LongCh1 - Christian Brothers University



4 Franchises and Buyouts

|— |CHAPTER 4 LECTURE NOTES |

|1 |Identify the major pros and cons of franchising. | |

| |The pros and cons of franchising |

|PPT 4-1 |Make it clear that franchising is not the best alternative for all entrepreneurs. |

|Franchises and Buyouts |Figure 4-1 provides a useful summary of the pros and cons of franchising. |

| |Advantages of franchising |

|PPT 4-2 |Success rate for franchises is much higher than that for nonfranchised businesses. |

|Looking Ahead |• One explanation for the higher success rate is that franchisors are highly selective when granting a |

| |franchise. |

|PPT 4-3/TM 4-3 | |

|Franchising | |

|PPT 4-4/TM 4-4 |a. Training |

|The Pros and Cons of |Emphasize importance of training to inexperienced entrepreneurs (e.g., refer to the training provided |

|Franchising |by Kwik Kopy Printing, Subway, or the “Hamburger U” training offered by McDonalds—all profiled in the |

| |text) |

|PPT 4-5/TM 4-5 |Initial training is ordinarily supplemented with subsequent training and guidance. |

|Major Pluses and Minuses in the| |

|Franchising Calculation | |

|[Acetate 4-5] | |

| |Financial assistance |

| |Franchising organizations often extend a helping hand financially. |

| |Association with a well-established franchisor may improve a new franchisee’s credit standing with a |

| |bank or other lender. |

| |The SBA introduced the Franchise Registry to facilitate lending. |

| |Operating benefits |

| |Franchising offers both a proven line of business and product or service identification. |

| |Offers the advantage of using the franchisor's trademark or brand name. |

| |Franchisors have developed and tested their methods of marketing and management. |

| |Limitations of franchising |

| |Franchising is like a coin—it has two positives and negatives. |

| |The positive side has been outlined, but it is also important to learn about the negative side. |

| |Franchise costs |

| |Initial franchise fee |

| |Investment costs (e.g., rent, inventory, ins premiums, legal fees) |

| |Royalty payments |

| |Advertising costs |

| |( Ask the students to identify factors that lead to variation in these costs (e.g., nature of the |

| |business, reputation of the franchisors, etc.). |

| |Restrictions on business operations |

| |Restricting sales territories |

| |Requiring site approval for the retail outlet and imposing |

| |requirements regarding outlet appearance |

| |Restricting goods and services offered for sale |

| |Restricting advertising and hours of operation |

| |( Ask the students which of these restrictions are likely to have the greatest impact on the success of|

| |franchised businesses. Why? |

| |Loss of independence |

| |The franchisee does surrender a certain amount of independence in signing a franchise agreement. |

| |The franchisor usually imposes controls to ensure success, but these are not always best for the local|

| |operator. |

| |Entrepreneurs can lose franchise rights if they fail to uphold the contract. |

| |( It might be a good idea to poll the class to ascertain how important independence would be to the |

| |students. |

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|2 |Explain franchising options and the structure of the industry. | |

|PPT 4-6 |Franchising Options and the Structure of Franchises |

|Franchisor Controls on Franchisees |Be sure students recognize that buying a franchise, entering a family business, starting a business |

| |from scratch, and buying an existing business are alternatives for entrepreneurial business. |

|PPT 4-7 |Franchising involves a formalized relationship that governs the way a business is operated. |

|Estimate of Investment Costs by |A franchise arrangement allows an entrepreneur to benefit from the accumulated business experience of |

|Great Clips |all members of the franchise system. |

| |Franchising: a marketing system revolving around a two-party legal agreement, whereby the franchisee |

| |conducts business according to terms specified by the franchisor |

| |Franchisee: the party in a franchise contract who is granted selling and other privileges whose power |

| |is limited by the franchising organization |

| |Franchisor: the party in a franchise contract who specifies the methods to be followed by the |

| |franchisee |

|PPT 4-8 |Franchising Options (Suggestion: the terminology of franchising is confusing to many students, so |

|Franchising Agreements |emphasize correct usage of the terms below.) |

| |Franchise contract: the legal agreement between franchisor and franchisee |

| |Franchise: the privileges in a franchise contract |

| |Product and trade name franchising: a franchise relationship granting the right to use a widely |

|PPT 4-9, 10/TM 4-10 |recognized product name |

|Franchising Arrangements |Business format franchising: the franchisee obtains an entire marketing system and ongoing guidance |

