4. ““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
5. What is Franchising?
Franchising is About Brands
￭Franchisor’s brand is its most valuable
asset
￭Meet Brand expectations
￭Developing a relationship with customers
to maintain their loyalty
6. What is Franchising?
Franchising is About Systems and Support
￭Ensure customer satisfaction
￭Common services provided to
franchisees:
￭ Recognized brand name
￭ Site selection and site development assistance
￭ Training for you and your management team
￭ R&D of new products and services
￭ Headquarters and field support
￭ Initial and continuing marketing and advertising
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
9. TYPES OF FRANCHISE
Two main types of franchise:
￭Product distribution franchise
￭Business format franchise
10. PRODUCT DISTRIBUTION 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
12. PRODUCT DISTRIBUTION FRANCHISE
FRANCHISEE
(Produces the final
drink)
Produces the syrup
concentrate (Sells the
syrup concentrate)
FRANCHISEE
Restaurants
& F&B
Outlets
Retail Stores
Vending
Machine
Operators
13. 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
17. 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)
18. 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
21. 10 Advantages of Franchise
Let’s check-out top advantages of franchising
22. 10 ADVANTAGES OF FRANCHISING
1. Risk of business failure
is reduced
2. Established market
share
3. Benefits of advertising
or promotion
4. Support from
franchisor
5. No prior experience is
needed
23. 10 ADVANTAGES OF FRANCHISING
6. Compete with big
businesses
7. Exclusive rights
8. Financing is easier
9. Benefits from other
franchisees
10.Established
relationship with
suppliers
24. 8 Disadvantages of Franchise
Let’s check-out disadvantages of franchising
25. 8 DISADVANTAGES OF FRANCHISING
1. High costs
2. Restrictions
3. Intrusive franchisor
monitoring
4. Franchisor might go
out of business
26. 8 DISADVANTAGES OF FRANCHISING
5. Bad reputation from
other franchisees
6. Difficulty in selling
franchise
7. Profit sharing
8. Inflexible nature of
franchise
27. CONCLUSION
￭ Franchising – a great model
￭ Proven formula for success
￭ Due diligence
￭ Long term business goals
Franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship. In franchising, franchisors (a person or company that grants the license to a third party for the conducting of a business under their marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), but also provide them with an operating system, brand and support.
So how does franchising work? Basically, the franchisor (the company) sells the rights to
use its business trademark, service mark, or trade name, or another commercial symbol of
the company, to the franchisee for a one-time franchise fee, which might range anywhere
from $0 to $225,000 (the franchise fee for Subway is approximately $15,000). In addition,
the franchisor charges an ongoing royalty fee, typically expressed as a percentage of gross
monthly sales. Ongoing royalty fees typically range from 2 to 10 percent (the royalty fee
for Subway is 12.5 percent and includes 8 percent toward franchise royalties and 4.5 percent
toward advertising). For example, if a Subway shop generates $20,000 in sales in a given
month, the franchisee must pay the franchisor $2,500 (12.5 percent of $20,000). Some
franchisors instead calculate the ongoing royalty fee on a sliding scale, with the percentage
fee decreasing as sales increase beyond preestablished thresholds. Suppose the monthly
sales threshold for a hypothetical franchise is $50,000. For the first $50,000 of sales, the
ongoing royalty fee charged is 6 percent, or $3,000, but for sales of more than $50,000,
the franchisor collects a 3 percent royalty fee. Therefore, if sales for a one-month period
total $80,000, the royalty fee equals $3,900, rather than the $4,800 that would have been
due if the sliding scale were not in place. The sliding scale thus encourages franchisees to
continue to find ways to increase sales volume.
A franchisor’s brand is its most valuable asset and consumers decide which business to shop at and how often to frequent that business based on what they know, or think they know, about the brand. To a certain extent consumers really don’t care who owns the business so long as their brand expectations are met. If you become a franchisee, you will certainly be developing a relationship with your customers to maintain their loyalty, and most certainly customers will choose to purchase from you because of the quality of your services and the personal relationship you establish with them. But first and foremost, they have trust in the brand to meet their expectations, and the franchisor and the other franchisees in the system rely upon you to meet those expectations.
