An Introduction to Franchising

by

Rahul Jain

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)

Brief Outline

What is franchising? Types of franchising Why franchise? Considerations for franchisor/franchisee Pitfalls/Be careful

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 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

TYPES OF FRANCHISE

3 main types of franchise:

Product distribution franchise; Business format franchise; and Management franchise.

A product distribution franchise model is very much like a supplier-dealer relationship.

Typically, the franchisee merely sells the franchisor’s 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:

Produces the syrup concentrate

Sells the syrup concentrate

FRANCHISEE Produces the final drink

Retail Stores

Restaurants & F&B Outlets

Vending Machine

Operators

PRODUCT DISTRIBUTION FRANCHISES

BUSINESS FORMAT FRANCHISING

In a business format franchise, the integration of the business is more complete.

The franchisee not only distributes the franchisor’s products and services under the franchisor’s trade mark, but also implements the franchisor’s format and procedure of conducting the business.

Famous Examples

BUSINESS FORMAT FRANCHISING -

outlet in Sale, Australia

outlet in Marseille, France

MANAGEMENT FRANCHISE

A form of service agreement.

The franchisee provides the management expertise, format and/or procedure for conducting the business.

Famous Examples

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 franchisees

Demand 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 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

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

Franchising in India Grown from a questionable format to an

admissible mode of business expansion in India Pioneering companies proved that franchising

can work in any market/ country Brought a graphic change in over-all working

culture in the business Technology and internet are helping at both

ends: To create the awareness about new products &

services, and Enabled high consumer servicing allowing fast

proliferation of worthy concepts & products

Franchising in India

Revolutionary year - 2010, Booming entrepreneurship: 1800 Home Grown

Franchisors & 2,00,000 Franchisees 85% success rate in franchising Vs. 90% failure in self

start ups Franchise industry estimation has towered up to over

US$ 7 billion Highest retail outlet density in the world to up to approx.

12 million Remains the best entry & expansion strategy SMEs are the key economy drivers Employs over 97,00,000 employees directly or indirectly

Franchising – a great model for SMEs

Proven formula for success Due diligence Central role of IPRs Avoidance of dispute

Conclusion

Assignment

Write a one page note on a company who have successfully adapted franchise model. (Both Franchisor and Franchisee perspective)

Provide all references