CHAPTER 2 FRANCHISING
Brief OutlineWhat is franchising?Types of franchisingWhy franchise? Why is franchising important to SMEs?Considerations for franchisor/franchiseePitfalls/Be carefulSingapore Experience
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?Legal and commercial arrangement concerning the successful business of a franchisor Use of franchisors trade name, format, system and/or procedure under licenceMeans to raise capital and expand quicklyAssistance to franchiseeMarketing, management, advertising, store design, standards specificationsPayment by franchisee by way of royalty, licensee fee or other means
Some Examples in AfghanistanDiyanat Company a Samsung FranchiserRahim Gardezi Habib Gulzar LG Franchisers And many more
Growth of FranchisingSinger 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. McDonalds, Starbucks)
Growth of FranchisingHome markets saturated attractive opportunities overseasLack of/relaxation of regulations in most countriesExpansion of international tradeExposure to international media
What is franchising?Franchising is more than distributorship
Extends to an entire operation or method of businessGreater assistance, control and longer durationDistributor merely re-sells products to retailers or customers
TYPES OF FRANCHISE3 main types of franchise:
Product distribution franchise; Business format franchise; andManagement franchise.
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.
PRODUCT DISTRIBUTION FRANCHISES
PRODUCT DISTRIBUTION FRANCHISES
Examples of famous product distribution franchise:
PRODUCT DISTRIBUTION FRANCHISES
BUSINESS FORMAT FRANCHISINGIn 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.
BUSINESS FORMAT FRANCHISING - outlet in Sale, Australia outlet in Marseille, France
MANAGEMENT FRANCHISEA form of service agreement.
The franchisee provides the management expertise, format and/or procedure for conducting the business.
Why is franchising important to SMEs?Leveraging on a recognised brand nameEnhancing business imageEnsuring consistent qualityAttaining higher productivity/better motivated staff Access to good locations Economies of scaleReducing risks of failure
WHY FRANCHISE?Franchises offer important pre-opening support:site selectiondesign and constructionfinancing (in some cases)traininggrand-opening program
WHY FRANCHISE?Franchises offer ongoing supporttrainingnational and regional advertisingoperating procedures and operational assistancesupervision and management supportincreased spending power, access to bulk purchasing and economies of scale
Common considerations of franchisors Developing franchise conceptMarket researchFamiliarity with local laws and regulationsProviding training and support to franchisees
Common considerations of franchisorsCriteria for choosing franchiseesControl over franchiseesSupply of products/materials to franchiseesIntellectual property rights issues, e.g. trade mark registration
Common considerations of franchiseesDemandProfitability of franchise, and length of time required to recoup investmentTrack record of franchisorSupport rendered to other franchisees
Common considerations of franchiseesExperience and profitability of other franchiseesExistence of competitionCapital requiredDemands of franchisor, e.g. income projections, deadline to open more franchise outlets
FranchisorFranchisee relationshipRegulated by contract which usually covers:Initial feeRoyalty fee/Management feeCapital required from franchiseeTerritory/Area of operationDuration of license and renewalIPRsTermination
BE CAREFULThe 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
Not reading, understanding and/or asking questions about the franchisee agreement and other legal documentsNot understanding the responsibilities of a franchisee and the rights and obligations of a franchisorNot seeking sound legal and financial adviceNot verifying oral representations of franchisorCommon Mistakes of Prospective Franchisees
Not analyzing the local market in advanceNot analyzing the competitionNot making thorough due diligence of the franchisorNot choosing the right locationCommon Mistakes of Prospective Franchisees
Generally young and well educated62% below 40 years old57% had post-secondary education32% own their own outlets46% occupy the outlets as tenantsFRANCHISEES IN SINGAPORE
FRANCHISING IN SINGAPORE
Reason for Franchising
2/3 of franchisees felt that economies of scale in bulk purchasing encouraged them to consider franchising
FRANCHISING IN SINGAPOREFeasibility of Franchising
Franchising is a more feasible option of business expansion than starting own outlets
FRANCHISING IN SINGAPORESuccess of the Franchise
Franchising a great model for SMEsProven formula for successDue diligenceCentral role of IPRsAvoidance of disputeConclusion
Kuala Lumpur, July 2008