| |from the franchisor |

| |Master licensee: firm or individual acting as a sales agent with the responsibility for finding new |

| |franchisees within a specified territory |

| |Multiple-unit ownership: a situation in which a franchisee owns more than one franchise from the same |

| |company |

| |Area developers: individuals or firms that obtain the legal right to open several outlets in a given |

| |area |

| |Piggyback franchising: the operation of a retail franchise within the physical facilities of a host |

| |store |

| |The structure of the franchising industry |

|PPT 4-11/TM 4-11 |Ask students to name examples of each franchising system (in addition to those examples already |

|The Structure of Franchising |mentioned in the textbook). Be ready with some local examples of your own to share with the students. |

|[Acetate 4-11] |Point out that the larger franchisors are the dominant force in the franchising industry. Ask the |

| |students why this is the case. |

| |Mention the 3 franchise facilitators represented in Figure 4-3: |

| |Industry Associations—Groups such as the International Franchise Association sponsor helpful workshops,|

| |seminars, trade shows, etc. |

| |Federal and State Agencies (e.g., FTC)—Provide information on franchise opportunities and enforcing |

| |franchising law/regulations. |

| |Business/Consulting Firms—Assist with franchise evaluation and offer development services. |

|3 |Describe the process for evaluating a franchise opportunity. | |

| |Evaluating franchise opportunities |

|PPT 4-12 |Selecting a franchise |

|Evaluating Franchise Opportunities|• Personal observation of advertisements in newspapers and magazines can be an easy way to learn of a |

| |franchise opportunity. |

| |• Ask the students to make copies of any franchise advertisements they see in publications such as |

| |Entrepreneur, The Wall Street Journal, and Inc. What are the common themes presented in those advertisements?|

|PPT 4-13 |Investigating the potential franchise |

|The 20 Fastest-Growing Franchises |The franchisor and potential franchisee will want to evaluate each other. |

|in 2003 |Be skeptical of a franchisor who pressures franchisees to sign quickly. |

| |Independent, third-party sources of information |

| |State and federal governments are valuable sources of franchising information. |

| |Several sources of franchising information are available, including the Franchise Opportunities Handbook and |

| |the Franchise Opportunities Guide. |

| |Entrepreneur, Inc., Success, and the Wall Street Journal are only a few of the publications that offer |

| |franchisor ratings. |

| |Franchise consultants are available to assist individuals. One such group is FranCorp, which offers seminars |

| |to guide franchise choice. |

| |The franchisor as a source of information—but be sure to recognize the primary purpose of this source (i.e., |

| |to promote the franchise). |

|PPT 4-14/TM 4-14 |( Financial data are sometimes provided in an information packet, but potential franchisees should remember |

|Franchising from the Franchisor’s |that these numbers are only estimates. |

|Perspective |Existing and previous franchisees as a source of information (perhaps the best source of franchise facts) |

| |( Explore with the students the relative usefulness of the three sources of information. Which is the most |

| |reliable source? Why? |

| |Finding global franchising opportunities |

| |There is a great opportunity for small firms in the United States to franchise in other countries. |

| |Although the appeal of foreign markets is substantial, the task of franchising there is not easy. |

| |Legal considerations in franchising |

| |The franchising contract |

| |The franchise contract is the basic agreement between the franchisor and the franchisee. |

| |Emphasize the advisability of consulting an attorney before signing the franchise agreement. The advice of a |

| |banker and the services of an accountant may also prove helpful. |

| |Franchise disclosure requirements |

| |The offer and sale of franchises are regulated by state and federal laws. |

| |Rule 436: Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures |

| |gives minimum disclosure standards. |

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|PPT 4-15 | |

|Legal Considerations in | |

|Franchising | |

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|PPT 4-16 | |

|Franchise Disclosure Requirements | |

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| |Basic requirements -- important information at least 10 days before |

| |investment. |

| |Disclosure option -- Rule 436 or UFOC guidelines |

| |Coverage -- pertains to business-format franchises, product franchising, and vending machine or display rack |

| |business ventures |

| |No filing -- Rule 436 requires only disclosure (unlike state rules) |

| |Remedies -- response to violations |

| |Purpose -- provide information to assess risk and benefits |

| |The uniform franchise offering circular (UFOC) provides basic information about the franchise offering and the|

| |franchisor (e.g., litigation and bankruptcy history; investment requirements; and condition that would affect |

