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An Introduction to Franchising
by
Rahul Jain
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Growth of Franchising
Singer Sewing Machinefirst franchise(mid-19thcentury)
Automobile (e.g. Ford), petroleum products(e.g. Shell), soft drinks (e.g. Coca Cola)
Food and restaurants (e.g. McDonalds,
Starbucks)
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Brief Outline
What is franchising?
Types of franchising
Why franchise?
Considerations for franchisor/franchisee
Pitfalls/Be careful
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What is franchising?
A franchise operation is a contractual relationship betweenthe franchisor and franchisee in which the franchisoroffers or is obliged to maintain a continuing interest in the
business of the franchisee in such areas as know-howand training; wherein the franchisee operates under acommon trade name, format and/or procedure owned orcontrolled by the franchisor, and in which the franchiseehas or will make a substantial capital investment in hisbusiness from his own resources.
- Definition by International Franchise Association
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What is franchising?
Legal and commercial arrangement concerning thesuccessful business of a franchisor
Use of franchisors trade name, format, systemand/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, licenseefee or other means
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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 orcustomers
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TYPES OF FRANCHISE
3 main types of franchise:
Product distribution franchise;
Business format franchise; and
Management franchise.
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A product distribution franchise model is verymuch like a supplier-dealer relationship.
Typically, the franchisee merely sells thefranchisors products. However, this type offranchise will also include some form ofintegration of the business activities.
PRODUCT DISTRIBUTION
FRANCHISES
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PRODUCT DISTRIBUTION
FRANCHISES
Examples of famous product distribution franchise:
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Produces the syrup
concentrate
Sells the syrup
concentrate
FRANCHISEE Produces the finaldrink
Retail StoresRestaurants &F&B Outlets
VendingMachine
Operators
PRODUCT DISTRIBUTION
FRANCHISES
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BUSINESS FORMAT
FRANCHISING
In a business format franchise, the integration ofthe business is more complete.
The franchisee not only distributes thefranchisors products and services under thefranchisors trade mark, but also implements thefranchisors format and procedure of conductingthe business.
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Famous Examples
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BUSINESS FORMAT
FRANCHISING -
outlet in
Sale, Australia
outlet in
Marseille, France
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MANAGEMENT
FRANCHISE
A form of service agreement.
The franchisee provides the managementexpertise, format and/or procedure forconducting the business.
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Famous Examples
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Why is franchising important to
SMEs?
Leveraging on a recognised brand name
Enhancing business image
Ensuring consistent quality
Attaining higher productivity/better motivatedstaff
Access to good locations Economies of scale
Reducing risks of failure
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WHY FRANCHISE?
Franchises offer important pre-openingsupport:
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 bulkpurchasing and economies of scale
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Common considerations of
franchisors
Developing franchise concept
Market research Familiarity with local laws and regulations
Providing training and support tofranchisees
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Common considerations of
franchisors
Criteria for choosing franchisees
Control over franchisees
Supply of products/materials to franchisees
Intellectual property rights issues, e.g. trademark registration
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Common considerations of
franchisees
Demand
Profitability of franchise, and length of timerequired to recoup investment
Track record of franchisor
Support rendered to other franchisees
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Common considerations of
franchisees
Experience and profitability of otherfranchisees
Existence of competition
Capital required
Demands of franchisor, e.g. income
projections, deadline to open more franchiseoutlets
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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
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BE CAREFUL
The franchisee is not completely independent.
In addition to the initial franchise fee, franchiseemust pay ongoing royalties and advertising fees.
Franchisee must be able to balance restrictionsand support provided by the franchisor with theirown ability to manage the business
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A damaged image or franchise system canresult if other franchisees perform poorly or
the franchisor has financial problems.
The duration of a franchise is usually limitedand the franchisee may have little or no sayconcerning termination
BE CAREFUL
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Not reading, understanding and/or askingquestions about the franchisee agreement
and other legal documents Not understanding the responsibilities of a
franchisee and the rights and obligations of afranchisor
Not seeking sound legal and financial advice
Not verifying oral representations of franchisor
Common Mistakes of Prospective
Franchisees
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Not analyzing the local market in advance
Not analyzing the competition Not making thorough due diligence of the
franchisor
Not choosing the right location
Common Mistakes of Prospective
Franchisees
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Franchising in India
Grown from a questionable format to anadmissible mode of business expansion inIndia
Pioneering companies proved that franchising
can work in any market/ country Brought a graphic change in over-all working
culture in the business
Technology and internet are helping at bothends:
To create the awareness about new products& services, and
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Franchising in India
Revolutionary year - 2010,
Booming entrepreneurship: 1800 Home GrownFranchisors & 2,00,000 Franchisees
85% success rate in franchising Vs. 90% failure in selfstart ups
Franchise industry estimation has towered up to overUS$ 7 billion
Highest retail outlet density in the world to up to approx.12 million
Remains the best entry & expansion strategy
SMEs are the key economy drivers
Employs over 97,00,000 employees directly or indirectly
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Franchisinga great model for
SMEs
Proven formula for success
Due diligence
Central role of IPRs
Avoidance of dispute
Conclusion
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Assignment
Write a one page note on a company whohave successfully adapted franchise model.(Both Franchisor and Franchisee perspective)
Provide all references