Chapter 4 Packet Notes

Question 1

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

Answer 1

Franchising

Question 2

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

Answer 2

Franchisor

Question 3

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

Answer 3

Franchisee

Question 4

The legal agreement between franchisor and franchisee.

Answer 4

Franchise Contract

Question 5

The privileges conveyed in the franchise contract.

Answer 5

Franchise

Question 6

• 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

Answer 6

Economic Activity Because of Franchised Businesses

Question 7

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

Answer 7

Advantages of Francising

Question 8

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

Answer 8

Limitations of Franchising

Question 9

• 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

Answer 9

Advantages of the Franchise Model

Question 10

• 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.

Answer 10

Government Concerns About Franchising

Question 11

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

Answer 11

Churning

Question 12

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

Answer 12

Encroachment

Question 13

• 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.

Answer 13

Franchisor Controls on Franchisees

Question 14

• Selecting a franchise
• Investigating the potential franchise

Answer 14

Evaluating Franchise Opportunities

Question 15

• Personal Observation
• Advertisements

Answer 15

Selecting a Franchise

Question 16

Information sources:

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

Answer 16

Information Sources

Question 17

• Federal Trade Commission
• Internet
• Franchise consultants

Answer 17

Independent, Third-Party Sources

Question 18

Disclosure documents

Answer 18

Franchisors Themselves

Question 19

• 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?

Answer 19

Evaluating Franchise Opportunities

Question 20

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

Answer 20

Franchisor Considerations

Question 21

Is your business replicable?

Answer 21

The business model

Question 22

How will you finance the growth of the company?

Answer 22

Financial Considerations

Question 23

What expert assistance will you need to become a franchiser?

Answer 23

Required Assistance

Question 24

What will go into your operations manual?

Answer 24

Operations Manual Development

Question 25

Are you willing to satisfy the governments disclosure requirements?

Answer 25

Government Regulations

Question 26

Can you add value for your franchisees year after year?

Answer 26

Adding Long-Term Value

Question 27

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

Answer 27

Benefits- Becoming a franchisor

Question 28

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

Answer 28

Drawbacks-Becoming a Franchisor

Question 29

* The franchising contract * Rule 436 of the FTC

Answer 29

Legal Issues in Franchising

Question 30

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

Answer 30

The Franchising Contract

Question 31

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

Answer 31

Rule 436 of the FTC

Question 32

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.

Answer 32

Franchise Disclosure Document (FDD)