| |renewal, termination, or sale of the franchise). The UFOC should be reviewed by a franchise attorney and an |

| |accountant. |

|4 |List some reasons for buying an existing business. | |

| |Buying an existing business |

|PPT 4-17, 18 |Discuss buying an ongoing business as an alternative to starting from scratch. |

|Buying an Existing Business? |Try to determine whether any students or their families have chosen this alternative. |

|PPT 4-19/TM 4-19 |Reasons for buying an existing business |

|Pros and Cons of Buying an |Reduction of uncertainties—a demonstrated performance record |

|Existing Business |Acquisition of ongoing operations and relationships -- some surprises |

| |A bargain price—room for caution |

|PPT 4-20 |Quick Start— “get going” in their new business |

|Investigating and Evaluating |Finding a business to buy (discuss the role of matchmakers) |

|Available Businesses |Investigating and evaluating available businesses |

| |Relying on professionals (especially attorneys and accountants) |

|PPT 4-21 |Finding out why the business is for sale--reasons for selling an existing business will often include: |

|Finding Out Why the |Old age or illness |

|Business Is For Sale |Desire to relocate in a different section of the country |

| |Decision to accept a position with another company |

| |Unprofitability of the business |

| |Discontinuance of an exclusive sales franchise |

|PPT 4-22/TM 4-22 |Maturation of the industry and lack of growth potential |

|Examining the Financial Data | |

| |Examining the financial data |

| |Emphasize the importance of an independent audit to reveal the accuracy of financial statements. |

| |Review financial statements and tax returns for the past five years. |

|5 |Summarize three basic approaches for determining a fair value for a business. | |

|PPT 4-23/TM 4-23 |Valuing the business |

|Valuing the Business |Explain the importance of accurately valuing a business that is for sale. |

| |Point out how each approach has unique limitations. |

| |Nonquantitative factors in valuing a business |

| |Competition |

| |Market |

|PPT 4-24/TM 4-24 |Future community development |

|Nonquantitative Factors in Valuing|Legal commitments |

|a Business |Union contracts |

| |Buildings |

| |Product prices |

| |Negotiating and closing the deal |

| |Discuss the importance of negotiating a purchase price. |

| |Be sure students know that the terms of the sale are also very important. |

| |Be |

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|PPT 4-25 | |

|Negotiating and Closing the Deal | |

|6 |Describe the characteristics of highly successful startups. | |

| |Increasing the chances of a successful startup |

| |Describe the features of high-growth firms: |

| |Team effort |

| |Founders’ related experience |

| |Founders’ other startup business experience |

| |Being in service or manufacturing industries |

| |Having financial resources |

| |Sharing ownership among founders |

| |Not being limited to local markets |

| |Explain that the firm may encounter problems if it grows too fast, because (1) cash flows may be inadequate to |

| |finance the firm’s growth and/or (2) profits generated may be insufficient to provide attractive returns on capital. |

|— |Answers to end-of-chapter |

| |discussion questions |

1. What makes franchising different from other forms of business? Be specific.

p. 73 Franchising is an alternative to business ownership whereby one party (the franchisee) is granted the privilege of conducting business as an individual owner but is required to operate according to certain methods and terms specified by the other party (the franchisor). This unique association with another party, which brings both benefits and restrictions, distinguishes franchising from completely independent ownership.

2. What is the difference between product and trade name franchising and business format franchising? Which one accounts for the majority of franchising activity?

p. 78 - 79 A franchise that only provides the right to use a trade name is a trade name franchise. Gasoline service stations and soft-drink bottlers are examples. When a franchise provides the legal right to use an entire marketing system and an ongoing relationship of assistance and guidance, it is a business format franchise. Fast food outlets are an example.

Trade name franchising and its close cousin, product franchising, account for almost 70 percent of all franchise sales. However, the volume of sales and number of franchise units associated with business format franchising have increased steadily over the years.

3. Identify and describe the parties in the franchising system.

p. 79 The franchisor and franchisee are the two main parties in the franchise system. The franchisor is the party in a franchise contract who specifies the methods to be followed by the franchisee. The franchisee is the party in a franchise contract who is granted selling and other privileges and whose power is limited by the franchising organization. Franchisors can sell franchises directly to franchisees, or they may market these in specific territories through master licensees or area developers. Franchise facilitators (such as industry associations, consulting firms, and federal/state agencies) are often a part of the process, since they promote the sale and implementation of franchises.

