business

1. 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

2. Growth of Franchising
 Singer Sewing Machine – first franchise
(mid-19th century)
 Automobile (e.g. Ford), petroleum products
(e.g. Shell), soft drinks (e.g. Coca Cola)
 Food and restaurants (e.g. McDonald’s,
Starbucks)

3. 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

4. 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

5. 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

6. 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

7. 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

8. TYPES OF FRANCHISE
 3 main types of franchise:
 Product distribution franchise;
 Business format franchise; and
 Management franchise.

9.  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

10. PRODUCT DISTRIBUTION
FRANCHISES
 Examples of famous product distribution franchise:

11. Produces the syrup
concentrate
Sells the syrup
concentrate
FRANCHISEE Produces the final
drink
Retail Stores
Restaurants &
F&B Outlets
Vending
Machine
Operators
PRODUCT DISTRIBUTION
FRANCHISES

12. 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.

13. Famous Examples

14. BUSINESS FORMAT
FRANCHISING -
outlet in
Sale, Australia
outlet in
Marseille, France

15. MANAGEMENT
FRANCHISE
 A form of service agreement.
 The franchisee provides the management
expertise, format and/or procedure for
conducting the business.

16. Famous Examples

17. 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

18. WHY FRANCHISE?
 Franchises offer important pre-opening
support:
 site selection
 design and construction
 financing (in some cases)
 training
 grand-opening program

19. 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

20. Common considerations of
franchisors
 Developing franchise concept
 Market research
 Familiarity with local laws and regulations
 Providing training and support to
franchisees

21. 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

22. 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

23. 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

24. 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

25. 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

26.  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

27.  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

28.  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

29.  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

30. FRANCHISING IN SINGAPORE
Reason for Franchising
2/3 of franchisees felt that economies of scale in bulk purchasing
encouraged them to consider franchising

31. FRANCHISING IN SINGAPORE
Feasibility of Franchising
Franchising is a more feasible option of business expansion than starting own
outlets

32. FRANCHISING IN SINGAPORE
Success of the Franchise

33. FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors’ Improvement in Average Monthly Sales since Franchising

34. FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors’ Improvement in Average Monthly Net Profit since Franchising

35. FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors’ Improvement in Average Monthly Sales since Franchising

36. 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.”

37. FRANCHISING IN SINGAPORE
Business Performance
Percentage Increase in Average Monthly Sales for Franchisees who
were Previously Running a Business in the Same Trade

38. FRANCHISING IN SINGAPORE
Business Performance
Percentage Increase in Average Monthly Net Profit for Franchisees
Previously Running a Business in the Same Trade

39.  Franchising – a great model for
SMEs
 Proven formula for success
 Due diligence
 Central role of IPRs
 Avoidance of dispute
Conclusion

40. Thank You
Tan Tee Jim, S.C.
tanteejim@leenlee.com.sg
Kuala Lumpur, July
2008