FRANCHISING

Growth Of Franchising

Singer Sewing Machine first franchise (mid-19th century, 1850) Automobile (e.g. Ford), petroleum products (e.g. Shell), soft drinks (e.g. Coca Cola) Food and restaurants (e.g. McDonalds, Starbucks) (1933)

What is Franchising?
A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources.
- Definition by International Franchise Association

What is Franchising?

Contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee. The agreement is governed by a contract, the Franchise agreement, which runs for a defined period of time, generally renewable and ranging from five to 20 years. Use of franchisors trade name, format, system and/or procedure under license. Means to raise capital and expand quickly.

Franchising

Assistance to franchisee Marketing, management, advertising, store design, standards specifications Payment by franchisee by way of royalty, licensee fee or other means Franchising is more than distributorship Extends to an entire operation or method of business Greater assistance, control and longer duration Distributor merely re-sells products to retailers or customers

Franchising

Franchising A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchisee An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party

TYPES OF FRANCHISE

3 main types of franchise:

1. Product distribution franchise; 2. Business format franchise; and 3. Management franchise.

1. PRODUCT DISTRIBUTION FRANCHISES

A product distribution franchise model is very much like a supplier-dealer relationship. Typically, the franchisee merely sells the franchisors products. However, this type of franchise will also include some form of integration of the business activities

EXAMPLES

Examples of famous product distribution franchises :

1. PRODUCT DISTRIBUTION FRANCHISES

Produces the syrup concentrate

Sells the syrup concentrate

FRANCHISEE

Produces the final drink

Retail Stores Restaurants & F&B Outlets

Vending Machine Operators

2. BUSINESS FORMAT FRANCHISING

In a business format franchise, the integration of the business is more complete. The franchisee not only distributes the franchisors products and services under the franchisors trade mark, but also implements the franchisors format and procedure of conducting the business.

EXAMPLES

3. MANAGEMENT FRANCHISE

A form of service agreement. The franchisee provides the management expertise, format and/or procedure for conducting the business.

Examples

Advantages of Franchising
Buying a name/reputation
Established markets Technical/management assistance Standardized procedures Quality standards Selection of location Facility design Quicker cash flow

Disadvantages of Franchising
Loss of independence High initial fees High royalties and advertising allowances Contractual restrictions

Inapplicable advertising
Termination clauses Not receiving promised help Unsuitable products Lack of competitive advantage of parent company

Why franchise?
Franchises offer important pre-opening support:
site selection

design and construction

financing (in some cases) training grand-opening program

Why franchise?
Franchises offer ongoing support

training
national and regional advertising operating procedures and operational assistance supervision and management support increased spending power, access to bulk purchasing and economies of scale

Franchisor Controls on Franchisees

Restricting of sales territory

Requiring site approval and imposing requirement on the outlets appearance

Restricting the goods/services that can be sold

Requiring specific operating hours

Controlling advertising

Ingredients of an attractive franchise opportunity

Registered trademarks

Successful prototype stores with a track record of profitability and a positive reputation
A business that can be systematized so that it can be easily replicated. A product or service that can be successful in many different geographic regions. An operations manual that specifies all the functions of the business and their associated policies

Ingredients of an attractive franchise opportunity

A training and support system Site selection criteria and architectural standards A detailed prospectus that spells out the franchisees rights, responsibilities, and risks.

Common considerations of franchisors

Developing franchise concept
Market research Familiarity with local laws and regulations

Providing training and support to franchisees

Criteria for choosing franchisees Control over franchisees Supply of products/materials to franchisees Intellectual property rights issues, e.g. trade mark registration

Common considerations of franchisees

Demand
Profitability of franchise, and length of time required to recoup investment Track record of franchisor Support rendered to other franchisees

Experience and profitability of other franchisees

Existence of competition Capital required

Demands of franchisor, e.g. income projections, deadline to open

more franchise outlets

FranchisorFranchisee relationship
Regulated by contract which usually covers:

Initial fee
Royalty fee/Management fee Capital required from franchisee Territory/Area of operation Duration of license and renewal IPRs Termination

FranchisorFranchisee relationship
Elements to look for in a franchise relationship:
Responsiveness Empathy Communication Dependability Accessibility Give and take Anticipation Structure Open-mindedness

Franchise agreements
Trade name franchise agreement that provides to the franchisee the right to use the franchisor's trade name and/or trademarks Product distribution franchise agreement that provides specific brand name products which are resold by the franchisee in a specific territory Business format franchise agreement that provides a complete business format, including trade name, operating procedures, marketing, and products or services for sale Piggyback Franchise A retail franchise operation within the physical facilities of a host store Area Developer/Master Licensee Firms or Individuals that obtain the legal right to open several franchised outlets in a given area

Franchise Your Business Successfully

To franchise your business in a fruitful manner, just get answers to some questions such as : Do you have a successful business? Do you wish to see its branches in different corners of the nation? Do you want to increase your brand visibility? Is franchising right for you? Is your business expandable? Will the target audience like your products or services? Well, to achieve all this why dont you franchise your business?

Franchise Your Business Successfully

Does the franchisor have an excellent reputation in the industry?

Is the franchisor in partnership or any other legal relationship with another franchisor? If so, how will the franchisee be protected should that relationship fail?
Is the franchisee required to do anything that appears questionable from a legal or ethical perspective? Under what circumstances can the franchisee or franchisor terminate the franchise agreement and what are the consequences to either party? Will the franchisor grant an exclusive territory? Is that area subject to reduction or modification? If so, under what conditions?

Franchise Your Business Successfully

Will the franchisor reveal the certified financial figures for one of its franchises and can those figures be verified with the franchisee?
Will the franchisor provide a management training program, an employee training program, public relations and advertising support, or credit? Does the franchisor assist in finding a suitable location? What is the financial health of the franchisor? Can financial statements be verified? What is the track record of the franchise?

Franchise Your Business Successfully

Does the franchisor conduct an in-depth investigation of the franchisee to assure that he or she has the necessary skills and financial requirements to operate the business successfully? How much capital will be required to start and operate the business to a positive cash flow? Does the initial fee include an opening inventory of products and supplies? What do royalties pay for and how are they calculated? Can you transfer your franchise license to someone else? When and how? How can you terminate the contract? circumstances can this be done? Under what

Franchise Your Business Successfully

Can the franchisor terminate the contract? Under what kind of conditions?
What disclosures are you required to make? disclosures is the franchisor required to make? What

BE CAREFUL

The franchisee is not completely independent.

In addition to the initial franchise fee, franchisee must pay ongoing royalties and advertising fees. Franchisee must be able to balance restrictions and support provided by the franchisor with their own ability to manage the business

BE CAREFUL

A damaged image or franchise system can result if other franchisees perform poorly or the franchisor has financial problems. The duration of a franchise is usually limited and the franchisee may have little or no say concerning termination

Common Mistakes of Prospective Franchisees

Not reading, understanding and/or asking questions about the franchisee agreement and other legal documents Not understanding the responsibilities of a franchisee and the rights and obligations of a franchisor Not seeking sound legal and financial advice Not verifying oral representations of franchisor

Common Mistakes of Prospective Franchisees

Not analyzing the local market in advance Not analyzing the competition Not making thorough due diligence of the franchisor Not choosing the right location

Conclusion

Franchising a great model for minimizing risks and maximizing returns Proven formula for success ready and waiting to be adopted by the new entrepreneur. Provides proven operating systems, solid research and development, established marketing methods and instant credibility, plus extensive training and support

THANK YOU !!