Franchising

Course Description: The course introduces franchising as a method of retail business in which the
investor/franchisee makes an investment in the form of a franchise fee in exchange for the right to
promote goods, services, and/or processes directly to the public. A franchise usually has a
recognizable name or trademark. Franchising involves the integration of independent companies at
different levels and in different areas of production and distribution. This integration permits more
effective sales and advertising.

Topic1: Introduction to Franchising

Learning objectives

 Define what is a franchising and franchise

 Answer the 4 question to evaluate if business is good for franchise
 Determine the 4 steps to franchise your business
 Define what is a franchisee and a franchisor
 Discuss the types of franchise
 List down the advantages and disadvantages of a franchise business
 Understand the benefits of franchising vs. corporate growth
 List down some misconceptions about franchising
 Have a better grasp of the History of Franchising

What is Franchising?

Franchising is a business method wherein a franchisor (business owner or manager) allows a

franchisee (person or entity) to market products or services under its name and trademark, and in
strict adherence to a system he prescribes. Among the benefits are 1:

• Minimized risk of business failure and higher chance of success;

• Savings on advertising costs with the use of a recognized trademark and, pooling of
resources with other franchisees; and

• Provision of detailed training and help by the franchisor to the franchisee and staff.

What is a franchise?

A franchise is a form of license obtained by a party (franchisee) to give them access to the proprietary
information, procedures, and marks of a company (franchisor) in order to enable the party to sell a
product or offer a service under the name of the business 2. Franchise is a very common method of
starting a business, particularly those who wants to enter in an extremely competitive industry such
as the fast food industry.

Watch this video: https://www.youtube.com/watch?v=ARuOtcn6Qq4

According to Anderson (2017) there are 4 Questions that needs to be answered in order to determine
if you should franchise your business. The questions are:

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  Is the business profitable?
 Do you want your brand name to be popular?
 Would you like to charge an upfront fee for selling your concept?
 Do you want to collect ongoing royalties in return for supporting your franchisees grow their
business?

As stated by Anderson (2017) there are 4 important steps to franchise your business

Step1: Strategic Planning- According to Chaffey (2015) It is defined as a systematic process used for
establishing goals, strengthening operational activities, ensuring that employees and other
stakeholders work towards common goals, agreeing on expected outcomes and assessing or adjusting
the direction of the organization in response to a changing environment.

Strategic planning also aims to know and assess your competitive advantage in the marketplace (what
makes you distinct from your competitors?), Franchise fees (royalties and franchisee and franchisor
profitability), target market, sales and marketing and lastly, training and support.

Step2: Development of Franchise and legal documents

 Development of business plan for a franchise

 Franchise Disclosure Document formulation
 Manual for Operations
 Development of marketing Plan for franchise

Step3: Franchise Sales and Lead Generation

 Setting Sales Goals

 Budget for Marketing
 Collateral for marketing
 Working with the Brokers
 Resales

Step4: Support for Franchisee

 Onboarding
 Real Estate
 Purchasing
 Training
 Royalties
 Ongoing Support
 Resale

What is a Franchisee?

A franchisee refers to a person or a business that operates and manages a franchise. According to
investopedia.com the franchisee has gained the right to use the trademarks, related logos and other
proprietary information of an established company to promote and distribute the same brand, and to
maintain the same standards as the first company.
What is a Franchisor?

A franchisor is an individual or a business enterprise owning and selling its rights and license to sell its
products and services3. The enterprise sells the rights to use its name and business concept. Generally,
a franchisor receives a great amount of money coming from start up fees, annual fees and a specific
percentage of the branches income.

Four corner stones of Franchising (Webber 2017)

 Licensing- This is a contractual agreement wherein an individual or company permits another

person or company to access its intellectual property rights like production process, brand
name, copyright , trademark, patent, technology and trade secrets under certain terms and
conditions.

 Franchise Agreement- This is a legal contract between you and the franchisor. This is a formal
legal document which it describes what the franchisor expects of you in the way you run every
facet of the company.

