Dollinger index

Intrapreneurship and Corporate Venturing 413

Franchisor Considerations

The primary form of franchising is the business format franchise. The franchisor grants the

right to the franchisee to operate the business in a prescribed way. The franchisor can sell these

rights one unit at a time or for a geographic territory. The one-at-a-time approach enables the

franchisor to maintain close control over locations and the speed of growth. The geographic

approach actually speeds growth, because it is usually in the interest of the franchisee to saturate

the territory as quickly as possible. However, it enables some franchisees to become very large

and powerful. This might be undesirable and risky from the franchisor’s point of view because

powerful franchisees can sometimes demand contractual concessions and resist royalty increases.

In the business concept format, the franchisor is selling the business or the marketing system, not

the hamburger or the quick-copy service. It is estimated that before the first franchisee is oper-

ating, the total costs for a franchisor of setting up these systems can run from as little as $5,000

to $1,950,000 or more. Table 10.1A shows the range of costs for the top 10 franchises and Table

10.2A shows the different cost drivers for the franchisor.

Franchising takes other forms in addition to the popular business format. A franchisor can

grant an exclusive right to trade. For example, an airport or highway authority grants to spe-

cific companies the exclusive right to sell food and beverages in the airport or along the highway.

A distributorship is also a form of franchise. Automobile dealers have a franchise to sell a par-

ticular make of automobile. A registered trademark franchise enables the franchisee to use a

name with the expectation that it is recognizable to customers and that quality will be main-

tained. One example is the Best Western Hotel system. Each unit is independently owned and

operated, but each uses the name Best Western and meets certain minimum standards.

In addition to different types of franchises, there are different types of franchise agreements.

The simplest is the individual franchise agreementwhich allows the franchisee to open one

store. Area franchise agreementsenable the franchisee to operate a number of stores within a

defined geographic area. A master franchise agreementauthorizes the franchisee to grant fran-

chise rights to other franchisees. It is like a sub-franchise agreement. Last, a franchisor can grant

a multiple unit franchisewhich specifies exactly how many units the franchisee may open.

Franchise Name

Abbey Carpet Systems

Assist-2-Sell

Banfield, The Pet Hospital

Batteries Plus

CiCi’s Pizza

Cruise Planners

Curves for Women

Del Taco

Domino’s Pizza

Friendly’s Restaurants

Minimum

Investment*

$ 48,900

$ 35,000

$242,000

$176,485

$404,400

$ 2,245

$ 38,425

$272,000

$118,350

$498,500

Maximum

Investment*

$ 108,100

$ 62,000

$ 443,000

$ 327,485

$ 646,400

$ 20,440

$ 53,450

$ 626,000

$ 450,100

$1,954,000

Years in

Operation

35

16

8

14

18

12

11

18

39

10

TABLE 10.1A Top 10 Franchise Performers for 2005

*From the Uniform Franchise Offering Circular. Does not include real estate costs.

SOURCE: The Wall Street Journal Online Startup Journal from FRANdata, Arlington, VA. Retrieved from the Web August 14, 2006