Franchise

Management
- Prof. Rohita Dwivedi
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)

Growth of
Franchising
Home markets saturated – attractive opportunities
overseas

Lack of/relaxation of regulations in most countries

Expansion of international trade

Exposure to international media
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

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
Franchis
e
Legal definition of Franchise:
Black’s Law Dictionary 7th edition 1999 defines Franchise as, “the
sole right granted by the owner of a trademark or trade name to
engage in business or to sell a good or service in certain area.”
Franchise
Operation
Definition by International Franchise Association

“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.”
Franchisin
g
A network of interdependent business relationships that allows a
number of people to share:
1. A brand identification
2. A successful method of doing business
3. A proven marketing and distribution system
Definition of
Terms
Franchisor / Franchiser
the person or company that grants the franchisee the right to do
business under their trademark or tradename

Franchisee
the person or company that gets the right from the franchisor to
do business under the franchisor’s trademark or tradename and
benefits from it.
Definition of
Terms...
Franchise Agreement
the legal, written contract between the franchisor and franchisee
which tells each party what each is supposed to do

Single-Unit Franchise Agreement

an agreement where the franchisor grants the franchisee the rights
to open and operate ONE franchise unit
Definition of
Terms...
Multi-Unit Franchise Agreement
an agreement where the franchisor grants a franchisee the rights
to operate MORE THAN ONE unit

Area Development Franchise Agreement

an agreement where the franchisee has the right to open more
than one unit during a specific time, within a specific area
Definition of
Terms...
Master Franchise Agreement
an agreement where the franchisee is given more rights than an
area development agreement; such as sub-franchising or the right
to sell franchises to other people within a territory

UFOC / Disclosure Statement

the Uniform Franchise Offering Circular is the disclosure document
that provides the information about the franchisor and franchise
system to a prospective franchisee.
Definition of
Terms...
Franchise Fee
the payment given to the franchiser for joining the network. It
can be seen as an entry fee paid for the “secrets of the business”.

Royalty Fee
represents the amount the franchisee pays the franchiser every
month (or whenever agreed) for commission of its sales. In return,
the franchiser provides continuous training, market studies and
release of new products.
Definition of
Terms...
Advertising / Marketing Fund
the monthly fee paid by the franchisee for a common fund,
managed by the franchiser for promoting the brand

Copyright & Registered Trademark

the usage of the brands & products / special services / methods of
production, etc. patented by the franchiser are authorized to the
franchisees and will be protected from abusive usage by potential
customers.
Basic Characteristics of a
Franchise
• The business format is comprehensive and complete

• It is also an established and proven success

• The franchisor offers immediate help & advice

• Initial fee is to cover up the cost of setting up the franchise and

should not be a source of profit for a reputable franchisor
Basic Characteristics of a
Franchise...
• An operating manual is supplied by the franchisor

• The franchisee pays a continuing royalty or management service fee to the

franchisor in return for back-up services

• A binding franchise agreement is drawn up & signed by the franchisor &

franchisee

• The franchisor & franchisee are legally independent of each other

Types of
Franchise
1. Investment Franchise

2. Executive Franchise

3. Retail Franchise

4. Distribution Franchise

5. Depot Franchise

6. Job Franchise
 1. Investment Franchise/ Business Format
Franchise
Investment franchises are operated by the fast-food and
restaurant chains, as well as by some well-known hotels.
● The franchisee has overall control of the business
● Employs his or her own senior management and
staff.
2. Executive
Franchise
Usually business to business type franchises, executive franchises
range from coaching and consultancy, to sales and recruitment
franchise business opportunities.
Executive franchise businesses will suit a 'white collar' professional,
who has developed, and wishes to utilise, management and
executive business skills to benefit from higher than average
income, controllable work and life balance and intellectual
challenge. Executive franchises are also suitable for people looking
to work in executive, training, and business to business sectors.
2. Executive
Franchise...
Involves the provision of professional services
Financial advice, legal services or recruitment assistance.
3.Retail
Franchise
The franchisee runs the outlet, employs staff and displays goods
approved by the franchisor.
4. Distribution
Franchise
A distribution franchise permits the franchisee to operate from a
depot or central office that is usually owned by the franchisor.

The distribution industry is big business, but it doesn’t have to be a

big initial capital spend. Many distribution franchisees start out
with a scalable, low-maintenance business opportunity providing
them with the room and support required to start a self-employed
career at an affordable level.
4. Distribution
Franchise...
Some business opportunities require to build up to a large
warehouse operation, while other small one-man-van
opportunities can be purchased for a fraction of the cost. The
common thread in every distribution opportunity is that the
territory secure can prove to be most important asset. The size of
the geographic area, the quality of the area’s road network and
the
volume and mix of residential and commercial customers will
4. Distribution
Franchise...
Make sure you have discussed the territory’s opportunities and
limitations in-depth with the franchisor before you make your
purchase, and you could soon be on the way to running your own
successful distribution business.
5. Depot
Franchise
The franchisee is the operator and sole occupant of the depot. This
type of franchise is generally available to courier companies and
parts suppliers, for whom a depot is an essential part of the
business.
6. Job
Franchise
Usually a one-person business, operated by the franchisee from
home. Operations, such as lawn care, car repairs or furniture
refurbishing, are examples of job franchises.
7. Management
Franchise
A management franchise is where the franchisee will be
responsible for both running the franchise and employing and
managing a team of operatives.
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
FR AN CH ISE? ..
.
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