 Fee Structure- A table or list showing the prices for the different business facilities or
activities. This will help customers to manage their expectations and gain information about
the company’s fees.

 Brand Ownership- This pertains to creating your brand that will reflect the company’s values
and reputation so that they can entice consumers to purchase their products. As of now,
building a good brand is vital and crucial to the company’s growth because people are not
only buying products from them they are also buying stories behind every products.

Types of Franchising

According to the Philippine Franchise Association there are two types of franchising:

 Product Purchasing also known as trade name franchising, is the type of franchise in which a
distributor grants a franchisee the right to market its goods, but with no business process (ex.
Car dealership service stations)

 Business Format Franchising gives franchisees the benefit of an established trademark and
business model, as compared to creating a new company and brand from nothing. As well,
franchisors can spread quickly through countries and continents. Franchisees are given
comprehensive training, which is not an option for people launching their own business.
Usually, franchisors monitor how the franchisees perform business to ensure consistency.
Although such restrictions greatly limit the ability of the franchisee to conduct its own
judgment of the business.

As stated by Philippine Franchise Association the advantages of the franchisees are:

 High success rate

 Recognized brand and trademark
 You are not alone
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  Re-saleability of the franchise
 Huge Profit

According to Philippine Franchise Association the challenges of the franchisees are:

 Control
 On going costs
 Failed Expectations

Benefits of the Franchisor4

 Franchising helps an organization to expand their international presence

 Economies of Scale can be experienced by the franchisors
 Franchisor benefits from business growth by not worrying too much about its running costs
 Franchisors are given royalty fees calculated as a percentage of sales.

Challenges of the Franchisor5

 Difficult to monitor franchisee activities

 There is a threat in maintaining the company’s reputation because other businesses are
allowed to use their name.
 Slower growth rate compare to mergers and acquisitions

The Cost Involved in buying a Franchise

According to Barringer and Ireland (2018) below are some costs involved in buying a franchise:

 Initial Franchise Fee- start up fees charged by the franchisor

 Capital Requirements-The costs may differ and may include cost of purchasing property, cost
of constructing a building, buying inventory and the cost of acquiring a business license.

 Continuing Royalty Payment- specific portion of gross revenue

 Advertising Fees-In certain cases, franchisees are expected to pay national or regional
advertising fund.

 Other fees
o Staff training
o Management expertise
o Computer assistance

Please visit this websites to get ideas of the cost and inclusions of a franchise:
https://www.facebook.com/foodcartnegosyopinoyfranchisephilippines

http://tapawarma.ph/franchise/
https://www.jollibee.com.ph/Philippines/

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Benefits of Starting a Franchise vs. corporate owned 6

Franchising Corporate Owned

Introduces business to various areas of the Controlling every aspect of the business
country or the world
Managing the corporation on a lighter side, Profits are all yours
because routine responsibilities are managed by
the franchisees
Earning money by collecting royalties Less investment in personnel training and
material development
Company growth is stable and gradual Slow growth

Franchise vs. Licensing

What is a License?

A license is a legal agreement where one party, called the "Licensor," gives the other party “Licensee”
the permission to use or gain from a trademark, technology or other legal rights 7. Examples: Many
businesses, such as Lego, were licensed with the Batman character and Microsoft giving individuals
the right to use their products.

What is a Franchise?

A franchise is a legal arrangement where one party, called the "Franchisor," gives the other party
”Franchisee” the right to create, build, and repeat the franchisor's business operations.

Trademark and Domains

Tard (2019) defined a trademark as an identifiable logo, phrase, term, or symbol that signifies and
legally distinguishes a particular product from all other products of its kind. A trademark defines a
product exclusively acknowledges the company's ownership of the mark.

