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Business Ownership: The Franchise Option

Key Economic Concepts:

• Benefit
• Business
• Choice
• Costs
• Decision Making
• Entrepreneurship
• Legal Forms of Business
• Risk

Description:

Students explore an alternative to starting a business from scratch – investing in a franchise. They begin by considering the pros and cons of a franchise and whether this form of business is an option that would fit their personality and needs. Students then research and analyze franchise opportunities, ultimately selecting one that they think they might be able to successfully operate in their own community. While making their choice, students consider a variety of factors including their personal interests and abilities, the reputation of the product or service, the franchisor’s ability and willingness to assist the franchisee, and market factors such as consumer demand and anticipated competition.

Lesson Objectives:

Students will:

• Using a cost-benefit analysis, students will determine whether they are better suited for starting a business from scratch or through a franchise.
• Analyze a franchise for its appropriateness as a new business they would start in their local community.

Introduction:

On the board, copy this list of businesses in the exact same order.

Fantastic Sam’s
Radio Shack
A&W Restaurants
Nathan’s Famous Inc.
Century 21 Real Estate
Hollywood Tans
International House of Pancakes
Subway
Embassy Suites Hotels
Scott’s Lawn Service

Have students look at the list of businesses on the board. Ask them to identify the good or service provided by each, then guess what the businesses have in common. If they are unable to come up with the correct answer, erase all but the first letter of each company name to expose the connection. [Answer: Each business is a franchise].

Tell students that they are going to explore a form of business called a franchise. Lots of people dream about having their own business but starting a business from scratch can be intimidating – especially for people who have limited business experience or money to invest in a business. A franchise is an alternative way to start a business. Some features of a franchise help reduce the risk entrepreneurs face when starting a new business.

Resources:

• Entrepreneur.com": This website discusses entrepreneurship
  www.entrepreneur.com ^[3]
   

The following articles discuss the advantages and disadvantages of a franchise:

• Choosing the Best Business to Buy: Discussion of the pros and cons of buying a business.www.entrepreneur.com/startingabusiness/selfassessment/whattypeofbusinessshouldyoustart/article47774.html ^[4]
   
• The Pros and Cons of Buying a Franchise: Discussion of the pros and cons of buying a business.
  http://franchises.about.com/od/franchising101/a/pro_con.htm ^[5]
   
• Should You Buy a Franchise? (Advantages & Disadvantages): Discussion of the pros and cons of buying a business.http://sbinfocanada.about.com/od/franchiseinfo/a/buyfranchise.htm ^[6]
   
• Franchise Facts: Discussion of Franchise Demographics.
  www.whichfranchise.org/article.cfm?articleID=224 ^[7] or www.azfranchises.com/franchisefacts.htm ^[8]

• "The Franchise Zone: Franchise Biz Plan": This website offers an online directory and background information on hundreds of franchise opportunities.
  www.entrepreneur.com/franchises/index.html ^[1]

• "A Consumer Guide to Buying a Franchise":This website gives information on owning a franchise by showcasing online publishing by the Federal Trade Commission. This guide addresses the obligations of a franchise owner, how to shop for franchise opportunities, and asking the right questions before investing.
  www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.shtm ^[9]

Process:

 NOTE: The amount of reading required for this lesson is extensive, and therefore you may want to spend two class periods on this lesson instead of one. Or, you may wish to print out some of the material for the students to read prior to actually going through the lesson.

Activity 1: What is a Franchise?

Students are introduced to the franchise concept as defined by federal and state laws. The role of the franchiser and franchisee are explained. Descriptions and examples of the two general types of franchises (product distribution franchises and business format franchises) are also provided.

Activity 2: Franchise Pros and Cons

Students are asked to imagine they want to start their own business. After reading about the pros and cons of franchises, they are asked to tell whether they think a franchise is right for them. They are directed to include three reasons for their decision as well as one negative.

The pros and cons they may list are summarized below.

Pros:

• Reduced risk of failure
• Start-up assistance in the form of training, advice, operational manuals, and sometimes, financing
• On-going training and support from franchiser
• Association and synergy with other franchisees for help/ideas
• Standardized/proven product and operational systems
• Product or service with brand-name recognition
• Collective buying power
• Assistance with sales and marketing
• Research and development support
• Some independence operating their business.
  
  Cons:
• Restrictions set by franchiser (geographic, products, operations, vendors, etc.)
• Franchisees must pay ongoing royalties and advertising fees.
• The franchiser's problems are also the franchisee’s problems (e.g., poor image, limited advertising, supply problems, franchiser’s financial difficulties)
• The term of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.
• Smaller profit margins
• Difficult to achieve redress if franchiser fails to meet obligations

NOTE: Consider having students use word processing software to prepare their response. They can then print it out or deliver it to you via email.

As a class, discuss:
1. What do you view as the most important reasons for your choices?
2. What features of a franchise reduce the risk of business failure? [Potential answers include having a well-known brand with an established reputation, the managerial training and support provided by the franchiser, the association and synergy with other franchisees, marketing assistance]
3. How might a franchise increase one’s risk of failure? [Potential answers include franchise restrictions on geography or product, problems with the quality of the product throughout the franchise chain, and the financial failure of the franchise]

Activity 3: Selecting a Franchise

Students identify and research two franchise opportunities that they think might succeed near where they live and go to school. They record their findings on a worksheet which offers a list of questions for an investor to consider when selecting a franchise. Answers to the questions can be found at the Franchise Zone ^[1] and the corporate web sites of the franchisers. At the bottom of the worksheet, students are asked to make a choice between the two options and defend their decision.

