Wipo Smes Kul 08 Topic01
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Wipo Smes Kul 08 Topic01 Wipo Smes Kul 08 Topic01 Presentation Transcript

  • An Introduction to Franchising and its Importance for Entrepreneurs and Small and Medium-Sized Industries by Tan Tee Jim, S.C . Senior Partner, Head, IP & IT, Lee & Lee Kuala Lumpur, July 2008
  • Growth of Franchising
    • Singer Sewing Machine – first franchise (mid-19 th 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.
    • 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
  • PRODUCT DISTRIBUTION FRANCHISES
    • Examples of famous product distribution franchise:
  • PRODUCT DISTRIBUTION FRANCHISES Produces the syrup concentrate Sells the syrup concentrate FRANCHISEE Produces the final drink Retail Stores Restaurants & F&B Outlets Vending 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 Sale, Australia outlet in 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
    • 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
    BE CAREFUL
    • 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
    Common Mistakes of Prospective Franchisees
      • 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
    FRANCHISEES IN SINGAPORE
  • 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
      • Franchising – a great model for SMEs
      • Proven formula for success
      • Due diligence
      • Central role of IPRs
      • Avoidance of dispute
    Conclusion
  • Thank You Tan Tee Jim, S.C . [email_address] Kuala Lumpur, July 2008