An Introduction to Franchising and its

Importance for Entrepreneurs and Small and

Medium-Sized Industries

Kuala Lumpur, July

2008
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
Brief Outline

 What is franchising?
 Types of franchising
 Why franchise? Why is franchising important to
SMEs?
 Considerations for franchisor/franchisee
 Pitfalls/Be careful
 Singapore Experience
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 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
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

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

FRANCHISEE drink

Retail Stores
Restaurants & Vending
F&B Outlets 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.
Famous Examples
 BUSINESS FORMAT
FRANCHISING -

outlet in outlet in
Sale, Australia 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
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
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
FRANCHISING IN SINGAPORE

Reason for Franchising

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

encouraged them to consider franchising
FRANCHISING IN SINGAPORE

Feasibility of Franchising

Franchising is a more feasible option of business expansion than starting own

outlets
FRANCHISING IN SINGAPORE

Success of the Franchise

FRANCHISING IN SINGAPORE

Success of Franchising

Franchisors’ Improvement in Average Monthly Sales since Franchising

FRANCHISING IN SINGAPORE

Success of Franchising

Franchisors’ Improvement in Average Monthly Net Profit since Franchising

FRANCHISING IN SINGAPORE

Success of Franchising

Franchisors’ Improvement in Average Monthly Sales since Franchising

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.”
FRANCHISING IN SINGAPORE

Business Performance

Percentage Increase in Average Monthly Sales for Franchisees who were

Previously Running a Business in the Same Trade
FRANCHISING IN SINGAPORE

Business Performance

Percentage Increase in Average Monthly Net Profit for Franchisees

Previously Running a Business in the Same Trade
Conclusion

 Franchising – a great model for

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

Kuala Lumpur, July

2008