wipo smes kul 08 topic01
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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
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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)
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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
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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
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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
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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
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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
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TYPES OF FRANCHISE
3 main types of franchise:
Product distribution franchise; Business format franchise; and Management franchise.
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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
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PRODUCT DISTRIBUTION FRANCHISES
Examples of famous product distribution franchise:
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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
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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.
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Famous Examples
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BUSINESS FORMAT FRANCHISING -
outlet in Sale, Australia
outlet in Marseille, France
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MANAGEMENT FRANCHISE
A form of service agreement.
The franchisee provides the management expertise, format and/or procedure for conducting the business.
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Famous Examples
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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
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WHY FRANCHISE?
Franchises offer important pre-opening support: site selection design and construction financing (in some cases) training grand-opening program
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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
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Common considerations of franchisors
Developing franchise concept Market research Familiarity with local laws and
regulations Providing training and support to
franchisees
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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
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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
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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
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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
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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
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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
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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
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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
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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
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FRANCHISING IN SINGAPORE
Reason for Franchising
2/3 of franchisees felt that economies of scale in bulk purchasing encouraged them to consider franchising
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FRANCHISING IN SINGAPORE
Feasibility of Franchising
Franchising is a more feasible option of business expansion than starting own outlets
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FRANCHISING IN SINGAPORE
Success of the Franchise
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FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors’ Improvement in Average Monthly Sales since Franchising
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FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors’ Improvement in Average Monthly Net Profit since Franchising
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FRANCHISING IN SINGAPORE
Success of Franchising
Franchisors’ Improvement in Average Monthly Sales since Franchising
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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.”
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FRANCHISING IN SINGAPORE
Business Performance
Percentage Increase in Average Monthly Sales for Franchisees who were Previously Running a Business in the Same Trade
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FRANCHISING IN SINGAPORE
Business Performance
Percentage Increase in Average Monthly Net Profit for Franchisees Previously Running a Business in the Same Trade
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Franchising – a great model for SMEs
Proven formula for success Due diligence Central role of IPRs Avoidance of dispute
Conclusion