ENT 3173 EXAM 2 Garner FSU | Quizlet

Four Types of Policies

-Appropriate rules toward ownership of franchised outlets

-The right mechanisms to ensure that franchisees act in the best interest of the franchise system

-The correct term for a franchise agreement, as well as its possible renewal

-The appropriate policies for advertising, both national and local

What % of franchisors do not allow passive ownership?

24%

When is passive ownership often a cheaper option?

When multiunit franchising is used

Which owners tend to free ride less than owners of individual units?

Multiunit owners

Most passively owned franchises are investments for what kind of individuals?

Wealthy individuals

Why does passive ownership reduce performance?

-Store manager is an employee, not an owner

-Passive owners tend to treat their stores as investments, not jobs

-Can create hybrid arrangements where ownership is passive but manager owns part of the operation

-East Coast Original Custard -

outlet operator must own 15%

of the business

What shouldn't you do with relation to passive ownership?

-Don't allow passive ownership in a new franchise system if you need to provide outlet operators with strong ownership incentives

-Don't automatically reject passive ownership if the benefits from multiunit franchising are high; the benefits might outweigh the costs

What is an advantage of passive ownership?

It's a way to raise capital

What is an agency principal?

Someone who acts as an agent to a company based on their best interest, not the company's

How much does Subway have in their advertising trust fund?

$600 million

What are mechanisms to control franchisees?

-Writing detailed contracts

-Reserving termination rights

-Controlling sources of supply

-Requiring exclusive dealing

-Ensuring payment of royalties

-Providing franchisees with excess profits

What is the average terms in years?

10.3 years, with an 8 year renewal

What percentage of franchisees offer the right to renew?

91%

What do long term contracts offer?

-Better opportunity for franchisees to amortize their investment

-Better chance for a franchisee to sell the outlet if desired

-More assurance for the franchisee that the franchisor will not engage in extortion

-Less incentive for franchisees to cheat and free-ride

What do longer terms create?

-Difficulty in changing key elements, such as the royalty rate

-Problems if a firm is poor at picking franchisees

-Problems with outlets looking dated and stale

What shouldn't you do in relation of contract lengths?

-Don't use short term contracts if you want franchisees to invest heavily in their outlets

-Don't use long term contracts if you are uncertain that your policies and fees are the right policies and fees; your system may die before you can make changes

What goes with national advertising?

-Vital to building brand name

-72% of franchisors charge a national advertising fee to franchisees

--Lodging: 78% do

--Auto repair: 39% do

-Most charge based on a percentage of sales; 5% charge a flat rate

-National advertising funds must be set up as trusts and kept separate from royalties

-Small chains rarely charge this fee but put a trigger into contracts

When is local advertising important?

When the chain is small and new

What percentage of franchisors charge a national advertising fee?

72%

What is long term lenient?

Reduced fear, little control over franchisee

What is long term strict?

Reduced fear, high control over franchisee

What is short term lenient?

High fear, little control over franchisee

What is short term strict?

High fear, high control over franchisee

What is area development?

Franchisee has the right to develop a territory that will contain more than one outlet

What is a master franchisee?

They have the right to collect a portion of franchisee fees and royalties in exchange for the master

What percentage of franchises offer area development?

28%

What are exclusive territories?

When franchisor agrees to not add a company-owned outlet or sell an outlet to a new franchisee within an area

What percentage of franchises offer exclusive territories?

70%

What do passive owners treat their stores as?

Investments

What does passive ownership reduce?

Performance

What is essential to making a franchise system succeed?

Creating effective policies

In particular, franchisors must...

-Adopt appropriate rules about outlet ownership

-Choose the right mechanisms to ensure that franchisees act in the best interest of the franchise system

-Devise the correct term for a franchise agreement, as well as its possible renewal

-Create appropriate policies for national and local advertising

How do you ensure payments of royalties?

-Make it difficult to under-report sales with computerization

-Audit franchisees

How do you control the sources of supply?

-Limit the sources of raw materials

-Can only be done with inputs that are proprietary to a system

-Can provide a list of approved suppliers and/or specify key product characteristics

How do you require exclusive dealing?

-Prevent franchisees from selling the products of other companies

-Maintain the right to purchase any outlet that a franchisee wants to sell

How do you provide franchisees with excess profits?

-Make the franchise so profitable that franchisees have no reason to cheat

-Minimizes the need to monitor franchisees, it's a "win-win"

How do you reserve termination rights?

-Franchisor needs to establish its right to end the franchise agreement and take back the outlet if franchisee fails to uphold standards

-Example: Choice Hotels- 20 year term, can terminate every 5 years without cause

How goes with writing detailed contracts?

Must maintain tight control over the brand name

Contracts must clearly specify franchisees' responsibilities

Procedures, equipment, maintenance, dress code

McDonald's contracts tell when and how to clean floors and even the specific cleaning solution to use

Contracts must clearly specify consequences of not meeting these responsibilities

What is important for large chains?

National advertising, triggers in contracts are smart

Why is percentage of sales much more popular than flat rate?

It's much more fair, 95% of people do that

What is important for new and small chains?

Local advertising

What is unique about Pinch-A-Penny?

The broke down average sales and average profit, they've never closed any stores

What is Pinch-A-Penny's initial start-up cost?

$35,000, renewable every 10 years

What is Pinch-A-Penny's royalty rate?

6% of sales, with weekly royalties

What are the four types of support?

-Training

-Ongoing support services

-Real estate services

-Financing assistance

What is a key issue for potential franchisees choosing among different chains?

