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Chapter 4.2 Own a Franchise or Start a Business

Chapter 4.2 Own a Franchise or Start a Business. Mrs. Leonard Entrepreneurship. Franchise Ownership. A franchise is a legal agreement that gives an individual the right to market a company’s products or services in a particular area Ex. Jiffy Lube stations, McDonald’s

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Chapter 4.2 Own a Franchise or Start a Business

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  1. Chapter 4.2 Own a Franchise or Start a Business Mrs. Leonard Entrepreneurship

  2. Franchise Ownership • A franchise is a legal agreement that gives an individual the right to market a company’s products or services in a particular area • Ex. Jiffy Lube stations, McDonald’s • Franchisee is a person who purchases a franchise agreement • Franchisor is a person or company that offers a franchise for purchase • More than 500,000 people in the U.S. own franchises • Franchising opportunities are available in every field, from motels to pet stores

  3. Sources for finding out about Franchise Ownership and Opportunities • Franchise Opportunities Handbook – publication of the U.S. Department of Commerce • Lists more than 1,400 franchise opportunities by category • Provides information about costs and capital requirements • Consumer Guide to Buying a Franchise • Publisher by the Federal Trade Commission • Books on franchising available at your public library • The Wall Street Journal • Magazines such as Forbes, Barron’s Business Start-Ups, Entrepreneur, and Inc

  4. Operating Costs of a Franchise • Initial Franchise Fee – fee the franchise owners pays in return for the right to run the franchise • Fee can run anywhere from a few thousand to a few hundred thousand dollars (usually non-refundable) • Start-Up Costs – costs associated with beginning a business • Include the costs of renting a facility, equipping the outlet, and purchasing inventory

  5. Operating Costs of a Franchise • Royalty Fees – weekly or monthly payments made by the owner of the franchise to the seller of the franchise • Payments usually are a percentage of your franchise’s income • Advertising fees – fees paid to support television, magazine, or other advertising of the franchise as a whole

  6. Advantages of Owning a Franchise • An entrepreneur is provided with an established product or service • Allows entrepreneurs to compete with giant companies • Franchisors offer management, technical, and other assistance • On-site training or classes, aid with starting the new business and handling daily operations, and tips on crisis management • Offer help on everything from site selection and building design to equipment purchase and recipes • Most maintain a toll-free telephone number that franchises can call for advice

  7. Advantages of Owning a Franchise • Equipment and supplies can be less expensive • Because franchises are part of large chains, they can purchase in bulk • A guarantee of consistency attracts customers • Franchise contract mandates a certain level of quality, consumers know what they can walk into a franchise anywhere and receive the same product and service

  8. Disadvantages of Owning a Franchise • Franchises can cost a lot of money and cut down on profits • Initial capital is needed to purchase a franchise business is high • Some of the profits you earn as a franchise owner are returned to the franchisor as royalty fees • Owners of franchises have less freedom to make decisions than other entrepreneurs • Many business decisions have already been made • Products and services, prices set by franchisors

  9. Disadvantages of Owning a Franchise • Franchisees are dependent on the performance of other franchisees in the chain • If other franchises run sloppy operations, customer opinions of the chain will decline – which will make customers stop going • The franchisor can terminate the franchise agreement • If franchisee fails to pay royalty payments or meet other conditions, the investment in the franchise could be lost • If the franchise expires, the franchisor can choose not to renew the agreement

  10. Evaluating a Franchise Ask these questions to evaluate a specific franchise • What is the projected demand for the franchised product or service in the area I want to locate in? • Will I be guaranteed an exclusive territory for the duration of the franchise term, or can the franchisor sell additional franchises in the territory • What are the costs and royalty fees associated with the franchise • How profitable have other franchises in the area been? What do other franchisees think of the franchisor?

  11. Evaluating a Franchise • How long has the franchisor been in business? How profitable is the franchisor? • What services does the franchisor provide? Will the franchisor help me with marketing, merchandising, and site selection? • Are benefits provided by the franchisor worth the loss of independence and the cost of purchasing the franchise? • What happens if I want to cancel the franchise agreement?

  12. Evaluating a Franchise • Some franchisors make false or misleading claims about their franchises • Carefully study the documents the franchisor gives you • Be suspicious of any company that will not back up its claims with written financial statements • Beware of high-pressure sales tactics – never allow yourself to be pressured into making the decision to quickly • Consult an attorney before signing a franchise agreement, these are complicated documents Who is interested in starting a franchise? On page 88 look at table of top 10 Franchises – which would you want to open?

  13. Starting your own business • As an entrepreneur, you might want to establish a business of your own • Who wants to start their own business?

  14. Advantages of Starting your own Business • Entrepreneurs who start their own business get to make decisions about everything from where to locate, prices to charge, and employees to hire • They are completely independent and create their own destinies • Entrepreneurs find great satisfaction in starting their own business • Attracted to the challenge of creating something new • Feel triumph when their business turns a profit

  15. Disadvantages of Starting your Own Business • There is no certainty that customers will purchase what you offer –you must estimate the demand for your product or service • Must make decisions that other types of entrepreneurs need not make • What product/service to offer, the location, what employees to hire

  16. 4.2 Assessment • Thinking Critically 4.2 (p.91) • Questions 1-3 • Type the questions and your answers (answer in bold) • Save! • 4.2 true/false and multiple choice worksheet • Put in your notebook

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