4. Discuss the advantages and limitations of franchising from the viewpoints of the potential franchisee and the potential franchisor.

p. 73 - 78 The major advantages and disadvantages of franchising from the viewpoint of a potential franchisee are as follows:

|Advantages |Limitations |

|Formal training |Cost of a franchise |

|Financial assistance |Restrictions on business operations |

|Operating benefits |Loss of independence |

The major advantages and disadvantages of franchising from the viewpoint of a potential franchisor are as follows:

|Advantages |Limitations |

|Reduced capital requirements |Reduction in control |

|Increased management motivation |Sharing of profits |

|Speed of expansions |Increasing operational costs |

5. Should franchise information provided by a franchisor be discounted? Why or why not?

p. 84 Information provided by a franchisor should not be discounted. The franchisor should not, however, be the only source of information. Since franchisors are prohibited from making profit predictions for their franchises, either in writing or orally, a prospective franchisee should be cautious if the franchisor offers any predictions. Otherwise, the franchisor is an excellent source of information.

6. Do you believe that the Uniform Franchise Offering Circular is useful for franchise evaluation? Defend your position.

p. 85 Some students may argue that the government requirement is unnecessary. They may favor self-regulation by the industry. However, most students will perceive the document as useful, since it standardizes the type of information available for evaluation by potential franchisees. For example, knowledge of the bankruptcy history of a franchise can be very valuable in the franchise selection process.

7. Evaluate loss of control as a disadvantage of franchising from the franchisor’s perspective.

p. 78 Within certain limits, a franchisor can specify, in the franchise contract, matters that concern him or her about the operation of the business. The franchisee is an independent businessperson and not under the direct or daily control of the franchisor. In most situations, this is not a major problem. Sometimes, however, the franchisor may experience this as a drawback when a franchisee fails to devote sufficient energies to a franchise and it begins to fail. A franchisor may even consider purchasing back the franchise to salvage the image of the franchise.

8. What are the possible reasons for buying an existing company versus starting a new business?

p.85 - 86 The entrepreneur want to start a new business if he/she has a new product or service that necessitates a new business. Also, those businesses that are available for sale may be handicapped by poor locations or undesirable facilities that the entrepreneur wishes to avoid. However, buying an existing business has its advantages. For example, this option involves less uncertainty (since the business is operating), relationships with customers and suppliers are already established, and a business may be available at a price below what it would cost to create one from scratch.

9. What are some common reasons that owners offer their businesses for sale? Which of these reasons might a buyer consider to be negative?

p. 87 As discussed in the chapter, the real reason for offering a business for sale may never be disclosed. However, most sellers will probably explain their motivations, if asked. Some of the common reasons are: 1) Illness or aging of the owner, 2) Desire to relocate and/or retire in a different part of the country, 3) Decision to accept a position in another company, maybe a competing firm, 4) Business is not as profitable as expected—more work required than anticipated, 5) Loss of an exclusive sales franchise, and 6) Perception of lack of growth in the market segment. (Reason 4, 5, and 6 can easily be considered negative to the buyer. The instructor should anticipate receiving many other logical reasons from students.)

10. What are some of the nonquantitative factors in valuing a business?

p. 88 – 89 A list of these factors can be extremely long! Almost anything can be a consideration. In the chapter, however, the authors have selected the following factors as typical of nonquantitative considerations:

a. Competition

b. The ability of the market to support the business

c. Future community development

d. Legal commitments

e. Union contracts, if any

f. The quality of buildings

g. Product prices – are they competitive?

|— |COMMENTS ON CHAPTER “YOU MAKE THE CALL” SITUATIONS |

Situation 1

1. What other Internet sites might prove helpful information to Moore as he tries to learn more about this franchise?

Numerous Web sites could provide helpful information to Moore. Some of these are:









Moore could also access articles about the franchise by accessing the Web sites of entrepreneurial magazines such as Inc. and Entrepreneur. Most of these type publications archive their articles and provide free access. A word search with an internet search engine such as Google would definitely locate articles and other web sites related to the franchise.

2. What other questions should Moore have asked the Tucson franchise?

Hopefully, the franchisee Moore spoke with was credible. If so, the sales information regarding the last thirty days should be useful. However, many other questions could have been asked to this person. Some example questions are;

Did you receive training from the franchisor?

What support do they provide you now?

Is your territory restricted?

