Why opt for a franchise model of business?


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The powerpoint presentation aims to give a simple yet detailed description of how the franchise model of business works. What are the things to look out for or consider while starting a franchise business and which franchises have been relatively successful.

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Why opt for a franchise model of business?

  1. 1.  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.
  2. 2.  What is franchising?  Types of franchising  Why franchise? Why is franchising important to SMEs?  Considerations for franchisor/franchisee  Pitfalls/Be careful  Singapore Experience
  3. 3. “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
  4. 4.  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
  5. 5. › Extends to an entire operation or method of business › Greater assistance, control and longer duration › Distributor merely re-sells products to retailers or customers
  6. 6.  3 main types of franchise: › Product distribution franchise; › Business format franchise; and › Management franchise.
  7. 7.  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.
  8. 8.  Examples of famous product distribution franchise:
  9. 9.  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.
  10. 10.  A form of service agreement.  The franchisee provides the management expertise, format and/or procedure for conducting the business.
  11. 11.  Franchises offer important pre-opening support: › site selection › design and construction › financing (in some cases) › training › grand-opening program
  12. 12.  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
  13. 13.  Developing franchise concept  Market research  Familiarity with local laws and regulations  Providing training and support to franchisees
  14. 14.  Criteria for choosing franchisees  Control over franchisees  Supply of products/materials to franchisees  Intellectual property rights issues, e.g. trade mark registration
  15. 15.  Demand  Profitability of franchise, and length of time required to recoup investment  Track record of franchisor  Support rendered to other franchisees
  16. 16.  Experience and profitability of other franchisees  Existence of competition  Capital required  Demands of franchisor, e.g. income projections, deadline to open more franchise outlets
  17. 17. 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
  18. 18.  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
  19. 19.  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
  20. 20.  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
  21. 21.  Not analyzing the local market in advance  Not analyzing the competition  Not making thorough due diligence of the franchisor  Not choosing the right location