGS YOU HAVETO KNOW ABOUT FRANCHISE CONTRACTS • Agreements with strong franchise companies are typically non-negotiable. • A franchise company's willingness to negotiate substantive provisions of its franchise agreement should be a warning sign. • Franchise agreements are typically unilateral in nature. • The franchise agreement is full of "must-do.” • The franchise agreement is full of "can't-do."
- 27. EXAMPLE OF FRANCHISING MCDONALD'SCONTINUES TO BE RECOGNIZED AS A PREMIER FRANCHISING COMPANY AROUND THE WORLD. MORE THAN 80% OF OUR RESTAURANTS WORLDWIDE ARE OWNED AND OPERATED BY OUR FRANCHISEES.
- 28. THE 5 KEYELEMENTS THAT WILL HELP YOU SELL FRANCHISES • In order to sell franchises, you must start by understanding the nature of your specific franchise buyer. Franchisors who target their prospects with a generic “Be in business for yourself, but not by yourself” will often find their message falling on deaf ears. So before you begin your marketing efforts, be sure you understand what it is that you're selling, who you're selling it to, and why they should be interested in buying. Keep these five elements in mind: 1. The many sales of franchising. 2. The many “buyers” you need to address. 3. The many messages of your materials. 4. The many motives of your franchisee. 5. Size matters.
- 29. THE FRANCHISING INDUSTRYREGULARLY LIKES TO REMIND US THAT BEING A FRANCHISEE IS A SAFE AND POTENTIALLY VERY PROFITABLE CAREER. WHILE THIS MAY BE TRUE, THERE ARE ALSO A DARK SIDES.
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- 31. Pros Cons A bigname can lead to big success Initial and continuing fees Ongoing help and support You do things their way, not yours Access to Proprietary Methods Other peoples decisions could sink your franchise Defined territory You cannot escape hard work Greater access to finance Limited Creativity/Flexibility Reduced Risk Sole Sourcing FRANCHISEE
- 32. Pros Cons Access tobetter talent. Less control over managers. Easy expansion capital. A weaker core community. Minimized growth risk. Innovation challenges. FRANCHISOR
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- 34. 1- ANYTIME FITNESS •Number of franchises/co.: 2,796 • Cost to open a franchise: $78,700-$371,000 • Why it's hot: With over 2 million members in 2,885 sites across the globe, customers have 24 hour access, 365 days a year. With the secure access key and Anytime Fitness state of the art security systems, customers can feel comfortable visiting thousands of locations at no extra cost. The chain credits its top ranking to, "financial strength and stability, growth rate, and size of the system," according to its website.
- 35. 2. 7-ELEVEN • Numberof franchises/co.: 53,027 • Cost to open a franchise: $37,200-$1.6 million • Why it's hot: The international convenience store chain is well known and simple. Customers know what to expect when shopping at 7-Eleven, and that business model has always worked for the store. It also has a unique sales method that attracts investors. "Most franchise systems require royalty payments based on a percentage of sales. With the 7-Eleven system, you pay royalties based upon the store’s gross profit, that is, net sales receipts less the wholesale cost of the merchandise you sell," according to 7-Eleven.
- 36. 3. SUBWAY • Numberof franchises/co.: 42,227 • Cost to open a franchise: $116,600- $263,200 • Why it's hot: Despite the recent controversy surrounding the brand, the chain remains one of the leading global sandwich chains. The company started making its menu healthier in recent years, which is also helping to attract customers. It's expanding globally, and many look to be a part of this expansion. 4. PIZZA HUT • Number of franchises/co.: 12,956 • Cost to open a franchise: $297,000-$2.1 million • Why it's hot: The pizza industry is lucrative, and investors can trust respected companies like Pizza Hut to succeed. The recognizable chain has a trusted reputation and a strong support structure for franchises to help its owners successfully run their stores.