How long did it take for you to be profitable?

What kinds of ongoing fees, if any, do you pay?

Are there restrictions on your operating methods?

Can you do your own promotion?

Etc, etc.

If Moore could locate any ex-owners of this franchise they could provide valuable information about the dark side of the franchise, if there is one.

3. What information might a Uniform Franchise Offering Circular from Gumball Gourmet provide?

The UFOC would provide important information on a variety of items, including litigation and bankruptcy history, investment requirements, and conditions that would affect renewal, termination, or sale of the franchise.

Situation 2

1. How concerned do you think this family should be about their inexperience? Why?

Lack of experience should not be a major problem. Most franchise purchasers are first-time entrepreneurs. If the franchisor is strong and has a good training program any inexperience will not be a handicap. This particular franchise offers six weeks of training at its headquarters and two additional weeks at the franchisee’s location! This franchisor began franchising in 1988, therefore, it is experienced in selecting a franchisee from applicants.

2. Will the proposed location in the mountains be a potential problem for this type of restaurant? Why or why not?

Weather is frequently a major consideration in a business’s success or failure. Back Yard Burgers had traditionally required a two-drive-thru design for its buildings. However, the Prewitt’s were so eager to operate this business they convinced the franchisor to grant an exception and allow them to convert one drive-thru into an inside dining area. Their idea has helped them overcome the weather challenge and become one of the more successful franchises! In fact, nearly all Back Yard Burgers now have some indoor dining area.

Situation 3

1. What sources of information about this franchise would you recommend that the friends consider?

The sources of information described in this chapter should, once again, provide the information needed by these three ladies. In this case they should also look carefully at local conditions to make an assessment of the potential for the gym.

2. Is their work-out experience sufficient to prepare them for ownership of this franchise?

Probably not! They may have knowledge of accounting issues because of their work experience, but beyond that the odds are they will need help. However, their experience as customers of the gym will be valuable to decisions regarding certain aspects of operations, facilities, and maybe even promotion.

3. Would the three friends be making a wise decision if they decided to buy this franchise? Why or why not?

Giving an answer to this question will be possible only after the three ladies have carefully evaluated the franchise, the local market potential for the gym, financing arrangements, and their personal relationship to see if a business relationship might work as well as their work-out relationship at the gym has succeeded.

Situation 4

1. Should a prospective buyer of this firm investigate other possible reasons why the owners might want to sell? Why or why not?

Yes. The move overseas can likely be checked out without too much trouble. One might wonder why the business couldn’t still be owned as an absentee owner. Nevertheless, any prospective buyer should look for other more negative reasons for the proposed sale.

2. What sales and revenue numbers are needed to evaluate the asking price?

A prospective buyer needs as much financial data as is available. (See Appendix B “Valuing a Business” for more information about this process) Typically, past income and balance sheets for five or more years would be required.

3. What nonquantitative factors might have an impact on the fairness of the asking price?

There may be community issues related to the manufacturing plant which could impact a “fair” price. Also, the firm may have some legal issues outstanding. The business is very old and all buildings and equipment should be examined closely. And there is the chance that energy conservation may fizzle as suddenly as it sizzled, and the volatility of the construction industry will always be with you. If a prospective buyer can’t cope with the uncertainties or with all those bids, he or she should try something simpler.

Additional Notes:

Outlook: The company has a proven track record in a business that seems well positioned, given the frequency of power outages on the West Coast, and benefits from the popularity of natural-light architecture. The big challenge for a new owner will be figuring out how to balance growth efforts between residential sales (say, a $1,000 skylight for a bedroom) and lofty projects (like a $385,000 contract to install a huge 10,000-square-foot skylight in the roof of a landmark building). The current owners rely on a three-pronged approach to selling skylights: yellow-pages advertising in ritzy residential areas, listings in Sweet’s Directory (the construction industry’s buyers’ guide), and leads from a national service that flags promising building projects across the United States. If a new owner decides to focus on the bigger jobs, sales and profits will rise faster than they have in the past, likely requiring a move from the current leased space (about 7,000 square feet) into a facility twice as large. Don’t worry about adding marketing staff, though. The current owners just hired someone to land high-end jobs in the $100,000-plus range.

