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FranchisingManagementSession1 - Introduction to Franchising Management

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Introduction to Franchising Management

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FranchisingManagementSession1 - Introduction to Franchising Management

  1. 1. Franchise Management - Prof. Rohita Dwivedi
  2. 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. 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. 4. 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
  5. 5. 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
  6. 6. Franchise Legal definition of Franchise: Black’s Law Dictionary 7th edition 1999 defines Franchise as, “the sole right granted by the owner of a trademark or trade name to engage in business or to sell a good or service in certain area.”
  7. 7. Franchise Operation Definition by International Franchise Association “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.”
  8. 8. Franchising A network of interdependent business relationships that allows a number of people to share: 1. A brand identification 2. A successful method of doing business 3. A proven marketing and distribution system
  9. 9. Definition of Terms Franchisor / Franchiser the person or company that grants the franchisee the right to do business under their trademark or tradename Franchisee the person or company that gets the right from the franchisor to do business under the franchisor’s trademark or tradename and benefits from it.
  10. 10. Definition of Terms... Franchise Agreement the legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do Single-Unit Franchise Agreement an agreement where the franchisor grants the franchisee the rights to open and operate ONE franchise unit
  11. 11. Definition of Terms... Multi-Unit Franchise Agreement an agreement where the franchisor grants a franchisee the rights to operate MORE THAN ONE unit Area Development Franchise Agreement an agreement where the franchisee has the right to open more than one unit during a specific time, within a specific area
  12. 12. Definition of Terms... Master Franchise Agreement an agreement where the franchisee is given more rights than an area development agreement; such as sub-franchising or the right to sell franchises to other people within a territory UFOC / Disclosure Statement the Uniform Franchise Offering Circular is the disclosure document that provides the information about the franchisor and franchise system to a prospective franchisee.
  13. 13. Definition of Terms... Franchise Fee the payment given to the franchiser for joining the network. It can be seen as an entry fee paid for the “secrets of the business”. Royalty Fee represents the amount the franchisee pays the franchiser every month (or whenever agreed) for commission of its sales. In return, the franchiser provides continuous training, market studies and release of new products.
  14. 14. Definition of Terms... Advertising / Marketing Fund the monthly fee paid by the franchisee for a common fund, managed by the franchiser for promoting the brand Copyright & Registered Trademark the usage of the brands & products / special services / methods of production, etc. patented by the franchiser are authorized to the franchisees and will be protected from abusive usage by potential customers.
  15. 15. Basic Characteristics of a Franchise • The business format is comprehensive and complete • It is also an established and proven success • The franchisor offers immediate help & advice • Initial fee is to cover up the cost of setting up the franchise and should not be a source of profit for a reputable franchisor
  16. 16. Basic Characteristics of a Franchise... • An operating manual is supplied by the franchisor • The franchisee pays a continuing royalty or management service fee to the franchisor in return for back-up services • A binding franchise agreement is drawn up & signed by the franchisor & franchisee • The franchisor & franchisee are legally independent of each other
  17. 17. Types of Franchise 1. Investment Franchise 2. Executive Franchise 3. Retail Franchise 4. Distribution Franchise 5. Depot Franchise 6. Job Franchise
  18. 18. 1.Investment Franchise/ Business Format Franchise Investment franchises are operated by the fast-food and restaurant chains, as well as by some well-known hotels. ● The franchisee has overall control of the business ● Employs his or her own senior management and staff.
  19. 19. 2. Executive Franchise Usually business to business type franchises, executive franchises range from coaching and consultancy, to sales and recruitment franchise business opportunities. Executive franchise businesses will suit a 'white collar' professional, who has developed, and wishes to utilise, management and executive business skills to benefit from higher than average income, controllable work and life balance and intellectual challenge. Executive franchises are also suitable for people looking to work in executive, training, and business to business sectors.
  20. 20. 2. Executive Franchise... Involves the provision of professional services Financial advice, legal services or recruitment assistance.
  21. 21. 3. Retail Franchise The franchisee runs the outlet, employs staff and displays goods approved by the franchisor.
  22. 22. 4. Distribution Franchise A distribution franchise permits the franchisee to operate from a depot or central office that is usually owned by the franchisor. The distribution industry is big business, but it doesn’t have to be a big initial capital spend. Many distribution franchisees start out with a scalable, low-maintenance business opportunity providing them with the room and support required to start a self-employed career at an affordable level.
  23. 23. 4. Distribution Franchise... Some business opportunities require to build up to a large warehouse operation, while other small one-man-van opportunities can be purchased for a fraction of the cost. The common thread in every distribution opportunity is that the territory secure can prove to be most important asset. The size of the geographic area, the quality of the area’s road network and the volume and mix of residential and commercial customers will define business’s future.
  24. 24. 4. Distribution Franchise... Make sure you have discussed the territory’s opportunities and limitations in-depth with the franchisor before you make your purchase, and you could soon be on the way to running your own successful distribution business.
  25. 25. 5. Depot Franchise The franchisee is the operator and sole occupant of the depot. This type of franchise is generally available to courier companies and parts suppliers, for whom a depot is an essential part of the business.
  26. 26. 6. Job Franchise Usually a one-person business, operated by the franchisee from home. Operations, such as lawn care, car repairs or furniture refurbishing, are examples of job franchises.
  27. 27. 7. Management Franchise A management franchise is where the franchisee will be responsible for both running the franchise and employing and managing a team of operatives.
  28. 28. 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
  29. 29. WHY FRANCHISE? Franchises offer important pre-opening support: • site selection • design and construction • financing (in some cases) • training • grand-opening program
  30. 30. 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
  31. 31. Common considerations of franchisors Developing franchise concept Market research Familiarity with local laws and regulations Providing training and support to franchisees
  32. 32. 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
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. 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
  37. 37. 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…
  38. 38. 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
  39. 39. 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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