FRANCHISING

What is a Franchise?“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.”

Features

Legal and commercial arrangement

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

procedure under license

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

Types

Type Meaning Example

Product Distribution Fra. Supplier-Dealer Rel.Sells franchisors product

Business Format Franchise

Not only distributes franchisors products but follows the business format

Management Franchise Service agreement, for mgt expertise.

Product Distribution-Eg

• Produces the syrup concentrate

• Sells the syrup concentrate

• FRANCHISEE • Produces the final drink

• Retail Stores

• Restaurants & F&B Outlets

• Vending Machine Operators

Business Format- Eg.

Subway Outlet- Australia Subway Outlet- France

Advantages

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

Disadvantages

Loss of independence High initial fees High royalties and advertising allowances Contractual restrictions Inapplicable advertising Termination clauses Unsuitable products Lack of competitive advantage

Franchisee’s Perspective Proven operating location Credible top management Skilled field support staff A trade identity A proprietary operations manual Effective training programs Disclosure and offering documents Plans for advertising, marketing, PR and promotion A communications system Sufficient capital

Franchisor’s Perspective

Faster growth Lower capital requirements Motivation – franchisors are owners of the franchise Control of locations Revenue stream – franchise fees/royalties

But… Reduced control Profit sharing Greater commitment to operating support

Franchising important to SMEs?

Leveraging on a recognized 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