Great franchisors provide systems, tools and support so that their franchisees have the ability to live up to the system’s brand standards and ensure customer satisfaction. And, franchisors and all of the other franchisees expect that you will independently manage the day-to-day operation of your businesses so that you will enhance the reputation of the company in your market area.
When selecting a franchise system to invest in, you want to evaluate the types of support you will be provided and how well the franchisor is managing the evolution of the products and services so that it keeps up with changing consumer expectations.
Many people, when they think of franchising, focus first on the law. While the law is certainly important, it is not the central thing to understand about franchising. At its core, franchising is about the franchisor’s brand value, how the franchisor supports its franchisees, how the franchisee meets its obligations to deliver the products and services to the system’s brand standards and most importantly – franchising is about the relationship that the franchisor has with its franchisees.
Distributor merely re-sells products to retailers or customers
Fundamentally there are two types of franchises. They are Product distribution franchises and Business format franchises. The most significant portion of the product distribution format is that the product itself is manufactured by the franchisor. Many times some sort of pre-sell preparation is necessary on the franchisee end before their sale.
One more important difference between these two types is that in product distribution type of franchises, the franchisor licenses their logo and trademark to the franchisees however he/she does not provide the complete system necessary to run the business successfully. However in the business format type the total system is supplied by the franchisor for running the business. Nowadays most of the franchises are of the type business format franchises.
If you look at United States, almost 80% of the totals of 770,000 franchise businesses are of the business format franchise type. Let’s have a close look at these two types of franchises.
In this type of franchises, the franchisees sell manufactured products to the franchisor. This type of business can often be found in industries such as automobile, drinks and automobile accessories. These franchises are similar to the supplier-dealer kind of relationships. However in the product distribution franchises, franchisee has the benefit of getting more services from franchisor than compared to what dealers will get from their suppliers.
In this type of franchises, the franchisee makes use of franchisor’s brand name and also his trademark. And more significantly, the franchisee gets to use the complete business system of the franchisor. This type of format is helpful in achieving consistency that gives results in form of sustained success. In this type of structure the franchisee is empowered with a detail plan that details almost all things related to operation of the franchise. In this type the franchise is provided training about things such as advertising and marketing of the franchise, management of the premises, recruitment and training of staff, greeting new and old customers and all other things related to the operation of the franchise.
The boom in franchising did not take place until after World War II. Nevertheless, the rudiments of modem franchising date back to the Middle Ages when the Catholic Church made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over to the church. The practice ended around 1562 but spread to other endeavors. For example, in 17th century England franchisees were granted the right to sponsor markets and fairs or operate ferries. There was little growth in franchising, though, until the mid-19th century, when it appeared in the United States for the first time.
The Singer Company implemented a franchising plan in the 1850s to distribute its sewing machines. The operation failed, though, because the company did not earn much money even though the machines sold well. The dealers, who had exclusive rights to their territories, absorbed most of the profits because of deep discounts.
Other companies tried franchising in one form or another after the Singer experience. For example, several decades later, General Motors Corporation established a somewhat successful franchising operation in order to raise capital.
McDonald’s was one of the first companies to sell franchises internationally in the 1970s.
Today, franchised businesses account for nearly 50 percent of all retail sales in the United States.
In addition, there are many reasons for international expansion; it could be because the “home” market is small or becoming saturated.
Although many business owners did affiliate with cooperative ventures of one type or another, there was little growth in franchising until the early 20th century, and what franchising there was did not take the same form as it does today.
The franchising industry is expected to employ 1.4 crore people by 2017, which is almost 10 percent of the Given such a large need for skilled resources, is absolutely imperative to identify the skill gaps and work towards 1bridging the same.
1. The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
2. Products and services will have already established a market share. Therefore there will be no need for market testing.
3. You can use a recognised brand name and trade mark. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
4. The franchisor gives you support - usually as a complete package including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
5. No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise.
A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchisees.
You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.
Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
Relationships with suppliers have already been established.
Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.
You may find that after time ongoing franchisor monitoring becomes intrusive
The franchisor might go out of business.
Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough
You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
All profits (a percentage of sales) are usually shared with the franchisor.
The inflexible nature of a franchise may restrict your ability to introduce changes to the business to respond to the market or make the business grow.
SME - Small and medium-sized enterprises
Due diligence - a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
