franchising
DESCRIPTION
TRANSCRIPT
FRANCHISING
What is a Franchise?“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.”
Features
Legal and commercial arrangement
Use of franchisor’s trade name, format, system and/or
procedure under license
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
Types
Type Meaning Example
Product Distribution Fra. Supplier-Dealer Rel.Sells franchisors product
Business Format Franchise
Not only distributes franchisors products but follows the business format
Management Franchise Service agreement, for mgt expertise.
Product Distribution-Eg
• Produces the syrup concentrate
• Sells the syrup concentrate
• FRANCHISEE • Produces the final drink
• Retail Stores
• Restaurants & F&B Outlets
• Vending Machine Operators
Business Format- Eg.
Subway Outlet- Australia Subway Outlet- France
Advantages
Buying a name/reputation Established markets Technical/management assistance Standardized procedures Quality standards Selection of location Facility design Quicker cash flow
Disadvantages
Loss of independence High initial fees High royalties and advertising allowances Contractual restrictions Inapplicable advertising Termination clauses Unsuitable products Lack of competitive advantage
Franchisee’s Perspective Proven operating location Credible top management Skilled field support staff A trade identity A proprietary operations manual Effective training programs Disclosure and offering documents Plans for advertising, marketing, PR and promotion A communications system Sufficient capital
Franchisor’s Perspective
Faster growth Lower capital requirements Motivation – franchisors are owners of the franchise Control of locations Revenue stream – franchise fees/royalties
But… Reduced control Profit sharing Greater commitment to operating support
Franchising important to SMEs?
Leveraging on a recognized 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