- 37. 5. AUNTIE ANNE’SHAND- ROLLED SOFT PRETZELS • Number of franchises/co.: 1,598 • Cost to open a franchise: $194,900- $367,600 • Why it's hot: Auntie Anne's is so well-liked that even stars like Shaquille O'Neal have franchised with the company. The global pretzel chain is unique in that no other chains produce product like it at such a large volume. 6. KFC • Number of franchises/co.: 13,846 • Cost to open a franchise: $1.3 million-$2.5 million • Why it's hot: Like McDonald's, KFC is a world-renowned company. Recently the chain been shaking up its menu and expanding, helping it to gain plenty of media attention. This brings in entrepreneurs looking to take part in the innovative time for the company.
- 38. 7- MCDONALD’S • Numberof franchises/co.: 29,544 • Cost to open a franchise: $1 million-$2.3 million • Why it's hot: McDonald's is one of the most popular fast-food chains in the world. The extensive training and support from the Company brings in many franchisees looking to be a part of the dynasty.
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- 40. Franchise Business Index Theestimates of output, employment and the number of establishments in the franchise industry reported here provide valuable measures of the size and growth of the industry. But, because most of the key data inputs required to make these estimates are published only on an annual basis, the estimates are made only at an annual frequency. A more timely reading of the business environment for franchise operations in the US is provided by the Franchise Business Index (FBI) – a monthly index of franchise activity that was developed for IFA by IHS. The FBI combines indicators of the growth or decline of industries where franchise activity has historically been concentrated with measures of the demand for franchise business services and the general business environment. The components of the index are: • Employment in Franchise Businesses • Number of Self Employed • Unemployment Rate • Retail Sales of Franchise-Intensive Industries • Small Business Optimism Index • Small Business Credit Conditions Index
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- 46. • You mighthave come across the terms ‘franchising’ and licensing’. As similar as these tow may sound, there’s quite a lot of differences between the two. • You can see that while a License provides the Licensee with the right to use certain property for a certain period of time. A Franchise provides the Franchisee with a comprehensive system for managing its business. Accordingly a Franchise Agreement is typically a lot more prescriptive than a license agreement. • Franchising is extremely expensive. So, licensing can be a good way to start if you are interested in franchising your business. CONCLUSION
- 47. • Whether youare licensing or franchising, the important thing is to protect your IP.
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- 49. REFERENCES • http://www.investorwords.com/5023/trademark.html • http://www.investorwords.com/6456/condition.html •http://www.businessdictionary.com/definition/contract.html • Licensing & franchising - International Business - Manu Melwin Joy • http://www.licensemag.com/license-global/top-100-licensors • https://www.quora.com/What-are-the-best-examples-of-brand-licensing-for-learning-purposes • http://www.slideshare.net/manumelwin/licensing-franchising-international-business • https://www.entrepreneur.com/article/201514 • http://www.franchisedirect.com/top100globalfranchises/rankings/ • https://d23.com/disney-history/ • http://studioservices.go.com/disneystudios/history.html • https://www.entrepreneur.com/article/254859 • https://www.entrepreneur.com/article/226489 • http://www.businessinsider.com/top-50-franchises-in-the-world-2015-7 • http://mllaw.co.nz/assets/InfoCentrePDFs/What-is-the-difference-Between-a-Franchise-and-a-Licence.pdf
Editor's Notes
- #2 Gficg.com
- #3 Update the agenda
- #5 Licensee receives the license; Licensor gives (or grants) the license.
