MODULE 2

Categories of franchise

1. Product or Distribution Franchise - A product manufactured by the franchisor (or on his

behalf by another) is sold to a franchisee who in turn sells it to the consumer under the
trademark of the franchisor. Such a franchise is usually restricted to a particular
geographical area and the franchisee pays fees referred to as royalties to the franchisor for
the right to do business under his trademark.

Some familiar product distribution franchises include:

Pepsi
Exxon
Ford Motor Company

Although product distribution franchising represents the largest percentage of total retail sales, most
franchises available today are business format opportunities.

2. Manufacturing, Production or Processing Franchise - The franchisor sells to the

franchisee an essential ingredient or provides some specific know-how, which along with
ongoing quality controls by the franchisor, enabling the franchisee to manufacture/product/
process the final product and sell to the consumer. Coca cola operates in many markets in
this manner supplying franchisees with the essential ingredient of Coca cola protected by a
trade secret enabling them to produce the final product.

3. Business format franchising – The owner of a business (franchisor) licenses to another

(franchisee) the right to use the particular business model including the intellectual property
associated with it, particularly the trademark. Business format franchising is the most widely
used form of franchising.

Four essential elements of business format franchising

The franchisor allows the franchisee to use under license its proprietary IP, principally its
trademarks but also its designs, patents, copyright and its confidential business information.
The most important is usually the trademark on which the brand has been built and it is that brand
recognition that makes the franchised business attractive.

The franchisor controls the way the business is run and managed by the franchisee.

The franchisor provides training, mentoring and assistance to the franchisee.

The franchisee makes both initial and periodic payments to the franchisor.

WHY FRANCHISING WORKS?

The reason that franchising works can be summed up in one six-letter word PROFIT! The
parent company earns its money through the continuing success of its franchises. For this reason,
franchisors constantly continue to assist their franchisees with training, promotion, advertising, and
new product development, and generally assist with any problems that crop up. The franchisee has
the advantage of a "proven" business formula, and is literally led by the hand to success in his
venture.
Advantages of franchising for the franchisee
The franchisee is the third-party buyer who purchases the brand rights from the franchisor (the owner of the
brand). The franchisee pays an initial franchise fee to the franchisor for the rights to use their brand in addition
to ongoing franchise fees for marketing, royalties, and more.
There are several advantages of franchising for the franchisee, including:
1. Business assistance
One of the benefits of franchising for the franchisee is the business assistance they receive from the franchisor.
Depending on the terms of the franchise agreement and the structure of the business, the franchisee might
receive essentially a turnkey business operation. They may be provided with the brand, the equipment,
supplies, and the advertising plan—essentially everything they need to operate the business.
Other franchises may not provide everything, but all franchises provide the knowledge and wisdom of the
franchisor. Whether that knowledge is stored in a searchable, digital knowledge base or is a phone number to
reach the franchisor directly, the franchisee has access to a deep reservoir of business assistance to guide
them through the process of owning and operating a business. This knowledge can be essential to running a
successful business and makes it much easier than starting a business from scratch.
2. Brand recognition
A big benefit that franchisees receive when opening a franchise is brand recognition. If you start a business
from scratch, you would have to build your brand and customer base from the ground up, which would take
time.
Franchises, on the other hand, are already well-known businesses with established customer bases built in. So
when you open a franchise with this recognizable branding, people will automatically know what your
business is, what you provide, and what they can expect.
3. Lower failure rate
In general, franchises have a lower failure rate than solo businesses. When a franchisee buys into a franchise,
they’re joining a successful brand, as well as a network that will offer them support and advice, making it less
likely they’ll go out of business.
As well, franchises have already proven their business concept, so you have reassurance that the products or
services you’ll be offering are in demand.
4. Buying power
Another benefit of franchising is the sheer size of the network. If you’re operating a standalone business and
need to order products or supplies to make your products, you’re paying more money per item because your
order is relatively small.
However, a network of franchises has the opportunity to purchase goods at a deep discount by buying in bulk.
The parent company can use the size of the network to negotiate deals that every franchisee benefits from. A
lower cost of goods lowers the overall operation costs of the franchise.
5. Profits
In general, franchises see higher profits than independently established businesses. Most franchises have
recognizable brands that bring customers in droves. This popularity results in higher profits. Even franchises
that require a high initial investment for the franchise fee see high return on investment.
6. Lower risk
Starting a business is risky. This is true whether a business owner is opening an independent business or
purchasing a franchise. That being said, the risk is lower when opening a franchise.
One of the reasons franchise owners face lower risk than independent business owners is the franchise
network. Most franchises are owned by established corporations that have tested and proven the business
model of the franchise in multiple markets.
This lower risk may also make it easier to access loans, including the best SBA franchise loans, to help you
launch your business.
7. Built-in customer base
One of the biggest struggles of any new business is finding customers. Franchises, on the other hand, come
with instant brand recognition and a loyal customer base. Even if you’re opening the first branch of a franchise
in a small town, the likelihood is that potential customers are already familiar with the brand from exposure to
TV commercials or travel to other cities.
 8. Be your own boss
One of the biggest benefits of owning a business is being your own boss. When starting a franchise business,
you get to be your own boss with the added benefit of receiving support from the franchise’s knowledge base.
Owning a business is hard work, but when you’re your own boss, you get to create your own schedule, have
autonomy over your career, and potentially work from home.
A franchise gives you the benefit of being your own boss without the risk of starting your own independent
business.