Training

When are chains more likely to survive?

When franchisors provide more than the average level of training

What are issues to consider with pre-opening training?

-Nature of the industry

-Complexity of the product

-Learning curve for the business

What goes on with ongoing field training?

-Reinforce ideas

-Introduce new products/processes

-Very costly, but reduces free riding

What are overall lessons with training?

-Franchising requires a firm to develop a plan for training franchisees that includes the amount, form, and timing of the training

-Franchisors need to examine the costs and benefits of training to figure out the optimal amount of training to provide to franchisees

-Involve Franchise community

What are the support services?

-Field operations evaluation

-Centralized services

-Communication

What goes into field operations evaluation?

-Audits of franchisees to detect problems

-Costly

-Gain economies of scale as the chain grows

What goes into centralized services?

-Exploit economies of scale and learning curve effects

--Express Oil Change, 157 outlets

-Data processing, purchasing, inventory control

-Major source of value-added from franchisor to franchisee

What goes into communication?

-Transmit information

-Toll-free phone numbers

--Substitute for field audits

-National and regional meetings

--Reinforce corporate goals

--Franchisees exchange ideas

-Newsletters

--Spread information about franchisor and franchisee activities

-Weigh costs and benefits

What are the overall lessons with support services?

-Franchisors provide value to franchisees through field operations evaluation, centralized services, and communications

-Small, young systems must avoid providing too many services

What goes on with site selection at McDonald's?

-They manage all the site evaluation, acquires the property and constructs the building

-After making the decision to develop a site, they award the franchise to the most qualified candidate

What goes on with site selection at Hilton?

-You sign, date and return the UFOC receipt to your developer. The developer discusses the site and market with you, and may visit the site.

-Gain site control (i.e., purchase contract, option to purchase, etc.), if you do not already own or lease the site. We may require you to prepare a market study which discusses the competition for your proposed hotel and anticipated operating results."

What does lease-negotiation assistance do?

-Help with rates

-Might want to be the landlord

-Build a reputation for fair dealing

-Small, young chains should let franchisees handle their own leases

What are overall lessons with Real Estate Services?

-Don't ignore site-selection and lease-negotiation assistance as ways to help control your franchisees

-Don't provide site-selection and lease-negotiation assistance when you first establish your franchise system

What is direct assistance?

-Loans to franchisees

-Only about 1/3 of franchisors do this

-Lots of risk for the franchisor

What is indirect assistance?

-Facilitating loans from third parties

-Most franchisors do this

-Minimal risk for the franchisor

What's most important to a location with fast food?

Be through an area with traffic, it's a convenience point

How should franchisors help franchisees with financial assistance?

By facilitating loans from third parties rather than loaning them money directly

What are the four support services a means of?

Adding value

What is key strategic decision?

It's how much support to offer, the size of the chain is a strong consideration

What are the three types of multiunit franchising?

-Master franchising

-Area development

-Subfranchising

What is master franchising?

Franchisor sells to a "master franchisee" the right to collect a portion of franchisee fees and royalties in exchange for the master franchisee recruiting, training, and supporting the franchisees

What are the advantages of master franchising?

-Franchisees want to maximize sales

-Franchising facilitates fast growth

-Franchising facilitates the buyback of franchised outlets

-Good approach to foreign markets

What are the disadvantages of master franchising?

-Less likely to survive

-Lose control over franchisees

-Bad decisions in choosing master franchisees have large effects

-Very difficult to predict how many units the main franchisor can support

What are the advantages of area development?

-Reduces the number of franchisees you need to attract

-Franchisees can achieve economies of scale

-Much knowledge transfer among outlets in the same area

-Reduces the free riding problem

What are the disadvantages of area development?

-Employees, not owners, manage each outlet

-Gives franchisees added bargaining power

What is subfranchising?

Franchisor sells someone the rights to resell outlets to franchisees

What does the subfranchisor do?

They train franchisees, help them set up, and collect royalties

What are the advantages of subfranchising?

-Enhances growth

-Subfranchisors have a lot of bargaining power

What are the disadvantages of subfranchising?

-Difficult to create a development schedule

-Few people have the financial resources to be a subfranchisor

What are the overall lessons of multiunit franchising?

-Each can foster growth

-Master franchising, area development, and subfranchising each can create partners with more bargaining power than a typical franchisee

When do most franchisors offer franchisees the right to expand?

Locally before offering franchises to new operators

What percentage of new McDonald's outlets are opened by existing franchisees?

More than 60%

What are the advantages to the right to expand?

-Provides incentives to franchisees

-Relatively cheap growth

-Avoid problems involved with franchisees competing with each other

---Great Clips offers franchisees right of first refusal on all new locations

What percentage of franchisors offer exclusive territories?

70%

East Coast Original Frozen Custard offers a ___ mile radius territory

Five

What percentage of the systems that survive over time offer exclusive territories?

91%

What are the advantages of exclusive territories?

-Reduces franchisees' fear of their business being cannibalized

-Reduces franchisees' fear of royalty rate renegotiation

What are the disadvantages of exclusive territories?

Franchisees will want fewer outlets in an area than will the franchisor

What is a key issue with exclusive territories?

Size of the territory

What happens if the territory is too large?

-Sales may not be high enough

-Competitors may take a stronger position

How do you measure the territory?

-Geographic radius

-Square miles

-Number of people

What needs to happen if you give franchisees exclusive territories?

-You need to create a set of policies that encourage franchisee effort

-Perhaps grant exclusive territories and create minimum expansion requirements