NOTE: Some teachers prefer to print and distribute the worksheet in advance to students versus having them print their own copies.

If time allows, have students form small groups representing business partnerships. Each group must study the franchise alternatives selected by the various partners then choose one the group thinks would be most successful in the local community. Each group must make a presentation (an oral report, poster, or Power Point presentation) to the class on their choice. The class then votes for the franchise they think will most likely succeed.

Ask students:
1. What other information would you have wanted to have had when selecting your franchises?
2. Where might you get this information?
3. Do you think you can trust the information provided by the franchiser? Why or why not? [Students will probably respond that the goal of the franchiser is to get franchisees – the franchiser may or may not be concerned about the success of the franchisee. A savvy student may point out there is a federal regulation that forces the franchiser to be truthful. You may want to explain that the Federal Trade Commission’s Franchise Rule ^[2] requires franchisers to disclose specific information to the prospective franchisee at least 10 days prior to signing a contract or accepting any money. The disclosure document—the Uniform Franchise Circular Offering (UFOC)—contains extensive information about the franchise including required fees, basic investment, bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial statement of the franchiser, earnings claims (if the company makes them), etc.]
4. There are several other sources of information that should be explored besides the franchiser. What kinds of information might these sources provide?
[- An accountant can help prospective investors to understand the company's financial statements, develop a business plan, and assess any earnings projections and the assumptions upon which they are based.
- An attorney can help prospective investors to understand the rights and responsibilities in a legal contract and any legal problems that might arise.
- Banks and other financial institutions may provide an unbiased view of the franchise as a business opportunity you are considering. Your banker should be able to get a Dun and Bradstreet report or similar reports on the franchiser.
- Better Business Bureau (BBB) in the city where the franchiser has its headquarters can tell if there have been any consumers complaints about the company's products, services, or personnel.
- Several states regulate the sale of franchises. The Division of Securities or Office of Attorney General may know if there have been any complaints from investors concerning the franchiser.]

Conclusion:

Reinforce the point that starting any business is a risk and there is no guaranteed success. All an entrepreneur can hope to do is reduce the risk of failure though careful investigation prior to making a commitment to a business venture.

Assessment Activity:

Evaluation is built into Activities 2 and 3. Activity 2 has students writing a paragraph that tells which would be better for them – investing in a franchise or starting a business from scratch. Their response must include at least three reasons for their choice and at least one drawback. Students also take a position and defend it in Activity 3 – this time they support their choice of a franchise for them to start near their home neighborhood or where they go to school.

This rubric can be used to assess both position statements. Weights for various elements being evaluated are at the discretion of the teacher.

Extension Activity:

1. Students are instructed to visit a web page that provides the history of Subway ^[10] – the chain that makes submarine sandwiches. One of today’s most successful franchise operations, Subway was started by a teenager! As a class discuss the reasons why someone might want to be a franchiser? [Potential answers include ability to grow the company more quickly, bulk purchasing of supplies and equipments, sharing of other costs such as building design and advertising]

2. Most people think a franchise is the same thing as a business opportunity. But in the eyes of the law, they differ in some respects. Students are asked to read two articles to find out how they are the same and how they are different. The will record their answers on this worksheet: Franchise or Business Opportunity. A rubric for this activity can be found here.

a. Different Worlds ^[11] : How to choose between a franchise and a business opportunity
b. Is a Franchise in Your Future? ^[12] : Difference between a Business and a Franchise
c. Franchise vs. New Business ^[13]

3. Invite a local franchisee to visit the class. Ask him or her:
- How did you become a franchisee?
- Why did you select the particular franchise you operate?
- What knowledge and skills did you have that helped you succeed as a franchisee?
- What do you wish you had known before you became a franchisee?
- What are the pros and cons of starting a new business? Being a franchisee?
- What did the franchiser do to help your business succeed?
- How was your franchise financed?

Links Used:

1. ^{^ ^} "www.entrepreneur.com/franchises/index.html" - (www.entrepreneur.com)
2. ^{^} "Federal Trade Commission’s Franchise Rule" - (www.ftc.gov)
3. ^{^} "www.entrepreneur.com" - (www.entrepreneur.com)
4. ^{^} "www.entrepreneur.com/startingabusiness/selfassessment/whattypeofbusinessshouldyoustart/article47774.html" - (www.entrepreneur.com)
5. ^{^} "http://franchises.about.com/od/franchising101/a/pro_con.htm" - (franchises.about.com)
6. ^{^} "http://sbinfocanada.about.com/od/franchiseinfo/a/buyfranchise.htm" - (sbinfocanada.about.com)
7. ^{^} "www.whichfranchise.org/article.cfm?articleID=224" - (www.whichfranchise.org)
8. ^{^} "www.azfranchises.com/franchisefacts.htm" - (www.azfranchises.com)
9. ^{^} "www.ftc.gov/bcp/edu/pubs/consumer/invest/inv05.shtm" - (www.ftc.gov)
10. ^{^} "Subway" - (www.subway.com)
11. ^{^} "Different Worlds" - (www.entrepreneur.com)
12. ^{^} "Is a Franchise in Your Future?" - (phoenix.about.com)
13. ^{^} "Franchise vs. New Business" - (www.toolkit.com)

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