Disadvantages of franchising for the franchisee

While there are many advantages of franchising, it would be remiss to think there aren’t also disadvantages.
Let us explain further.
1. Restricting regulations
While a franchise allows the franchisee to be their own boss, they’re not entirely in control of their business,
nor can they make decisions without taking into account the opinion of the franchisor.
For most franchisees, the most frustrating disadvantage that they face is that they must follow the restrictions
laid out in the franchise agreement. The franchisor can exert a degree of control over the majority of the
franchise business and decisions made by the franchisee.
Depending on the franchise agreement, the franchisor can control any of these aspects of the business:
 Business location
 Hours of operation
 Holidays
 Pricing
 Signage
 Layout
 Decor
 Products
 Advertising and marketing
 Resale conditions
These restrictions are put into place to maintain uniformity between the different franchises and the overall
brand, but they can also be frustrating and feel limiting for the franchisee.
2. Initial cost
While the initial investment of the franchise fee buys a lot of benefits for the franchisee, it can also be costly—
especially if you’re joining a very well-known and profitable franchise. While this often translates to larger
profits, coming up with this initial money can put a strain on any small business owner.
Even if you opt for a low-cost franchise, you’ll likely still have to front a few thousand dollars. While this can be
seen as a disadvantage of franchises, it’s important to weigh the opportunity against the initial investment and
find the right balance for your business. And keep in mind, there are also franchise financing options to help
you come up with this initial cost.
3. Ongoing investment
In addition to the initial investment you’ll have to provide to start your franchise, there are additional, ongoing
costs that are unique to franchises. Within the franchise agreement, the ongoing costs of the franchise should
be enumerated. These costs might include royalty fees, advertising costs, and a charge for training services.
You’ll want to keep these ongoing fees in mind when you’re deciding whether to start a franchise.
4. Potential for conflict
While one of the benefits of owning a franchise is the network of support you receive, it also has the potential
for conflict. Any close business relationship, especially when there’s an imbalance of power, comes with a risk
that the parties won’t get along.
While a franchise agreement states the expectations of both the franchisee and franchisor, the franchisee has
minimal power to enforce the franchise agreement without a costly legal battle. Whether it’s lack of support or
simply a clash of personalities, the closeness of the business relationship between franchisor and franchisee is
rife for conflict. A franchisor should screen all potential franchisees before entering into business with them,
and as the franchisor, you should also use this opportunity to get a feel for the franchisor’s personality and
management style.
5. Lack of financial privacy
Another disadvantage of franchising is a lack of privacy. The franchise agreement will likely stipulate that the
franchisor can oversee the entire financial ecosystem of the franchise. This lack of financial privacy can be seen
by franchisee as a disadvantage of owning a franchise; however, it may be less of an issue if you welcome
financial guidance.