Strategies for Developing strong trademarks (Chadrijan 2018)

 Fanciful or invented words are strongly protected by a trademark

 Arbitrary marks appear to be almost as powerful as invented terms comprising of one or more
real words, but their usage is not connected to their dictionary definition.
 Descriptive marks appear to be very weak, and are often not registered
 Generic marks are general categories of goods and services that re non registrable.

Domain Name

A domain name is the address from which web users can visit your website. A domain name is used to
define and monitor computers on the Internet8.

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Domain name prices

www.hostinger.ph

Buying a Franchise

Buying a franchise is a big business venture that requires a major financial investment. Potential
franchisees should strive to be as well educated as possible before buying a franchise, and should be
informed that exiting a franchise relationship is often legally and financially complicated (Barringer
and Ireland 2018).

According to Barringer and Ireland (2018) below are the questions to be answered to identify whether
the franchise is good for you:

 Are you willing to take orders from franchisors? Usually, franchises are very specific about
how the outlets work
 Do you want to be part of a "system" chain, rather than be an individual businessman?
 How would you respond if you give your franchisor a suggestion, and your recommendation is
turned down?
 What are you searching for in an enterprise? How much effort do you want to exert to make
this work?
 How ready are you to risk your money? How are you going to feel if your business is working
at a loss but you still have to pay for royalties?

Buying a New Purchase (International Franchise Association)

Advantages

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  Lower risk of loss over self-employed sector
 Tried and tested products and business methods
 Assistance
 Continuous training and assistance
 Advertising for local, regional and national
 Research and Development
 Collaboration and association with different franchisees

Disadvantages

 Costly (franchising fees)

 Lower profit margins
 No freedom and independence when it comes to decision making
 Difficult to seek compensation if franchisor is unable to meet obligations
 The problem of the franchisor can also be your problem.

Buying Existing Franchise (International Franchise Association)

Advantages

 Business is already working

 Decreased uncertainty and risk
 Infrastructure is already built
o Location
o Reputation and customers
o Staff
o Defined policies and procedures
o No start-up period

Disadvantages

 Tangible limits
o Problems with the design
o Problems with the location
o Problems with the merchandise
 Intangible limits
o Unmotivated employees
o Problems with pricing
o Lack of procedures
o Problem with releasing
 Higher Cost

Criteria for Selecting a Franchise(International Franchise Association)

 Cost
 Demand
 Brand Name
 Franchisor’s Experience
 Your abilities
  Competition
 Training support
 Expansion plans

As stated by Barringer and Ireland (2018) below are the misconceptions about franchising

 Franchising is a secure venture

 A powerful industry guarantees successful franchise
 No need to hire a franchise attorney or an accountant

International Franchising

Reasons to consider international Franchising according to Barringer and Ireland (2018):

 Globalization Trends
 Wider markets
 Established and sustainable Brands

Steps to take before buying a franchise overseas (Barringer and Ireland 2018):

 Evaluate the value of the brand of the franchisor within the foreign country
 Getting a good lawyer
 Assess whether the good or service is sellable in other countries
 Determine the level of education and assistance the franchisor is willing to provide.

History of Franchising10

Many business historians trace the early part of franchising as a term coined during the Middle Ages,
when feudal lords started the custom of offering tax collection rights and running markets on their
behalf to others. This allows the earliest examples of franchising a political practice instead of a
business operation. The first example of franchising started during the mid-nineteenth century
Germany, where brewers formed contracts with tavern owners to supply their beer explicitly in their
taverns.

The generation of franchising use was not found in breweries and taverns in the United States. This
resulted then in the selling of goods to housewives on the American plains. Isaac Singer became the
earliest American product name franchisor in 1851, when he started selling the rights to market his
sewing machines to end users to wandering individual sellers.

Despite being the first American product name franchisor, the Singer ® Sewing Machine Business was
fairly rapidly surpassed by an even more important product name franchisor: Coca-Cola. In the early
1890s, Coca-Cola decided to encourage a wide number of successful businessmen who earned
exclusive territories to sell the drink in exchange for paying for and taking the risk of selling the
product to bottle their carbonated beverage.