Price Rationale: This is a nicely priced business. Small manufacturers with $1 million to $5 million in annual revenues tend to sell for three to four times discretionary cash flow these days. The sum of EBITDA and owners’ compensation for this company equals cash flow of $213,561, so the suggested sales price falls between $641,000 and $854,000. The company’s actual selling price will probably hinge on the type of buyer it attracts: if the large players in the industry decide to pursue the company as a strategic acquisition, they would surely raise the ceiling on the price.

Pros: A favorable price, chic and useful products, and a sales history suggesting a recession-proof business all make this a gleaming opportunity.

|— |Answers to exploring the web exercises |

For each chapter, the instructor’s manual will include a short summary of suggested results students will have after completing the various Web exercises. Because the Web is a constantly changing medium, the answers may vary, and the links may change as well. Thus, answers are only suggested, and the URL for resources, where required, is provided.

Exercise 1

Answers will vary due to the students’ responses to the quiz. The results are divided into two parts, part one: Success Factors, and part two: Prerequisites.

Exercise 2

a. Answers will vary depending on what franchises students select; however, they should mention training and ongoing support.

b. Answers will vary depending on what franchises students select; however, they should mention that higher costs tend to be associated with the more successful franchises. Also, students should highlight what the franchisee is receiving for the various costs. For example, training and ongoing support might be included in the costs.

Exercise 3

Answers will vary depending on the country in which the student is interested in opening a franchisee and what franchises are available for that area.

Exercise 4

Answers will vary.

|— |SUGGESTED SOLUTION TO CASE 4: auntie anne’s pretzel |

1. Is an Auntie Anne’s Pretzel franchise a good idea for someone with an entrepreneurial spirit? Why or why not?

One of the rewards of entrepreneurship you learned about in Chapter 1 was freedom from oppressive cultures and the supervision of the bureaucratic environment. Franchising, however, seems to run counter to that reward because it requires business entrepreneurs to follow strict guidelines so that every franchise location is standardized to detailed specifications. This means that, like in corporate America, franchisees have to follow someone else’s rules. In the video, Anne Beiler says, “We’re looking for people who want to follow the system. So what we’re looking for is an A-student or someone who, in the lifetime of their education, they did exactly what the teacher asked them to do. We don’t want entrepreneurs. We don’t want people inventing their own things. A franchisee feels like an entrepreneur, but we are looking for franchisees, who will follow the system we have created and perfected for 15 years.” Chapter 1 also described one of the characteristics of successful entrepreneurs is an internal locus of control, or the belief that a person’s success depends on his or her own efforts. If a person considers this to include not only efforts, but ideas and creativity, then an Auntie Anne’s franchise may not be a comfortable fit. Even though Auntie Anne’s pretzel franchisees are given a formula for success, they also give up a certain level of individual control over their business. They become part of the franchise council, a collective body that discusses and negotiates changes to the franchise format with Auntie Anne’s management. For these reasons, a franchise may not be the best idea for the person with an entrepreneurial spirit. Other entrepreneurial characteristics, however, match well with the Auntie Anne’s format. You learned in Chapter 1 that entrepreneurs are tenacious, and in the video Anne Beiler describes the difficulties in securing an Auntie Anne’s pretzel franchise. One couple tried for 10 years to have a successful application before they were awarded a franchise location. Entrepreneurs are also risk takers, and even though there is a proven formula for success with Auntie Anne’s, applicants must have significant financial resources to invest in the franchise they propose. And franchise owners must work long hours, risking the disintegration of personal and family relationships.

2. How did FranCorp help Auntie Anne’s? What role does FranCorp play in the structure of franchising? FranCorp is a franchise consulting company based in Chicago, Illinois, that helped Auntie Anne’s move from a licensing arrangement, in which businesses licensed the Auntie Anne’s name and logo, to a full-fledged franchise agreement, which is a contractual arrangement touching all aspects of business operation. According to the figure in your text, FranCorp falls into the category of a franchise facilitator because its consultants provide assistance in evaluation and development of ideas into franchises.

3. Today, Auntie Anne’s Pretzels has more than 830 stores in 43 U.S. states and 12 countries, but in 1994, the company only had about 325 stores and desperately needed a cash infusion to grow. Management spent 10 months negotiating with venture capitalists who proposed buying a 32 percent stake in the company. In the end, Anne Beiler and her management team decided not to go public. After watching the video, why do you think this is so?

