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
asknowhowandtraining;whereinthefranchiseeoperates
underacommontradename,formatand/orproce
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hichthefranchiseehasorwillmakeasubstantialca
pitalinvestmentinhisbusinessfromhisownresour

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 franchisors 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 franchisors
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 franchisors 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 franchisors products and

services under the franchisors trade mark, but also implements
the franchisors 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 / messages
Understanding 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
Dont let them come in the way of long term
relationship
Remedy non-conformances speedily
Corrective actions matching with the degree of noncompliance.

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

FranchisorFranchisee 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.

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