FRANCHISING
What is Franchising
⚫ 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.
⚫ The agreement is governed by a contract,
the Franchise agreement, which runs for a
defined period of time, generally renewable and
ranging from five to 20 years.
Franchising
⚫ Franchising
⚫ A marketing system revolving around a two-party
agreement, whereby the franchisee conducts
business according to the terms specified by the
franchisor
⚫ Franchisee
⚫ An entrepreneur whose power is limited by a
contractual agreement with a franchisor
⚫ Franchisor
⚫ The party in the franchise contract that specifies the
methods to be followed and the terms to be met by
the other party
Franchising
⚫ 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
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
STEPS INVOLVED IN FRANCHISING?
TYPES OF FRANCHISE
3 main types of franchise:
⚫ Product distribution franchise
⚫ business format franchise
⚫ management franchise
1. PRODUCT DISTRIBUTION
FRANCHISES
⚫ 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
EXAMPLES
⚫ Example of famous product
distribution franchises:
1. PRODUCT DISTRIBUTION
FRANCHISES
Produces the
syrup
Sells the syrup concentrate
concentrate
FRANCHISEE Produces the final
drink
Retail Stores
Restaurants & Vending Machine
F&B Outlets Operators
2. 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.
⚫
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 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
EXAMPLES
3. MANAGEMENT
FRANCHISE
⚫ A form of service agreement.
⚫ The franchisee provides the management
expertise, format and/or procedure for
conducting the business.
EXAMPLES
Advantages of Franchising
Buying a name/reputation
Established markets
Technical/management assistance
Standardized procedures
Quality standards
Selection of location
Facility design
Quicker cash flow
Disadvantages of Franchising
Loss of independence
High initial fees
High royalties and advertising allowances
Contractual restrictions
Inapplicable advertising
Termination clauses
Not receiving promised help
Unsuitable products
Lack of competitive advantage of parent company
Types of Franchising Agreements
⚫ Direct Franchise Agreement – A franchisor may enter into individual franchise
agreements with each territory or outlet. direct franchising may not be that
suitable when the outlets are in another country.
⚫ Master Franchise Agreement - A franchisor may enter into a master franchise
agreement whereby another entity is given the right to sub-franchise the
franchisor's business concept within a given territory with a development
timetable.
⚫ Development Agreement - A development agreements oblige a developer to
open multiple outlets in accordance with a development timetable. Vis-ā-vis the
developer and the outlets; rather it involves franchising between the franchisor
and the developer.
