Franchise

Management- Prof. Rohita Dwivedi

Growth of Franchising

Singer Sewing Machine – first franchise (mid-19th century)

Automobile (e.g. Ford), petroleum products (e.g. Shell), soft

drinks (e.g. Coca Cola)

Food and restaurants (e.g. McDonald’s, Starbucks)

Growth of Franchising

Home markets saturated – attractive opportunities

overseas

Lack of/relaxation of regulations in most countries

Expansion of international trade

Exposure to international media

What is franchising?

Legal and commercial arrangement concerning the successful business of a

franchisor

Use of franchisor’s trade name, format, system and/or procedure under licence

Means to raise capital and expand quickly

Assistance to franchisee

Marketing, management, advertising, store design, standards specifications

Payment by franchisee by way of royalty, licensee fee or other means

What is franchising?

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

FranchiseLegal definition of Franchise:

Black’s Law Dictionary 7th edition 1999 defines Franchise as, “the sole right granted by the owner of a trademark or trade name to engage in business or to sell a good or service in certain area.”

Franchise OperationDefinition by International Franchise Association

“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.”

Franchising

A network of interdependent business relationships that allows a

number of people to share:

1. A brand identification

2. A successful method of doing business

3. A proven marketing and distribution system

Definition of TermsFranchisor / Franchiser

the person or company that grants the franchisee the right to do business under their trademark or tradename

Franchisee

the person or company that gets the right from the franchisor to do business under the franchisor’s trademark or tradename and benefits from it.

Definition of Terms...

Franchise Agreement

the legal, written contract between the franchisor and franchisee

which tells each party what each is supposed to do

Single-Unit Franchise Agreement

an agreement where the franchisor grants the franchisee the rights

to open and operate ONE franchise unit

Definition of Terms...Multi-Unit Franchise Agreement

an agreement where the franchisor grants a franchisee the rights to operate MORE THAN ONE unit

Area Development Franchise Agreement

an agreement where the franchisee has the right to open more than one unit during a specific time, within a specific area

Definition of Terms...Master Franchise Agreementan agreement where the franchisee is given more rights than an area development agreement; such as sub-franchising or the right to sell franchises to other people within a territory

UFOC / Disclosure Statementthe Uniform Franchise Offering Circular is the disclosure document that provides the information about the franchisor and franchise system to a prospective franchisee.

Definition of Terms...Franchise Fee

the payment given to the franchiser for joining the network. It can be seen as an entry fee paid for the “secrets of the business”.

Royalty Fee

represents the amount the franchisee pays the franchiser every month (or whenever agreed) for commission of its sales. In return, the franchiser provides continuous training, market studies and release of new products.

Definition of Terms...Advertising / Marketing Fund

the monthly fee paid by the franchisee for a common fund, managed by the franchiser for promoting the brand

Copyright & Registered Trademark

the usage of the brands & products / special services / methods of production, etc. patented by the franchiser are authorized to the franchisees and will be protected from abusive usage by potential customers.

Basic Characteristics of a Franchise

• The business format is comprehensive and complete

• It is also an established and proven success

• The franchisor offers immediate help & advice

• Initial fee is to cover up the cost of setting up the franchise and

should not be a source of profit for a reputable franchisor

Basic Characteristics of a Franchise...• An operating manual is supplied by the franchisor

• The franchisee pays a continuing royalty or management service fee to the

franchisor in return for back-up services

• A binding franchise agreement is drawn up & signed by the franchisor & franchisee

• The franchisor & franchisee are legally independent of each other

Types of Franchise

1. Investment Franchise

2. Executive Franchise

3. Retail Franchise

4. Distribution Franchise

5. Depot Franchise

6. Job Franchise

7. Management Franchise

1. Investment Franchise/ Business Format FranchiseInvestment franchises are operated by the fast-food and restaurant chains, as well as by some well-known hotels.● The franchisee has overall control of the business● Employs his or her own senior management and staff.

2. Executive FranchiseUsually business to business type franchises, executive franchises range from coaching and consultancy, to sales and recruitment franchise business opportunities.Executive franchise businesses will suit a 'white collar' professional, who has developed, and wishes to utilise, management and executive business skills to benefit from higher than average income, controllable work and life balance and intellectual challenge. Executive franchises are also suitable for people looking to work in executive, training, and business to business sectors.

2. Executive Franchise...Involves the provision of professional servicesFinancial advice, legal services or recruitment assistance.

3. Retail FranchiseThe franchisee runs the outlet, employs staff and displays goods approved by the franchisor.

4. Distribution FranchiseA distribution franchise permits the franchisee to operate from a depot or central office that is usually owned by the franchisor.

The distribution industry is big business, but it doesn’t have to be a

big initial capital spend. Many distribution franchisees start out

with a scalable, low-maintenance business opportunity providing

them with the room and support required to start a self-employed

career at an affordable level.

4. Distribution Franchise...

Some business opportunities require to build up to a large

warehouse operation, while other small one-man-van

opportunities can be purchased for a fraction of the cost. The

common thread in every distribution opportunity is that the

territory secure can prove to be most important asset. The size of

the geographic area, the quality of the area’s road network and the

volume and mix of residential and commercial customers will

define business’s future.

4. Distribution Franchise...

Make sure you have discussed the territory’s opportunities and

limitations in-depth with the franchisor before you make your

purchase, and you could soon be on the way to running your own

successful distribution business.

5. Depot FranchiseThe franchisee is the operator and sole occupant of the depot. This type of franchise is generally available to courier companies and parts suppliers, for whom a depot is an essential part of the business.

6. Job FranchiseUsually a one-person business, operated by the franchisee from home. Operations, such as lawn care, car repairs or furniture refurbishing, are examples of job franchises.

7. Management Franchise

A management franchise is where the franchisee will be

responsible for both running the franchise and employing and

managing a team of operatives.

Why is franchising important to SMEs?Leveraging on a recognised brand name

Enhancing business image

Ensuring consistent quality

Attaining higher productivity/better motivated staff

Access to good locations

Economies of scale

Reducing risks of failure

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

Common considerations of franchisors Developing franchise concept

Market research

Familiarity with local laws and regulations

Providing training and support to franchisees

Common considerations of franchisors…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 franchiseesDemand

Profitability of franchise, and length of time required to recoup investment

Track record of franchisor

Support rendered to other franchisees

Common considerations of 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

Franchisor–Franchisee relationshipRegulated 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

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

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.

BE CAREFUL…

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

Common Mistakes of Prospective Franchisees…