- #7 Hasbro Toyes National football league
- #10 Pros and cons from the licensor perspective
- #17 More information and details Start when How many companies Coca-cola 39
- #18 MEREDITH $20.1B Van $18B ICONIX BRAND GROUP $13B WB $6B Hasbro 5.9B
- #26 1. Location/territory. The franchise agreement will designate the territory in which you will operate and outline any exclusivity rights you may have. 2. Operations. This section details how franchisees are expected to run their units. 3. Training and ongoing support. Franchisors offer training and training programs for franchisees and their staff. Training may take place at corporate offices or out in the field. All ongoing administrative and technical support will also be outlined in the agreement. 4. Duration. The document will detail the length of the duration of the franchise agreement. 5. Franchise fee/investment. There will generally be an upfront initial franchise fee that grants the franchisee the right to use the franchisor's trademark and operating system. Those costs will be clearly outlined. 6. Royalties/ongoing fees. Here you will find the details of the franchisor's royalty structure. Most franchisors require franchisees to pay an ongoing royalty, usually a percentage of total sales, which is often paid on a monthly basis. 7. Trademark/patent/signage. This section will outline how a franchisee can use the franchisor's trademark, patent, logo and signage. 8. Advertising/marketing. The franchisor will reveal its advertising commitment and what fees franchisees are required to pay towards those costs. 9. Renewal rights/termination/cancellation policies. The franchise agreement will describe how the franchisee can be renewed or terminated. Some franchisors include an arbitration clause. This requires, in the event of any legal action, that an arbitrator review the case before it goes to court. 10. Exit strategies. Every franchise has its own resale policy. Some allow franchisees to sell their franchises at their discretion. Other agreements include buy back or right of first refusal clauses. These allow the franchisor to buy back the franchise at a rate determined by them or to match any potential buyer's offer.
- #29 In order to sell franchises, you must start by understanding the nature of your specific franchise buyer. Franchisors who target their prospects with a generic “Be in business for yourself, but not by yourself” will often find their message falling on deaf ears. So before you begin your marketing efforts, be sure you understand what it is that you're selling, who you're selling it to, and why they should be interested in buying. Keep these five elements in mind: 1. The many sales of franchising. The savvy franchisor realizes that when approaching a prospective franchisee, the franchise salesperson must make not just one sale, but rather FOUR separate sales if they are to succeed. The prospect will ultimately ask: Should I go into business for myself? Should I go into the “widget” business? Should I go it alone or buy a widget franchise? Should I buy your widget franchise? To become a prospect in your franchise sales pipeline, you can be fairly sure your candidate has already answered the first question affirmatively. That said, not everyone is right for business ownership -- even if they believe they are. You'll need to be sure your prospect understands the positives and negatives of business ownership, or you'll run the risk of awarding a franchise to a candidate who may be predisposed to failure. And nothing will doom a franchise as quickly as a track record of failed franchisees. To answer the second question, the franchisor will need to develop a selling proposition for the widget industry, but chances are it won't be unique. Rather, all the franchisor’s competitors in the widget market will be giving the same pitch. Advertisement The answer to the third question requires the franchisor to sell the concept of franchising, separately from the advantages of widgets. It's remarkable how many inquiries a franchisor will get from people who don’t understand what a franchise relationship is all about. If the franchisee believes that they'll have the freedom to do as they please, you're better off dispelling that notion early in the process. This third question also presents the franchise marketer with a unique dilemma. On the one hand, the marketer wants to say they're offering a can’t-miss opportunity in a great market. On the other, they need to tell the prospect that without the franchisor’s assistance, the prospect will be doomed to failure (or, at best, significantly less success). And, of course, the fourth question is where the rubber meets the road -- differentiating the offering from its closest direct competitors. This is where a new franchisor will need to focus its creative efforts -- in terms of the concept itself, the structure of the franchise offering, and ultimately, in the way the USP is communicated to the prospective franchisee. 2. The many “buyers” you need to address. The marketing message is further complicated by the fact that it will ultimately be heard by numerous people other than the prospect who will influence the franchise sale. In most cases, the franchisor can anticipate that its buyer will be influenced by: An attorney they'll retain to review the franchise legal documents The lender that will be providing the financing (and they may talk to several of these) Their personal accountant (especially for those opportunities with more sizable investments) Their trusted advisors and friends (and their know-it-all Uncle Charley, who will tell them they're crazy, no matter how good the message) Their spouse and other close family members Google (and other search engines), which will determine who gets to read your message online State regulators in eight states, who will determine if you can use the material at all You probably already know how unsupportive these additional “buyers” can be, so your website, videos, collateral materials, and other marketing pieces must address this audience as well as your prospective franchisee (who may often be the easiest of the group to sell to). 