The Millennium University College

Finance In the Hospitality Industry

 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 investment in his
business from his own resources.”
 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.
 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

• FRANCHIS drink

EE

• Retail
• Restaurant Stores • Vending
s etc 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.
BUSINESS FORMAT
FRANCHISING
BUSINESS FORMAT
FRANCHISING
 MANAGEMENT
FRANCHISE

• A form of service agreement.

• The franchisee provides the management

expertise, format and/or procedure for
conducting the business.
MANAGEMENT
FRANCHISE

United Parcel Service

 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

 Termination clauses

 Not receiving promised help

 Lack of competitive advantage of parent company

 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
 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
• Termination
 Common considerations of franchises

• Demand
• Profitability of franchise, and length of time
required to recoup investment
• Track record of franchisor
• Support rendered to other franchises
 Common Mistakes of Prospective
Franchises
• 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 analyzing the local market in advance.
• Not analyzing the competition.
• Not choosing the right location.