Another significant advancement in franchising is the growth of conversion franchising. Conversion

franchising is the method of changing independent companies into franchisees under the franchisor's
brand name. The leaders of this practice were the major oil companies when they started giving
independent repair centers the right to use their logos in the 1920's.

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We can also date many other franchising founders into the 1920s and 1930s in retail and service
businesses. Perhaps the oldest retail franchisor is Ben Franklin stores, which started franchising
around this time in 1920. The first Fast Food franchise was A&W ® Root Beer, established in 1924,
with Howard Johnson ® becoming the first restaurant franchisee in 1935.

In the 1950s and 1960s, franchising actually started as a type of business, when the currently existing
franchise chains, such as Tastee-Freez ®, KFC ®, McDonald's, and Burger King ®, were founded. The
franchising boom of the 1950s and 1960s can largely be attributed to two factors: the growth of
television ads and the creation of the national highway system.

Franchising exploded in the 1960s, the decade experienced the emergence of a whirlwind of fly-by-
night franchise operations the set up their structures, sold them to franchisees, received money from
the franchisees, and quickly shut down. Throughout the 1970s, the decline of many people's interest
in these franchises contributed to the start of franchise regulation.

In 1975, the Federal Trade Commission ( FTC) launched its first enquiry into franchise abuse. The
North American Securities Commission began developing draft rules in that same year for Uniform
Franchise Offering Circulars (UFOCs), which become the standard method for reporting franchise
opportunities to franchisees.

This increasing federal initiative in the 1970s also resulted in the FTC in 1979 setting out disclosure
requirements and business guidelines for selling franchises thus beginning of the regulated franchising
era.

Assessment: Quiz

Case Analysis: Argos Fire and Safety11

Setting the Scene!

It was back when Karen (owner) was a little girl that she was first introduced into her family business,
Argos Fire & Safety. She had begun to learn what the business was all about at this point. On one fine
summer’s day, sitting on the cliff-side, looking out upon the bay, it suddenly dawned on Karen that
she wanted to take up her family business and to start having a real input on the key decisions of the
business. She was always very passionate about her family business and spent countless days helping
out her father as much as she could when she was younger. It was from there that Karen then
believed that going into work every morning amidst family was the most perfect, happiest and most
life changing decision that she was ever going to make. “Argos fire & Safety distribute fire and
safety products throughout Ireland and provide a full back up service to all clients.” Clients respect
this as they get full support from the company. Any issues or maintenance problems, the company
will be on speed dial to fix, providing prospective franchisees and clients the feeling of comfort and a
sense of relief. “The aim is to grow the business and help others become more independent in their
professional careers by having their own business.”

To Franchise or not to Franchise!

“Argos Fire and Safety is a family run business that has been in operation for over 32 years.” Now is
the time for Argos Fire & Safety to take the world by surprise and expand. This has forever been
playing on the minds of each individual in the Corcoran household and now they have come to the
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conclusion that franchising is the route for them and for the business to achieve expansion.
Franchising has been selected as the route of expansion instead of other strategic options for
instance: mergers; acquisitions; and partnerships due to its robust model, high growth rates and lower
risk factor. Karen is embedded within the second generation of Corcoran’s, taking over the family
business. Going live with the franchise part of the company in 2014 is currently of major importance
to Karen. Furthermore, the selection process for the products and services that the company should
sell was a rigorous and time consuming process. Karen would have liked to complete this
decision making process earlier. Franchising is a fundamental part of growing her business and she
hopes to have that up and running between early 2014 and 2015. A key factor for the adoption of the
franchise model is to grow the business and to also help other prospective entrepreneurs/franchisees
become their own boss. What has become apparent is that the Corcoran family have always wanted
to give back to their roots and support people to go into business for themselves. The family have a
wealth of knowledge and skills in the IT sector and on what it takes to be an effective trainer.
Karen’s sisters have also helped to grow the business so it really is a tight-knit family that is
working together to make their business a success. Were it not for the efforts of many, this life
changing ordeal of setting up and expanding the business couldn’t have ever been on the cards.
Long hours, vast commitment, effort, and a lot of capital has been allotted to the business by the
family to make it a triumph.

