Franchise Final

INTRODUCTION

oA franchise is a license granted by a business to another business to make

and sell goods/services.

oA franchisor is the owner of the business who grants the license.

oA franchisee is the person who purchases the business name.

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 are as asknow-howandtraining;whereinthefranchiseeoperatesunderacommontradename,formatand/orprocedureownedorcontrolledbythefranchisor,andinwhichthefranchiseehasorwillmakeasubstantialcapitalinvestmentinhisbusinessfromhisownresources.”

FRANCHISE SYSTEM = FRANCHISE + FRANCHISOR + FRANCHISEE

WHAT IS IT A franchise is an agreement between two legally independent parties, a Franchisor (seller)

and a Franchisee (buyer) wherein the franchisor sells a right to market product or service using the trademark or trade name owned by his/her business and the franchisee agrees to market the same adopting the predefined operating methods of the franchisor. Franchisee, apart from the incurred cost on buying also has to oblige to a payment of royalty fees which is periodical and franchisor takes up an obligation to provide continued support to the franchisee, throughout franchise lifetime.

Normally referred to as“Business Format Franchising”

A contractual long-term relationship Grant of a licence to franchisee Franchisee gets:

Tried and tested product/service Profitable proven business model to follow Experience and know-how of the franchisor Entitlement to use the trade name / mark Entire package

Why Franchise?

• Legal and commercial arrangement concerning the successful business of a franchisor •Use of franchisor’s trade name, format, system and/or procedure under license•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• Group Advertising power• •Owning your business & making day to day decisions guided by franchisor’s experience• •Benefit of identification of trademarks, proprietary information, patents & designs• •Systematic training from experts• •Lower risk of failure and/or loss of investments• •Being a part of uniform operations throughout the country• •Assistance in financial & accounting matters from the franchisor, as well as ongoing

support• •Enhancement of management abilities

TYPES OF FRANCHISE

Three 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:

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

MANAGEMENT FRANCHISE

A form of service agreement.

The franchisee provides the management expertise, format and/or procedure for conducting the business.

Famous Examples

Key dimensions

• Financial• Marketing• License Agreements• Territory Management• Systems & Communications• Engagement • Conflict Resolution• Principles of Continuity

Financial

Financial Model: Win-Win• –And not that of squeezing the franchisee profits• –Risk vs. reward balance Cost of Franchise:• –Uniform and consistent across franchisees• –Initial fee• –Royalty fee / Management fee• –Capital required

Marketing

Branding• –Centralised, Local Marketing• –Standard designs / messagesUnderstanding Customer needs & environmental trends • –Technology• –Customer needs, requirements • –Customer profile• –Competition (familiar, unfamiliar)• –Feedback from Franchisees• –Inputs from independent sources

Marketing

• Advertising and Branding• Trademark Usage• Product / Price:–Being competitive–Meeting customer needs–Introduction of new products and phasing out

of existing products

Systems & Communications

• MIS: Franchisee & franchisor• Systems & Processes: • For managing the franchise outlet• Support• Physical Monitoring • Communications–Communicate actively–Document communications, meetings, decisions

License Agreements

• Contains details of the relationship like:–IPRs–Fee to be paid: Initial and ongoing–Duration of the Agreement–What Franchisor is expected to do–What Franchisee is expected to do –What none is expected to do–What is that we exist for–What are the conditions under which we would not

continue with this relationship

Territory Management

• Territory/Area of operation• Carve territories with a long term perspective• Do not create competition for existing

franchisees

Engagement

• Training of Franchisee & their Employees• Ongoing support• Franchisee Meets• Recognition & Awards for Franchisees & their

Employees• Do not treat Franchisee & their Employees as

subordinates:–Strong tendency among front end executives of

the franchisor to do so.

Conflict Resolution

• Three levels of conflicts:–Operational –Resolve at field level–Policy matters –Resolve at corporate level–Major disputes –Address at appropriate level• Transactional conflicts are likely to arise.–Resolve them proactively–Don’t let them come in the way of long term relationship• Remedy non-conformances speedily–Corrective actions matching with the degree of non-

compliance.

Principles of Continuity

• Win-Win relationship• Business sense to each other• Alignment of Values & Business Ethics

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

Advantages OF FRANCHISING

Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.

You can use a recognized brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.

The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.

You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.

Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.

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You benefit from communicating and sharing ideas with and receiving support from other franchisees in the network

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Relationships with suppliers have already been established.

Disadvantages OF FRANCHISING Costs may be higher than you expect. As well as the initial costs of

buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.

The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.

The franchisor might go out of business.

Other franchisees could give the brand a bad reputation.

You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.

All profits are shared with the franchisor