An Introduction to Franchising

by

Rahul Jain

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. McDonalds,
Starbucks)

Brief Outline

What is franchising?
Types of franchising
Why franchise?
Considerations for franchisor/franchisee
Pitfalls/Be careful

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 franchisors 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

What is 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

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

franchisors 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

FRANCHISEE

Produces the final

drink

Retail Stores
Restaurants &
F&B Outlets

Vending
Machine
Operators

BUSINESS FORMAT
FRANCHISING

In a business format franchise, the integration of

the business is more complete.

The franchisee not only distributes the

franchisors products and services under the
franchisors trade mark, but also implements the
franchisors format and procedure of conducting
the business.

Famous Examples

BUSINESS FORMAT
FRANCHISING -

outlet in
Sale, Australia

outlet in
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

FranchisorFranchisee 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

Franchising in India

Grown from a questionable format to an

admissible mode of business expansion in
India
Pioneering companies proved that franchising
can work in any market/ country
Brought a graphic change in over-all working
culture in the business
Technology and internet are helping at both
ends:
To create the awareness about new products
& services, and

Franchising in India

Revolutionary year - 2010,

Booming entrepreneurship: 1800 Home Grown
Franchisors & 2,00,000 Franchisees
85% success rate in franchising Vs. 90% failure in self
start ups
Franchise industry estimation has towered up to over
US$ 7 billion
Highest retail outlet density in the world to up to approx.
12 million
Remains the best entry & expansion strategy
SMEs are the key economy drivers
Employs over 97,00,000 employees directly or indirectly

Conclusion

Franchising a great model for

SMEs
Proven formula for success
Due diligence
Central role of IPRs
Avoidance of dispute

Assignment

Write a one page note on a company who

have successfully adapted franchise model.
(Both Franchisor and Franchisee perspective)
Provide all references