The journey has been long, challenging but ever so rewarding. The training that Karen personally
received at the National Franchise Centre was “great, constantly learning new things, helped with the
vision of the business and the business mentoring was very helpful”, due to being specifically tailored
to her needs. For the development of the business, the National Franchise Centre has helped “steer
them in the right direction and put things into perspective for the company”. Also, the true benefits
of franchising were identified whilst on the FAST programme at the NFC. Balancing the training at the
NFC with trying to run her own business was a very challenging task for Karen. Furthermore, the NFC
served its purpose for her by providing invaluable resources that has helped strategically position
Karen and her family business in a very effective direction. Since leaving the FAST programme, the
business is growing and the adoption of the franchise model is occurring. Every business encounters
challenges, hiccups and bumpy roads as they are part and parcel with every day business life, but the
main CHALLENGE which she encountered was time. There’s just not enough of it!

Questions (60pts.):

PLEASE BE CAREFUL IN ANSWERING THE QUESTIONS BELOW AND MIND THE RUBRICS (20pts. Each)

1. Determine the franchisability of Argos fire and safety by evaluating various factors discussed
in this topic. JUSTIFY and PROVIDE an IN DEPTH ANALYSIS of your answers.
2. Will Franchising help in expanding Argos fire and safety business? Justify your answer
3. What will be the pros and cons of Franchising this business? (Provide a 2 way analysis
(Franchisor and franchisee perspective)
Rubrics for Answering

Answer (Answer (point is 5

clear and
substantial)
Reason (Answer is supported 5
and is clearly emphasized)
Analysis (Theoretical 5
concepts
and discussions are observed
and applied)
Conclusion (States a 3
conclusion
with justification based on
reasonable interpretation)
Grammar( spelling, sentence 2
construction and etc.)
Total 40pts.

References:

Anderson, J.,2017, How to Franchise Your Business: A step by step approach to turn your business, or
idea into a franchise, Kindle Edition,

Barringer, B.R.,& Ireland, D.R,2018, Entrepreneurship: Successfully Launching New Ventures (6th
Edition) (What's New in Management), Pearson

Chadirijan,C.,2018,The Business of Trademarks: A Practical Guide to Trademark Management for

Attorneys and Paralegals, Universal-Publishers

Chaffey, D., 2015, Digital Business and E-Commerce Management: Strategy, Implementation and
Practice, Sixth Edition, Pearson Education Limited, United Kingdom

Webber,R.,2017, An Introduction to Franchising kindle edition,Red Globe Press

International Franchise Association Student Guide

https://francity.com/about-franchising/types-of-franchises/

https://www.investopedia.com/terms/f/franchise.asp

https://www.informit.com/articles/article.aspx?p=360649&seqNum=2#:~:text=An%20early
%20pioneer%20in%20service,Burger%20King%C2%AE%2C%20were%20established.

https://www.entrepreneur.com/encyclopedia/franchising

https://businessjargons.com/

https://www.franchising.com/guides/the_franchise_agreement.html
http://www.pfa.org.ph/

https://courses.lumenlearning.com/boundless-business/chapter/franchising/#:~:text=Benefits%20to
%20the%20franchisor%20include,and%20parent%20company%20marketing%20support.

https://www.accuratefranchising.com/resources/franchise-vs-corporate-growth/

https://www.franchiselawsolutions.com/franchising/licensing-versus-franchising/

https://www.investopedia.com/terms/t/trademark.asp

https://www.website.com/beginnerguide/domainnames/8/1/What-is-a-domain-name?.ws#:~:text=A
%20domain%20name%20is%20your,are%20a%20series%20of%20number