An Introduction to Franchising and its
Importance for Entrepreneurs and
Small and Medium-Sized Industries
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)
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
TYPES OF FRANCHISE
3 main types of franchise:
Product distribution franchise;
Business format franchise; and
Management franchise.
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.
PRODUCT DISTRIBUTION
FRANCHISES
Examples of famous product distribution
franchise:
PRODUCT DISTRIBUTION
FRANCHISES
Produces the syrup
concentrate
Sells the syrup
concentrate
Produces the final
FRANCHISEE drink
Retail Stores
Restaurants & Vending
F&B Outlets Machine
Operators
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 outlet in
Sale, Australia 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
BE CAREFUL
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
Common Mistakes of Prospective
Franchisees
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