It should be clear from the video that Auntie Anne’s exists not just to generate profit for its own sake, but to make money to fund charity work and outreach programs. It is also clear that Anne Beiler cares about her relationships in the company. She wants to nurture people and support them in growing. This is evident in what the Beilers look for in franchisees – attitude versus ambition – and how involved they are in the individual with their employees and franchisees. If the company had gone public, the pressure to perform financially would have outweighed the Beilers’ focus on people, and in the end, that lessened level of caring would have trickled down to the customer.

Rather than accept third-party capital, the Beilers chose to reduce the number of company-owned stores, close a couple of unprofitable stores, and become very cost conscious. This allowed the Beilers to grow the company at a comfortable pace and retain as much of the personal touch as possible.

4. How can you account for the tremendous demand for Auntie Anne’s Pretzel franchises?

Students’ answers will vary. One reason for the success is found in the answer to question 3: The Beilers are not trying to be the biggest pretzel company in the world. Because they are able to restrain their growth to a comfortable level, the company is under control. When companies growth outpaces their ability to put supportive systems in place, it can cause a great amount of turmoil in the business that eventually affects all performance metrics. Another reason behind the success could be that the Beilers don’t accept any franchise applicant who can afford the initial franchise fee and startup investment. Instead, they look for a specific personality and attitude. By screening franchise applicants at the outset, the company has a lesser chance of having to handle franchisees later on, who don’t fit into the system or who are pulling the company in a different direction. By embracing a certain type of personality, the Beilers ensure a level of consistency across franchises and a better ability of franchisees to work together on the franchise council. And lastly, Auntie Anne’s franchises are solid financially. Headquarters does rigorous due diligence before accepting a franchise, which means that each individual franchisee has a better chance for personal and business success.

Activities

Purpose: The purpose of these activities is for students to delve deeper into the workings of a single franchise. Since student have seen detailed videos of Auntie Anne’s, these activities are designed to build on their exposure and find out how much someone needs to know before deciding to apply for a franchise (no matter what the franchise). Basic solutions are given, but activities also require students to assess their own feelings about becoming a franchisee.

Setting it up: These activities are suited to individual assignment, but they could also be worked in teams of two students. There is not enough work for this to be a successful group activity. You could even assign the activities before watching the video in class, so that you could follow up the video presentation with a more fully informed discussion of the ins and outs of franchising.

1. At Auntie Anne’s Training Center, otherwise known as Pretzel University, new franchisees learn how to roll, twist, and bake pretzels, but what other kinds of training are they required to take? Visit the Auntie Anne’s Web site () and research the training conducted at Pretzel University. Based on the list of subjects covered, do you think you would feel confident opening your own business after following Auntie Anne’s training program? If you were to propose a new class at Pretzel University, what would it be and why?

As of publication, the list of training on the Auntie Anne’s Web site included the following: 6 days of Store Operations Training, 2 days of Training Skills, 2 days of Store Management Training, 1 day of Leadership Skills Program, and 1 day of Franchise Owner Meetings. Auntie Anne's will provide initial training for a minimum of three individuals. Training is conducted at the Auntie Anne’s Training Center, in Gap, Pennsylvania prior to the new store opening. On-site training is also provided.

2. Use the InfoTrac subscription that came with your book to find an article by Dina Berta titled, “Auntie Anne’s Latest Twist,” published in Nation’s Restaurant News. Read the article, which describes the newest class in Auntie Anne’s Pretzel University. Write two to three sentences summarizing the article.

The newest class in the training curriculum is leadership, which was added after it was determined that Auntie Anne’s was not doing enough to prepare franchisees in this area. The class begins by looking at character using the DISC personality profile system (dominance, influence, steadiness, and consciousness). Once trainees have learned their own DISC profile, they work with real-life Auntie Anne’s scenarios and role play solutions. To date, the class has been very well received by franchisees.

3. After watching the video, you may come away with the feeling that Auntie Anne’s has nothing but upside potential. But all franchising has its limitations. Read the franchising FAQs on the Auntie Anne’s Web site and write down all of the costs and the restrictions that are disclosed. After researching Auntie Anne’s in more detail, would you be interested in becoming a franchisee? Why or why not?

Sources: Small Business School video; company Web site at ; Polly Larson, “Creating Positive Franchise Relations,” Franchising World, September 2003, 5; Dina Berta, “Auntie Anne’s Latest Twist: a Leadership Class,” Nation’s Restaurant News, March 1, 2004, 20; “Auntie Anne’s, Inc. Selects MyAdGuys’ Brand Management Solution,” Internet Wire, May 1, 2002, online.

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