INTRODUCTION TO FRANCHISING AND ITS IMPORTANCE TO ENTREPRENEURS & SMALL & MEDIUM ENTERPRISES by Tan Tee Jim, S.C. Senior Partner, Head, IP & IT, Lee & Lee Lahore,
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INTRODUCTION TO FRANCHISING AND ITS IMPORTANCE TO ENTREPRENEURS & SMALL & MEDIUM ENTERPRISES by Tan Tee Jim, S.C. Senior Partner, Head, IP & IT, Lee & Lee Lahore, December 2007 How to be a successful entrepreneur – a tip 2 WHAT IS FRANCHISING? An arrangement whereby a party (franchisor), who has developed a way of running a business format/system successfully, licenses the rights to operate that format/system using his trademark, name or other IP rights to another party (franchisee) The licence involves the franchisor granting a right to use the format/system, trademark, name or other IP rights in exchange for an initial fee and annual royalty. 3 WHAT IS FRANCHISING? “Franchising allows people to go into business for themselves, not by themselves” 4 WHY FRANCHISE? A recognised brand name. Enhanced business image. Consistent quality. 5 WHY FRANCHISE? Franchises offer important pre-opening support: site selection design and construction financing (in some cases) training grand-opening program 6 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 7 DISADVANTAGES The franchisee is not completely independent. In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees. Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business 8 DISADVANTAGES A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem. The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination 9 ASSESSING FRANCHISING OPPORTUNITY Successful franchising essentially involves trust and understanding between the franchisor and franchisee Franchisor’s financial position and track record How thoroughly has the business been market tested 10 ASSESSING FRANCHISING OPPORTUNITY How well the format/system works in practice (Are existing franchisees pleased with their business? Any bad news?) Does the business have staying power? Or is it based on something which is temporarily fashionable? 11 HOW TO ASSESS A PROSPECTIVE FRANCHISE? Assess the reputation and reliability of the franchisor Find out the demand for the goods/services offered in the franchise Do sales projection Find out from other franchisees the support services provided Work out the amount of capital that is needed upfront 12 HOW TO ASSESS A PROSPECTIVE FRANCHISE? Work out the amount of cash that is needed under the worst case scenario Go through the contract thoroughly with a lawyer concerning , in particular, rights of the franchisee obligations of the franchisor terms of termination restriction on business entered after termination resolution of disputes 13 WHAT IS INVOLVED IN FRANCHISING? Tenure/Period of contract Initial fee Royalty/management fee Renovation cost Territory Supply of goods and services Compliance with contract Terms of termination 14 STEPS INVOLVED IN FRANCHISING? 15 WHAT SHOULD A COMPANY DO TO GET READY TO BE A FRANCHISEE? Conduct feasibility study Set up systems/procedures and support functions Study the operations manual Register trademarks and other IP rights 16 TYPES OF FRANCHISE Generally there are 2 main types of franchises: Product distribution franchises; and Business format franchises. 17 PRODUCT 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, these type of franchises will also include some form of integration of the business activities. 18 PRODUCT DISTRIBUTION FRANCHISES Examples of famous product distribution franchises include: 19 PRODUCT DISTRIBUTION FRANCHISES Produces the syrup concentrate Sells the syrup concentrate FRANCHISEE Produces the final drink Retail Stores Restaurants & F&B Outlets Vending Machine Operators 20 BUSINESS FORMAT FRANCHISING In business format franchises, on the other hand, the integration of the businesses is more complete. The franchisee not only distributes the franchisor’s products and services under the franchisor’s trademark, but also implements the franchisor’s complete method to conduct the business itself. 21 BUSINESS FORMAT FRANCHISING Examples of famous business format franchises include: 22 BUSINESS FORMAT FRANCHISING - outlet in Sale, Australia outlet in Marseille, France 23 FRANCHISING IN SINGAPORE About 350 active franchises, such as 24 FRANCHISING IN SINGAPORE Feasibility of Franchising Franchising is a more feasible option of business expansion than starting own outlets 25 FRANCHISING IN SINGAPORE Success of the Franchise 26 FRANCHISING IN SINGAPORE Success of Franchising Franchisors’ Improvement in Average Monthly Sales since Franchising 27 FRANCHISING IN SINGAPORE Success of Franchising Franchisors’ Improvement in Average Monthly Net Profit since Franchising 28 FRANCHISING IN SINGAPORE Success of Franchising Franchisors’ Improvement in Average Monthly Sales since Franchising 29 FRANCHISING IN SINGAPORE Reason for Franchising 2/3 of franchisees felt that economies of scale in bulk purchasing encouraged them to consider franchising 30 FRANCHISEES IN SINGAPORE 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 31 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.” 32 FRANCHISING IN SINGAPORE Business Performance Percentage Increase in Average Monthly Sales for Franchisees who were Previously Running a Business in the Same Trade 33 FRANCHISING IN SINGAPORE Business Performance Percentage Increase in Average Monthly Net Profit for Franchisees Previously Running a Business in the Same Trade 34 35 THANK YOU Tan Tee Jim, S.C. [email protected]