3. The many messages of your materials. You must also be aware that your franchise marketing materials will send more than one message. The copy that's used in your marketing will need to send two messages: A message that conveys the content of your offering A message that imparts the emotional impact of your franchise The franchise buying process is highly emotional. It's integrally related not only to a person’s financial well-being, but also wholly intertwined with the way a person does (or wants to) perceive themselves. So simply expressing the content of the offering and the value proposition, without accounting for the emotional impact of the franchise sales process, will considerably reduce your likelihood of closing a sale. Aside from the content, the materials themselves will carry a message. Your first impression will often come from your website. Fail to make a good impression, and you're done before you start. Print a cheap brochure (or worse yet, a folder with inserts), and you'll send the message that you're not serious about franchising. The quality of the paper stock you use can send a similar message. So do it right. 4. The many motives of your franchisee. It's also important to understand that your franchisee candidate won't be motivated by the same factors that motivate you. Many neophyte franchisors wrongly assume that franchise buyers are primarily motivated by financial returns. In fact, there are more important motives, such as: Independence Being one’s own boss Flexibility Control of their destiny So you're well-advised to understand who your prospects are and what really motivates them before drafting the message you'll use to attract them. If you already have franchisees, talk to them about what motivated them -- although you need to be careful to avoid a fallacy of composition. If, for example, all your prior messaging was focused on independence, you might expect to hear your franchisees echo that. To avoid that mistake, you may want to survey franchisees from similar systems to better understand the broader motives in your category. 5. Size matters. There are absolutely some prospective franchisees who won't consider anything other than a major brand. But there are also franchise prospects who are only interested in ground-floor opportunities. For them, a well-known brand is actually a turnoff -- so again, be careful with your messaging. If you're with a smaller franchise chain, chances are the type of folks you've attracted are looking for a venture that's more entrepreneurial -- or perhaps are indifferent to size. So don’t try to be something you're not. If you have a ground-floor opportunity, don’t hide it -- flaunt it.
- #32 A big name can lead to big success Working under a well-known brand name such as McDonalds or Subway has obvious benefits for franchisees. There is increased security for your enterprise not only are you following a tried and tested format, you can also benefit from the bigger bank balances of the larger corporations when it comes to funding for improvements. You can also save time and energy by not worrying about generating publicity to raise the awareness of your firm customers will know what to expect from a big chain and will often flock to a brand name. Having an established market, proven systems and a respected business name means that the battle is already half won for you before you even start your first day of trading. Ongoing help and support Once you take up your franchise, your franchisor won't simply wave you goodbye and let you run their brand into the ground without a word of advice. As well as training programs and first-hand support, most franchisors help find and retain customers and assist with setting up accounting or stock control systems. Most importantly, your franchisor will offer financial help in getting the business off the ground. Many help with your initial start-up costs, such as equipment or vehicles, as well as organizing marketing and advertising campaigns. Access to Proprietary Methods There is no need to reinvent the wheel as franchisees get access to all the trade secrets. Defined territory The British Franchise Association (BFA) lists this as one of the main reasons that makes franchising an attractive option. Franchisors carefully choose the location of their outlets to gain the largest possible amount of customers and to avoid treading on each others toes. Greater access to finance If your franchisor is reluctant to part with vast amounts of cash for your start-up costs, there is no need to panic banks will be happy to help you out. As a franchisee, you are looked upon more favorably when it comes to bank loans and overdrafts than if you were a struggling entrepreneur trying to kick-start your own firm from scratch. The increased security and reliability of a large firm behind you means that banks will often offer you substantial loans to aid your start-up costs. Reduced Risk For all of these reasons, starting a franchise of an established brand often has less risk than starting a business from nothing. Initial and continuing fees: Franchisors will charge new franchisees a lump sum to startup a business using their brand name. Although this can be under £1,000, the amount varies greatly according to the franchisor. Many will insist that you purchase most of the materials you need from your own pocket, and some will demand that you have a certain