INTRODUCTION TO FRANCHISING AND ITS

IMPORTANCE TO ENTREPRENEURS &

SMALL & MEDIUM ENTERPRISES

by

Tan Tee Jim, S.C.

Senior Partner,
Head, IP & IT,
Lee & Lee
Lahore, December 2007
How to be a successful entrepreneur –
a tip

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WHAT IS FRANCHISING?
 An arrangement whereby a party (franchisor), who
has developed a way of running a business
format/system successfully, licenses the rights to
operate that format/system using his trademark,
name or other IP rights to another party (franchisee)

 The licence involves the franchisor granting a right

to use the format/system, trademark, name or other
IP rights in exchange for an initial fee and annual
royalty.

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WHAT IS FRANCHISING?

“Franchising allows people to

go into business for
themselves, not by themselves”

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WHY FRANCHISE?
 A recognised brand name.

 Enhanced business image.

 Consistent quality.

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WHY FRANCHISE?
 Franchises offer important pre-opening
support:
 site selection
 design and construction
 financing (in some cases)
 training
 grand-opening program

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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

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DISADVANTAGES
 The franchisee is not completely independent.

 In addition to the initial franchise fee, franchisees

must pay ongoing royalties and advertising fees.

 Franchisees must be careful to balance

restrictions and support provided by the franchisor
with their own ability to manage their business

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DISADVANTAGES
 A damaged, system-wide image can result if
other franchisees are performing poorly or the
franchisor runs into an unforeseen problem.

 The term (duration) of a franchise agreement

is usually limited and the franchisee may have
little or no say about the terms of a
termination

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ASSESSING
FRANCHISING OPPORTUNITY

 Successful franchising essentially involves

trust and understanding between the
franchisor and franchisee
 Franchisor’s financial position and track
record
 How thoroughly has the business been
market tested

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ASSESSING
FRANCHISING OPPORTUNITY

 How well the format/system works in practice

(Are existing franchisees pleased with their
business? Any bad news?)

 Does the business have staying power? Or is

it based on something which is temporarily
fashionable?

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HOW TO ASSESS A PROSPECTIVE
FRANCHISE?
 Assess the reputation and reliability of the
franchisor
 Find out the demand for the goods/services offered
in the franchise
 Do sales projection
 Find out from other franchisees the support
services provided
 Work out the amount of capital that is needed
upfront

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HOW TO ASSESS A PROSPECTIVE
FRANCHISE?
 Work out the amount of cash that is needed
under the worst case scenario
 Go through the contract thoroughly with a lawyer
concerning , in particular,
 rights of the franchisee
 obligations of the franchisor
 terms of termination
 restriction on business entered after termination
 resolution of disputes
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WHAT IS INVOLVED IN
FRANCHISING?

 Tenure/Period of contract
 Initial fee
 Royalty/management fee
 Renovation cost
 Territory
 Supply of goods and services
 Compliance with contract
 Terms of termination

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STEPS INVOLVED IN FRANCHISING?

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WHAT SHOULD A COMPANY DO TO GET
READY TO BE A FRANCHISEE?

 Conduct feasibility study

 Set up systems/procedures and support
functions
 Study the operations manual
 Register trademarks and other IP rights

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TYPES OF FRANCHISE

 Generally there are 2 main types of

franchises:

 Product distribution franchises; and

 Business format franchises.

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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, these type
of franchises will also include some form of
integration of the business activities.

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PRODUCT DISTRIBUTION
FRANCHISES

 Examples of famous product distribution

franchises include:

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PRODUCT DISTRIBUTION
FRANCHISES
Produces the syrup
concentrate

Sells the syrup

concentrate

Produces the final

FRANCHISEE drink

Retail Stores
Restaurants & Vending
F&B Outlets Machine
Operators
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BUSINESS FORMAT
FRANCHISING
 In business format franchises, on the other
hand, the integration of the businesses is
more complete.

 The franchisee not only distributes the

franchisor’s products and services under
the franchisor’s trademark, but also
implements the franchisor’s complete
method to conduct the business itself.

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BUSINESS FORMAT
FRANCHISING
 Examples of famous business format
franchises include:

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 BUSINESS FORMAT
FRANCHISING -

outlet in outlet in
Sale, Australia Marseille, France
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FRANCHISING IN SINGAPORE

 About 350 active franchises, such as

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FRANCHISING IN SINGAPORE

Feasibility of Franchising

Franchising is a more feasible option of business expansion

than starting own outlets

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FRANCHISING IN SINGAPORE

Success of the Franchise

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FRANCHISING IN SINGAPORE

Success of Franchising

Franchisors’ Improvement in Average Monthly Sales since Franchising

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FRANCHISING IN SINGAPORE

Success of Franchising

Franchisors’ Improvement in Average Monthly Net Profit since Franchising

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FRANCHISING IN SINGAPORE

Success of Franchising

Franchisors’ Improvement in Average Monthly Sales since Franchising

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FRANCHISING IN SINGAPORE

Reason for Franchising

2/3 of franchisees felt that economies of scale in bulk purchasing

encouraged them to consider franchising

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FRANCHISEES IN SINGAPORE

 Generally young and well educated

 62% below 40 years old
 57% had post-secondary education
 32% own their own outlets
 46% occupy the outlets as tenants

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FRANCHISING IN SINGAPORE

Franchising helps existing businesses do better.

Franchisees’Response to the Statement:
“Joining a Franchise has Helped Me to Do Better than Before.”

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FRANCHISING IN SINGAPORE

Business Performance

Percentage Increase in Average Monthly Sales for Franchisees

who were Previously Running a Business in the Same Trade

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FRANCHISING IN SINGAPORE

Business Performance

Percentage Increase in Average Monthly Net Profit for

Franchisees Previously Running a Business in the Same Trade

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THANK YOU

Tan Tee Jim, S.C.

tanteejim@leenlee.com.sg