UNDERSTANDING THE FRANCHISE BUSINESS MODEL A Journalist’s Perspective Presented By Kathleen McDonald Franchise Consultant Nathan Associates, Inc. 16 February 2018

What is Franchising? A marketing and distribution system Based on a contractual relationship between two legally independent parties These parties are the franchisor – the owner of a trade name, service mark and/or trademark and The franchisee – the entrepreneur or investor who purchases the “pre-packaged” business concept and operates the business under a contract with the franchisor.

What is Franchising? By definition a franchise must include: A license permitting the franchisee to market a product or service using the franchisor’s trademark or trade name; The franchisor receives monthly royalty fees from the franchisee based on revenues from the franchise business; and The franchisor provides ongoing training and support services to the franchisee.

Franchising is Not A….. Joint venture Distributorship Partnership Branch or regional office Wholly owned subsidiary of an existing company Product Licensee Employment Contract Multi Level Marketing

Benefits of Franchising Is suitable for a wide variety of goods and services. Is one of several methods of delivering products or services of uniform and consistent quality to consumers. Allows the franchisee to be in business for himself, but not by himself.

Elements of Franchising A trademark or trade name used by two independent parties. The franchisor expands the business by getting others to conduct their business using the franchise trade name. Franchisees pay fees to the franchisor for the right to use the trade name or mark and agree to accept the franchisor’s method of doing business.

Elements of Franchising The franchise business is easily replicable and provides consistency in delivering goods, services and operations To ensure consistency in operations a franchise agreement is executed by both parties. Conditions are imposed on both parties, including acceptance by the franchisee to follow procedures as detailed in the operations manual.

Elements of Franchising Franchising includes a distinctive combination of business features. These are: a network of franchised locations; an efficient distribution system; operational support from the franchisor; and easier access to financing for franchisees.

The Franchising Process Step One: Preparation Both the franchisor and the franchisee Conduct research Enter into negotiation for a franchise agreement Execute an agreement

The Franchising Process Step Two: Operation – Franchisor Owns trademark, service mark and other IP Provides initial support and on going assistance to the franchisee in the management of the business Receives payment, including an initial franchise fee, and regular royalty or administrative fees, from the franchisee.

The Franchising Process Step Two – Franchisee Uses trademark Develops the business with the franchisor’s assistance Adheres to the principles of the franchise system Makes payments to the franchisee as agreed to in the franchise agreement

The Franchising Process The Results? The franchisor operates more units. The franchisee owns and operates a business which has a greater degree of success than one which is not franchise affiliated.

Advantages of Franchising For the franchisor: Expand rapidly at a relatively low cost; Business risks are distributed more broadly than in comparison to other methods of expansion; and Gain access to international markets which might otherwise be difficult to enter.

Advantages of Franchising For the franchisee: Degree of independence as a business owner; Ability to sell a proven product or service with recognition in the market; Access to a proven set of operating procedures; Short and long term operational support from the franchisor; and Easier access to capital.

Disadvantages of Franchising For the franchisor: Potentially limited control over marketing and promoting the franchise brand; Difficult to ensure quality and consistency associated with the brand; and Profit per unit may be lower than if all units were company owned

Disadvantages of Franchising For the franchisee: The franchisee is not completely independent, sometimes making it difficult to tailor the business to the local market. The term of the franchise agreement is limited.

How Does Franchising Support Local Economic Development? Drives entrepreneurial activity; Supports the participation of women, youth and minorities in business ownership; Promotes job creation; Reduces risk in consumer purchasing; and For economies in transition franchising is an ideal method of privatizing parts of large public sector enterprises.

Private Sector Development Activity Thank You Private Sector Development Activity Nathan Associates Inc.