amount of working capital before you are even considered to be a suitable candidate. Unfortunately, the costs don't end there. Franchisors will take a regular slice of your takings as royalty fees. If you have a tight profit margin, the bad news is that this fee is deducted from your actual turnover, not the surplus you make. You do things their way, not yours As mentioned before, each franchisee will gain training and guidelines on how the business should be run. Although this is a helpful leg-up into running your own firm, after your franchise is established you may feel your entrepreneurial creativity is somewhat restricted. You may get slightly frustrated if your plans for your outlet are hampered by company policy on what you can and cant do. Franchisors generally like their outlets to look and feel the same way, so you will have to work within someone else is idea of what is best for your firm. As well as restricting your independence, the penalties for falling out of line with your franchisors wishes can be harsh. Many franchise contracts stipulate that any wild alterations to the running of your franchise can lead to the termination of your agreement. Other peoples decisions could sink your franchise The lack of actual control you have over your franchise means that even if you run a profitable outlet, you could still lose everything if your franchisor makes bad business decisions and the firm fails. Another potential source of trouble that is out of your hands are the actions of other franchisees. One bad franchise could ruin the good name of the company, dragging down your profits as well as your reputation. You cannot escape hard work If you take on a franchise under the impression that the franchisor will do all of the hard work for you while you sit back and watch the money roll in, you will be in for a nasty shock. Working weeks of 60 hours or more are not unheard of among franchisees attempting to get their business off the ground. Implementing the standard working practices of your franchisor and then improving on them is a massive task and one that takes dedication and a lot of support from family and friends. Limited Creativity/Flexibility Most franchise contracts have very explicit standards, allowing little or no alterations or additions to the brand, stifling any creativity on the part of the franchisee. You must use their system, follow their rules. Sole Sourcing Some franchise contracts stipulate that franchisors must buy supplies only from an approved list of suppliers, possibly at a higher cost.
- #33 Access to better talent. Franchising is a great way to find talented people to manage your locations and give them an incentive to work hard. The most qualified and hardest working people generally prefer to invest in running a business in return for profits rather than taking a salary as an employee. So by franchising, you are going to get better talent that will work harder to build the business than you would by hiring someone to work for you. Easy expansion capital. Franchising is a good way to obtain expansion capital. Because your franchisees pay to buy outlets in your chain, you can grow the number of locations without tapping much of your own capital or needing to request financing from banks or investors. Minimized growth risk. Franchising can generate high financial returns for relatively little risk. Unlike adding company-owned outlets, when you franchise, you put relatively little money into adding each location. If you have a good business model, you can earn high royalties from sales at those outlets. The percentage returns you earn can be many times what you would have earned if you opened and ran the outlets yourself. Offsetting these positives are three major disadvantages of the franchising business model: Less control over managers. You can't tell franchisees what to do the way you can with employees. Franchisees are independent businesses. Moreover, they have different goals from yours, which can easily conflict and even lead to legal trouble. Consider the classic example: Franchisors make money by collecting a percentage of sales as a royalty for letting the franchisee use their brand name and operating system. Franchisees make money from the outlet's profits. Anything that boosts sales, but not profits will create conflict between you and the franchisee. If you want to offer customers promotional coupons, franchisees may likely object. Coupons boost sales, but not always profits, benefitting the franchisor, but not necessarily the franchisee. A weaker core community. It's more difficult to get franchisees as opposed to hired store managers to work together. Franchisees have an incentive to profit from each other's efforts to generate business. For instance, your franchisees might try to get out of paying for the advertising needed to attract customers, figuring they will get the customers anyway if other franchisees buy the advertising. Of course, if all of them do the same thing, you end up with no customers because you've got no advertising. There are ways of minimizing franchisee free riding, of course, but those cost money and require enforcing your franchisee contracts in court. Innovation challenges. It's a lot harder to innovate with franchising than if you own your own outlets. With franchising, if you come up with a new idea, you have to negotiate with your franchisees to get them to accept the new product or whatever innovation you want to introduce, instead of just putting the new idea in place on your own. Before you talk to the experts about franchising your business, consider these pros and cons. Franchising isn't a silver bullet for business expansion. But when the advantages outweigh the disadvantages, it can be a great way to grow your business