Franchising has grown significantly since the mid-19th century, especially in food and restaurants. It allows brands to expand internationally quickly while providing assistance to franchisees. There are three main types of franchises: product distribution, business format, and management. Franchising is important for small businesses as it provides access to recognized brands and support networks. Both franchisors and franchisees must carefully consider various legal and financial factors. With proper due diligence and contractual agreements, franchising can be a proven model for small business success.
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
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
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.
15. MANAGEMENT
FRANCHISE
A form of service agreement.
The franchisee provides the management
expertise, format and/or procedure for
conducting the business.
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
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