 What is franchising?  Typically, the franchisee merely sells the franchisor’s products.

 Types of franchising However, this type of franchise will also include some form of
 Why franchise? integration of the business activities.
 Considerations for franchisor/franchisee
Examples of famous product distribution franchise:
 Pitfalls/Be careful
What is franchising?  Examples of famous product distribution 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.”
- Definition by International Franchise Association
 Legal and commercial arrangement concerning the successful
business of a franchisor
 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 is more than distributorship
 Extends to an entire operation or method of business  Business format franchising
 Greater assistance, control and longer duration  In a business format franchise, the integration of the business is
 Distributor merely re-sells products to retailers or more complete.
customers  The franchisee not only distributes the franchisor’s products and
 3 main types of franchise: services under the franchisor’s trade mark, but also implements the
 Product distribution franchise; franchisor’s format and procedure of conducting the business.
 Business format franchise; and
 Management franchise.
 Product distribution franchise
 A product distribution franchise model is very much like a supplier-
dealer relationship.
Famous Examples 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
 Franchises offer ongoing support
 training
 national and regional advertising
 operating procedures and operational assistance
 Management franchise
 supervision and management support
 A form of service agreement.
 increased spending power, access to bulk purchasing and
 The franchisee provides the management expertise, format and/or
economies of scale
procedure for conducting the business.
Common considerations of franchisors  A damaged image or franchise system can result if other franchisees
 Developing franchise concept perform poorly or the franchisor has financial problems.
 Market research  The duration of a franchise is usually limited and the franchisee may
 Familiarity with local laws and regulations have little or no say concerning termination
 Providing training and support to franchisees
 Criteria for choosing franchisees Common Mistakes of Prospective Franchisees
 Control over franchisees  Not reading, understanding and/or asking questions about the
 Supply of products/materials to franchisees franchisee agreement and other legal documents
 Intellectual property rights issues, e.g. trade mark registration  Not understanding the responsibilities of a franchisee and the rights
 Demand and obligations of a franchisor
 Profitability of franchise, and length of time required to recoup  Not seeking sound legal and financial advice
investment  Not verifying oral representations of franchisor
 Track record of franchisor  Not analysing the local market in advance
 Support rendered to other franchisees  Not analysing the competition
 Experience and profitability of other franchisees  Not making thorough due diligence of the franchisor
 Existence of competition  Not choosing the right location
 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