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

Hampton Hotels ampm McDonalds 7-Eleven Inc Supercuts Days Inn Vanguard Cleaning Syst Servpro Subway Dennys Inc Jan-Pro Franchising Intl Hardees Pizza Hut Inc Kumon Math & Reading Cntrs Dunkin Donuts KFC Corp Jazzercise Inc Anytime Fitness Matco Tools Stratus Building Solutions

Source: Entrepreneur.com, Top Franchises for 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

11. Chesters 12. McDonalds 13. Anytime Fitness 14. Coldwell Banker Real Estate LLC 15. Jimmy Johns Sandwich Shops

6. Pizza Hut
7. Liberty Tax Service 8. Vanguard Cleaning Systems 9. Bonus Building Care 10. System4

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

Limitations
Franchise costs
Initial franchise fee Investment costs Royalty payments Advertising costs

Training
Franchisor-provided

Restrictions on business operations

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

Financial assistance
Loans & loan guarantees

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

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 outlets 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 franchisees 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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Before Buying a Franchise

ASK QUESTIONS

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

The Hotel Franchise Relationship

What is franchising? 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 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.

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

Hotel Franchising: Origin & Structure

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. 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 standards
Conflict can arise between hotel owners and brand managers - G.M. should balance legitimate interests of hotel and

brand

Hotel Franchising: Origin & Structure (continued.)

Figure 12.1: Ten Largest Brands Brand 1. Best Western International 2. Holiday Inn 3. Days Inn Worldwide 4. Marriott Hotels, Resorts & Suites 5. Comfort Inns and Comfort Suites 6. Sheraton Hotels & Resorts 7. Super 8 Motels 8. Ramada Franchise Systems Properties 4,008 1,576 1,947 433 2,065 399 2,092 971 Rooms 304,664 295,252 164,023 160,540 159,619 133,200 127,533 118,114

9. Hampton Inn / Hampton Inn and Suites

10.Holiday Inn Express

1,175
1,351

120,589
109,186

Regulations Related to Franchises

Franchise Rule requires that franchisers:
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

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

Hotel Franchising: Regulations Related to Franchises

Franchise Offering Circular (FOC) include Name of franchiser and type of franchise it offers for sale Business experience of franchise companys officers Fees & royalties that must be paid Initial investment requirements Rights & obligations of franchiser & franchisee Territorial protection offered by franchiser Required operating policies Renewal, transfer, and termination procedures Earnings claims A sample franchise agreement Specific info required by each state in which FOC is to be filed Name and address of legal representative of franchiser

The Franchise Agreement

A franchise relationship exists with a franchise agreement.

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: Major Elements

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

The Franchise Agreement: Major Elements

Franchise agreement includes: (continued.)
Fees - Affiliation fees / royalty fees / marketing fees / reservation fees 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

The Franchise Agreement: Major Elements

Franchise agreement includes: (continued.)
Termination or default - Events that permit a termination, or define a default, by either party

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

The Franchise Agreement: Advantages to the Franchisee / Franchiser

Allowing hotel owners to acquire a brand name with regional or national recognition Connecting the hotel to the GDS Increasing hotels sales, thus its profitability Affecting ability of hotels owner to secure financing Assistance with on-site training, advice on purchasing furnishings & fixtures, reduced operating costs, & free interior design assistance

Advantages to franchisee

Advantages to franchiser

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

The Franchise Agreement: Selecting a franchiser

Basic considerations for a selecting a franchise brand:
Quality and experience of the brand managers - Hotel owners, not brand managers, bear financial risk of poor brand management 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

Selecting a Franchiser: Franchiser Questionnaire

Contents in franchiser questionnaire
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Application fees Area of protection Recurring fees Standards Mandatory service programs Operating performance FOC Fair franchising Financing assistance 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).

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

A brand conversion = reflagging Process of changing a hotels flag from one franchiser to another 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.

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

Selecting a Franchiser: Negotiating the Franchise Agreement

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.