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Franchising and Established Chains

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What does the name McDonald's bring to your mind? Do you see Ronald McDonald and his friends eating hamburgers and fries, or do you have visions of golden arches dancing in your head? The McDonald's corporation hopes you think of all these things, for the company spends millions of dollars every year in advertising its products.

McDonald's does all this because it is the McDonald's name, product design, and business format that the company is licensed to franchise. If you purchase a McDonald's franchise, you are buying the right to use those things. You will be given help in all aspects of operating the business, including training your crew and managerial staff. You will also be given quality, service, and cleanliness standards from McDonald's that your restaurant must meet.

Some franchisors will give help in selecting your restaurant site. Before a franchisee can open up a new store, the franchisor often carefully surveys the location. Customers at other stores are questioned about how far they drive and asked if they have to go out of their way to reach a certain McDonald's . Then the franchisor compiles all the data and tries to predict the impact of opening a store at the new site.

Many fast food franchisors will also assist the franchisee in obtaining a credit line, negotiating a lease, and receiving consent from zoning and planning boards. The fast food franchisor also provides the franchisee with operations manuals. In addition, the franchisor usually runs a training school which the franchisee is required to attend. The fast food franchisor also provides the franchisee with a manual which contains a record of the initial training, procedures for all phases of management, and recipes to be updated as methods change.

Burger King requires its franchisees to attend a training center for seven weeks, where they learn cooking, personnel supervision and selection, and bookkeeping. Mister Donut holds a four-week training course for all new franchisees. A representative of the franchisee designated by the company is required to complete the training course to the company's satisfaction before the opening of the franchisee's Mister Donut shop and must also attend and complete any additional training and/or refresher courses prescribed by the company.

Set Rules Must Be Followed

Franchisees must conduct their new business according to stipulations outlined by the franchisor in contracts. These stipulations encompass a broad range of franchise activities, including such things as the precise amount of meat and spices to be put in a hamburger, the correct amount of time needed to cook a hamburger, and menu items that must be offered. The contract also deals with other matters like the hours of operation, inventory, insurance, personnel, and accounting. By establishing these stipulations in the contract, a franchisor is able to control costs and-more importantly-promote a unified brand image of identical outlets through a wide area.

Portion and Quality Control: Fast food chains are particularly concerned with portion and quality control. For example, at Burger King a hamburger that has been cooked must be served in ten minutes or it must be thrown out. This is one way a franchisor can hope to insure quality control. Portions are also strictly controlled to standardize the products. In other words, the amount of meat and sauce on a particular hamburger and the thickness of shakes will be the same in each store throughout a chain.

Supplies: In the fast food industry it is common for franchisors to encourage franchisees to purchase materials and supplies from the franchisor or from a franchisor-approved supplier. Burger King, for example, has distribution centers throughout the United States that sell supplies such as napkins and French fries to the franchisees. Some hamburger franchisees form cooperatives to make bulk supply purchases. However, the parent company cannot force a franchisee to buy materials and supplies from a certain supplier, though it can demand that materials and supplies meet certain specifications.

Some Contract Clauses: Written into every contract is a termination clause, which allows the franchisor to end its relationship with the franchisee under certain circumstances. Several other clauses usually included in the contract involve items that affect the individual franchisee directly, such as inheritance rights, the right to sell the franchise, and the right to open another competing business after leaving a franchise. Although the franchise contract allows the franchisor to distribute his or her product or service via the franchise, the clauses in the contract regulate and to some degree control the rights obtained by the franchisee; however, these same clauses also offer supportive protection to the franchisee.

A Long-Term Relationship

When the franchise agreement is signed, both the franchisor and the franchisee have entered into a long-term relationship of perhaps as long as 20 years, which may include an option to renew and extend the agreement. During that time, the franchisor will send district managers and inspectors regularly to visit the operating unit. This field service will provide advice and assistance to the franchisee on daily operations, check on the quality of the product and service, monitor the performance of the enterprise, and enforce regulations if necessary.

Fast food franchisors want to make sure that each franchise unit is operating in such a manner as to portray the predictable, unified image that the public desires and that the company has worked so hard to develop. For example, the franchisors want to make sure that each one of their franchisees is using national marketing plans and selling their product as advertised on national television. These food companies have coined proven methods, and any tampering with the product or architectural design could result in a loss of profit and even a loss of faith in the quality guarantee by the trademark.

Along with these policing methods, the franchisor also supplements the manuals and provides additional training. Fast food companies want to prevent any deviations from the norm that could injure their standardized image, and franchisees want the expert knowledge and advertising provided by the franchisor. Therefore, the two parties engage in a mutually beneficial ongoing relationship for the life of their agreement.

Cost of Buying a Franchise

First of all, you can't just suddenly buy a franchise. There is a waiting list to become a franchisee at some of the chains. In fact, some people wait for several years. Then there is the matter of money. What fast food franchises cost varies enormously. You can expect to need start-up capital from approximately $40,000 to more than $400,000, and these figures do not include the land, the building, or improving the site, which could cost from over $100,000 to as much as $1 million. You should also know that some franchisors may require their franchisees to have a financial worth of at least $250,000 and ready cash of $200,000 or more.

Although it may sound impossible, it still is possible to buy a franchise. Start-up costs can be reduced substantially by leasing the land and/or building. In addition, some fast food chains help their long-time employees obtain their own franchises by providing them with low-interest loans and often leasing the building. An employee getting a franchise this way may only need as little as $50,000 for start-up costs. If you are thinking of owning a franchise some day, you may be interested in knowing what your start-up expenditures will be for. They usually include such things as:
  • Initial Franchise Fee
  • Building
  • Equipment and Signs
  • Training Expenses
  • Working Capital
The franchisee also pays the franchisor to obtain the rights to the name, the product, and the business format. This cost is usually included in the franchise fee. The franchisee will normally also pay royalties based on a percentage of gross sales. In addition, the franchisee will contribute a percentage of gross sales toward an advertising fee.
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