An Introduction to Franchising Kuala Lumpur, July 2008.
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1An Introduction to Franchising Kuala Lumpur, July 2008
2What 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
3Growth of FranchisingSinger 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)
4TYPES OF FRANCHISE 3 main types of franchise: Product distribution franchise;Business format franchise; andManagement franchise.
5PRODUCT DISTRIBUTION FRANCHISES 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.
6PRODUCT DISTRIBUTION FRANCHISES For example an independent garage will use and promote only Maaco products, while a school may agree to sell only Coca-Cola products in its cafeteria and at all sporting events.Examples of famous product distribution franchise:
7BUSINESS 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.
12Why is franchising important to SMEs? Leveraging on a recognized brand nameEnhancing business imageEnsuring consistent qualityAttaining higher productivity/better motivated staffAccess to good locationsEconomies of scaleReducing risks of failure
13WHY FRANCHISE? Franchises offer important pre-opening support: site selectiondesign and constructionfinancing (in some cases)traininggrand-opening program
14WHY FRANCHISE? Franchises offer ongoing support training national and regional advertisingoperating procedures and operational assistancesupervision and management supportincreased spending power, access to bulk purchasing
15Franchisor–Franchisee relationship Regulated by contract which usually covers:Initial feeRoyalty fee/Management feeTerritory/Area of operationDuration of license and renewalTermination
16BE 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
17BE CAREFULA 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
18Common Mistakes of Prospective Franchisees Not reading, understanding and/or asking questions about the franchisee agreement and other legal documentsNot understanding the responsibilities of a franchisee and the rights and obligations of a franchisorNot seeking sound legal and financial adviceNot verifying oral representations of franchisor
19Common Mistakes of Prospective Franchisees Not analyzing the local market in advanceNot analyzing the competitionNot choosing the right location
20FRANCHISEES IN SINGAPORE Generally young and well educated62% below 40 years old57% had post-secondary education32% own their own outlets46% occupy the outlets as tenants
21FRANCHISING IN SINGAPORE Reason for Franchising2/3 of franchisees felt that economies of scale in bulk purchasing encouraged them to consider franchising
22FRANCHISING IN SINGAPORE Feasibility of FranchisingFranchising is a more feasible option of business expansion than starting own outlets
23FRANCHISING IN SINGAPORE Success of the Franchise
24FRANCHISING IN SINGAPORE Success of FranchisingFranchisors’ Improvement in Average Monthly Sales since Franchising
25FRANCHISING IN SINGAPORE Success of FranchisingFranchisors’ Improvement in Average Monthly Net Profit since Franchising
26FRANCHISING IN SINGAPORE Success of FranchisingFranchisors’ Improvement in Average Monthly Sales since Franchising
27FRANCHISING IN SINGAPORE Franchising helps existing businesses do better.Franchisees’Response to the Statement:“Joining a Franchise has Helped Me to Do Better than Before.”
28FRANCHISING IN SINGAPORE Business PerformancePercentage Increase in Average Monthly Sales for Franchisees who were Previously Running a Business in the Same Trade
29FRANCHISING IN SINGAPORE Business PerformancePercentage Increase in Average Monthly Net Profit for Franchisees Previously Running a Business in the Same Trade
30Conclusion Franchising – a great model for SMEs Proven formula for successDue diligenceCentral role of IPRsAvoidance of dispute
31Thank You Tan Tee Jim, S.C. firstname.lastname@example.org Kuala Lumpur, July 2008