INTRODUCTION TO FRANCHISING AND ITS

IMPORTANCE TO ENTREPRENEURS &

SMALL & MEDIUM ENTERPRISES
by
Tan Tee Jim, S.C.
Senior Partner,
Head, IP & IT,
Lee & Lee
Lahore, December
2007

How to be a successful entrepreneur

a tip

WHAT IS FRANCHISING?

An arrangement whereby a party (franchisor), who

has developed a way of running a business
format/system successfully, licenses the rights to
operate that format/system using his trademark,
name or other IP rights to another party (franchisee)

The licence involves the franchisor granting a right

to use the format/system, trademark, name or other
IP rights in exchange for an initial fee and annual
royalty.
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WHAT IS FRANCHISING?

Franchising allows people to

go into business for
themselves, not by themselves

WHY FRANCHISE?

A recognised brand name.

Enhanced business image.

Consistent quality.

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

DISADVANTAGES

The franchisee is not completely independent.

In addition to the initial franchise fee, franchisees

must pay ongoing royalties and advertising fees.

Franchisees must be careful to balance

restrictions and support provided by the franchisor
with their own ability to manage their business

DISADVANTAGES

A damaged, system-wide image can result if

other franchisees are performing poorly or the
franchisor runs into an unforeseen problem.

The term (duration) of a franchise agreement

is usually limited and the franchisee may have
little or no say about the terms of a
termination

ASSESSING
FRANCHISING OPPORTUNITY

Successful franchising essentially involves

trust and understanding between the
franchisor and franchisee

Franchisors financial position and track

record
How thoroughly has the business been
market tested

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ASSESSING
FRANCHISING OPPORTUNITY

How well the format/system works in practice

(Are existing franchisees pleased with their
business? Any bad news?)

Does the business have staying power? Or is

it based on something which is temporarily
fashionable?

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HOW TO ASSESS A PROSPECTIVE

FRANCHISE?

Assess the reputation and reliability of the

franchisor
Find out the demand for the goods/services offered
in the franchise
Do sales projection
Find out from other franchisees the support
services provided
Work out the amount of capital that is needed
upfront

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HOW TO ASSESS A PROSPECTIVE

FRANCHISE?

Work out the amount of cash that is needed

under the worst case scenario

Go through the contract thoroughly with a lawyer

concerning , in particular,

rights of the franchisee

obligations of the franchisor

terms of termination

restriction on business entered after termination

resolution of disputes
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WHAT IS INVOLVED IN
FRANCHISING?

Tenure/Period of contract
Initial fee
Royalty/management fee
Renovation cost
Territory
Supply of goods and services
Compliance with contract
Terms of termination
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STEPS INVOLVED IN FRANCHISING?

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WHAT SHOULD A COMPANY DO TO GET

READY TO BE A FRANCHISEE?

Conduct feasibility study

Set up systems/procedures and support

functions

Study the operations manual

Register trademarks and other IP rights

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TYPES OF FRANCHISE

Generally there are 2 main types of

franchises:

Product distribution franchises; and

Business format franchises.

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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, these type
of franchises will also include some form of
integration of the business activities.

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PRODUCT DISTRIBUTION
FRANCHISES

Examples of famous product

distribution franchises include:

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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
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BUSINESS FORMAT
FRANCHISING

In business format franchises, on the other

hand, the integration of the businesses is
more complete.

The franchisee not only distributes the

franchisors products and services under
the franchisors trademark, but also
implements the franchisors complete
method to conduct the business itself.
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BUSINESS FORMAT
FRANCHISING

Examples of famous business format

franchises include:

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BUSINESS FORMAT
FRANCHISING -

outlet in
Sale, Australia

outlet in
Marseille, France
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FRANCHISING IN SINGAPORE

About 350 active franchises, such as

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FRANCHISING IN SINGAPORE
Feasibility of Franchising
Franchising is a more feasible option of business
expansion than starting own outlets

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FRANCHISING IN SINGAPORE
Success of the Franchise

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FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors Improvement in Average Monthly Sales since Franchising

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FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors Improvement in Average Monthly Net Profit since Franchising

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FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors Improvement in Average Monthly Sales since Franchising

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FRANCHISING IN SINGAPORE

Reason for Franchising

2/3 of franchisees felt that economies of scale in bulk

purchasing encouraged them to consider franchising

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FRANCHISEES IN SINGAPORE

Generally young and well educated

62% below 40 years old
57% had post-secondary education
32% own their own outlets
46% occupy the outlets as tenants

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FRANCHISING IN SINGAPORE

Franchising helps existing businesses do better.

FranchiseesResponse to the Statement:
Joining a Franchise has Helped Me to Do Better
than Before.

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FRANCHISING IN SINGAPORE

Business Performance
Percentage Increase in Average Monthly Sales
for Franchisees who were Previously Running a
Business in the Same Trade

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FRANCHISING IN SINGAPORE

Business Performance
Percentage Increase in Average Monthly Net
Profit for Franchisees Previously Running a
Business in the Same Trade

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THANK YOU

Tan Tee Jim, S.C.

tanteejim@leenlee.com.sg