Franchises are generally known to the public under a well-promoted name like McDonald's®

Historically, the word franchise meant the granting of a right or privilege to an individual or group.

In more recent times it includes business arrangements known as franchises, licenses, dealerships and distributorships, to name a few.

What is franchising? Types of franchising Why franchise? Why is franchising

important to SMEs? Considerations for franchisor/franchisee Pitfalls/Be careful Singapore Experience

“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

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

› Extends to an entire operation or method of business

› Greater assistance, control and longer duration› Distributor merely re-sells products to retailers

or customers

3 main types of franchise:

› Product distribution franchise; › Business format franchise; and› Management franchise.

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.

Examples of famous product distribution franchise:

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.

A form of service agreement.

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

Franchises offer important pre-opening support:› site selection› design and construction› financing (in some cases)› training› grand-opening program

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

Developing franchise concept Market research Familiarity with local laws and

regulations Providing training and support to

franchisees

Criteria for choosing franchisees Control over franchisees Supply of products/materials to

franchisees Intellectual property rights issues, e.g.

trade mark registration

Demand Profitability of franchise, and length

of time required to recoup investment

Track record of franchisor Support rendered to other

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

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

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

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

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

Not analyzing the local market in advance

Not analyzing the competition Not making thorough due diligence of

the franchisor Not choosing the right location