Advantages of franchising for the franchisor

The advantages and disadvantages of franchising don’t solely apply to the franchisee, of course. The franchisor
should also weigh the pros and cons before deciding to enter into this business model. First, let’s explore the
benefits of franchising that the franchisor can enjoy.
1. Access to capital
One of the biggest barriers to expansion for small business is the money it costs to expand. And while there
are several business loan options, they don’t always pan out. Franchising your business will take some time
and money on your end, but it also has the potential to make you a lot of money in the form of franchise fees.
Expanding your business as a franchise allows you to expand with little debt. The business expands as capital
becomes available from franchisees instead of taking on debt through loans. The franchisor also shares
minimal risk with the franchisee because the franchisee puts their name on the deed for the physical location
of the business and lowers the franchises overall liability.
2. Efficient growth
Opening the first unit of a business is costly and time consuming. Opening a second unit can be almost as
difficult. When that burden is shared with another business owner, it makes the process more efficient and
takes the onus off the initial business owner.
When trying to grow your small business, starting a franchise can make opening multiple locations a much
simpler process.
3. Minimal employee supervision
One of the big stresses as a business owner is hiring and managing employees. As a franchisor, the only
support that you have to provide to the franchisee is training and business knowledge. In general, the
franchisor has no hand in the management, hiring, and firing of employees.
This minimal employee supervision allows the franchisor to focus on the growth of the business instead of
day-to-day operations. Instead of worrying about whether an employee shows up for their shift or not, the
franchisor is focused on the big picture for business success.
4. Increased brand awareness
One of the many benefits of franchising is increased brand awareness. The more locations the brand has, the
more people who are aware of the brand. And the more these customers come to know and love the brand,
the more profitable and successful the brand can be. This increased brand awareness of a multi-location
franchise can be highly beneficial to the franchisor and their franchisees—a win-win.
5. Reduced risk
One of the biggest benefits to the franchisor in a franchise agreement is the ability to expand without an
increase in risk. Because the franchisee takes on the debt and liability of opening a unit under the name of the
franchise, the franchisor gets all the benefit of an additional location without taking on the risk themselves.
Additionally, the franchisor is often further insulated because the franchise is incorporated as a new business
entity, leaving the original business owned by the franchisor as a separate entity from the franchise. A
franchise lawyer can help to set up the terms for this type of protection within the franchise agreement.
Disadvantages of franchising for the franchisor
While franchisors receive a lot of benefits from starting a franchise, there are also some disadvantages to
consider.
1. Loss of complete brand control
When a business owner opens an independent business, they maintain complete control over their brand and
every decision that happens within the business.
When a franchisor allows a franchisee to open a business under their brand, they’re giving away (actually,
selling) some of the control over their small business branding. While the franchise agreement should contain
strong stipulations and rules to guide the decisions made by the franchisee, your franchisees won’t be clones
of you. They will think and act differently, and your brand could wind up suffering because of it.
2. Increased potential for legal disputes
Any time you enter into a close business agreement with other people, you open yourself to the risk of legal
disputes. While a well-crafted and lawyer-approved franchise agreement should limit a lot of the possibilities
for legal disputes between the franchisor and franchisees, these disputes are still possible.
Any legal disputes that must be resolved in mediation or through the court system can be costly in both time
and money, which takes away from the success of the franchise.
3. Initial investment
While much conversation is devoted to the initial investment that a franchisee must make in the franchise, that
ignores the initial cost that is taken on by the franchisor.
When a franchisor starts a franchise, there’s a startup cost to get the business in operation. A franchisor must
make sure that the franchise agreement is written clearly and reviewed by a lawyer experienced in franchise
law. You may also hire a franchise consultant for expertise during this process. Starting a franchise requires an
initial investment of both time and money on the part of the franchisor.
4. Federal and state regulation
While not entirely a drawback, dealing with the federal regulations set down by the Federal Trade Commission
for franchises can be a nuisance for franchisors. These regulations ensure that franchises are operated fairly,
but it also requires time and effort from the franchisors to meet all of these regulations.
And while you don’t have to file your agreement with the federal government, you do have to file with some
states—and you will have to make sure you’re compliant with different state’s laws. This can be a time-
consuming process, but can be made easier with professional guidance.

WHERE TO FIND FRANCHISE OPPORTUNITIES

Well, now that we know what franchising is, how and why it works, and some of the advantages and
disadvantages, how can we go about finding the right franchise opportunity?

There are a number of good sources of information for franchise offers. Here is a list of six of the most
important:

1. Annual directories
2. Daily newspapers
3. Trade publications
4. Franchising publications
5. Franchisor exhibitions
6. Franchise marketing agencies

How much investment is needed?

Investment is dependent on the nature of the chosen franchise business. Investment could range
from as low as P200,000 to as high as P4 million. (The initial investment to put up a Jollibee franchise ranges
from P15M to P30M depending on the store size and model. This includes construction of the store, kitchen
equipment and facilities, furniture and fixtures, air-con system, signage and pre-operating expenses. Return of
investment is usually between three and five years.

Factors that affect investment size are:

Size/area of establishment
 Location
 Equipment
 Outlet type  Stock inventory
 Office / space rental  Insurance  Permits and licenses
 Other working / operating expenses
In general, franchise investment includes:

 Franchise fee
 Marketing study
 Store design
 Layout assistance
 Training programs
 Leasehold improvements (outlet construction)
 Equipment
 Pre-opening marketing expense, and pre-opening supplies

What assistance does the Mother Company extends?

The franchisor or the Mother Company will provide continuing support to its franchises including the
initial training program. Before the franchisee gets started with his business, he will undergo a Basic
Operations Training Program (BOTP). This, along with other programs, will enrich the franchisee's
management and analytical skills needed in the operation of the business.

Other forms of assistance include:

 Store layout and design, equipment specifications, furniture and fixtures construction management
 Creative advertising and marketing programs
 Product development
 Manufacturing and logistics facilities
 Consultative services for operations
 Manpower and personnel
 Recruitment and training of management team

How much is the expected profit?

Income from the business is dependent on a number of factors such as: location, market condition
and type of supervision, advertising and marketing. Depending on the franchise business, recovery period can
be anywhere from 6 months to 36 months

What are the basic requirements in applying for a franchise?

 Letter of Intent (LOI) - containing the exact address of your proposed site, your exact mailing address,
contact numbers, etc.
 Vicinity Map of Proposed Site - for on-site evaluation
 Legal document certifying applicant's ownership of the site
 Detailed resume or bio-data