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Franchising

Franchising may be defined as a business arrangement which allows for the reputation,

(goodwill) innovation, technical know-how and expertise of the innovator (franchisor) to

be combined with the energy, industry and investment of another party (franchisee) toconduct the business of providing and selling of goods and services. Franchising is a

system of business that has grown steadily in the last 5 years and is estimated to account

for more than one-third of the world!s retail sales. "here are few of us how who are not

touched by the results of franchising. Franchises range from the ubi#uitous $c%onalds tolocal sweet shops and medical stores like &uardian. 'nother notable chain is the ata

hoe *ompany, a firm of *+ech origin. $ore recently, several indigenous business

organi+ations have entered the franchising arena, for example irulas, $onginis,oodlands, "atas, eliance, $F "yres and /umbo 0ing. uccessful franchising occurs

in a range of industries and often works well where there is a customer service element as

well as a recognised product and brand.1n franchising the 2know-how3 of a business is key to its success. Franchising works

particularly well where the franchisor advertises on a national basis and brings a well-known, tried and tested brand to the market. "he franchisee gets the benefit of a head

start in business by selling well-known goods and services. 1n simple terms a franchise isa sophisticated know how and trade mark licence. 1n order to maintain brand standards

the franchisor will often control the supply chain and direct that products are sourced

from specific suppliers and are sold in a particular way. "he franchisor may also specifythings such as staff training and layouts.

Franchising encompasses products and services from the manufacture, supply formanufacture, processing, distribution and sale of goods, to the rendering of services, the

marketing of those services, their distribution and sale. 1n a basic franchising arrangement

the franchisor has developed a system for conducting business. "he system has beenfound to be successful. "he franchisor wishing to emulate the success of that business

system, usually in a different geographic area, establishes a blueprint for others also

wishing to emulate this success to operate the same business using the same name and

same systems.

"he franchised system is generally a package including the intellectual property rights 4

such as the rights to use the "rade $ark, trade names, logos, and 2get-up3 associated withthe business any inventions such as patents or designs, trade-secrets, and know-how of

the business and any relevant brochures, advertising or copyrighted works relating to the

manufacture, sale of goods or the provision of services to customers. "he 1ntellectual

6roperty is uni#ue to the business and provides the business with it!s competitiveadvantage and market niche.

' typical franchise system will generally include7

1.A license

1n return for an agreed amount the franchisee is granted a license to conduct his or herbusiness along the lines prescribed by the franchisor. "his will usually include the use of

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all relevant 1ntellectual 6roperty, marketing and advertising publications, store design as

well specialised e#uipment necessary to operate the systems.

8. A shared development and improvement obligation

$ost franchising arrangements have an on-going shared development and improvementobligation which is encumbent on both the franchisor and franchisee. "his re#uires a

mutual trust and respect and a sharing of the overall aims and goals of the franchise. "he

franchisor also has the responsibility to nurture, encourage and provide assistance to thefranchisee on an ongoing basis..

"he franchisee for their part is re#uired to maintain and promote the franchise and to

conduct business prescribed in the system manuals and best practice guidelines so as to

meet the mutually set goals."he franchisee also has the continuing obligation to pay maintenance fees to the

franchisor in accordance with the franchise arrangement. "hese fees usually include an

advertising 9 marketing component as well as an on-going management service fee.

3. The franchisors right to define the rules regarding operations .

$ost Franchise arrangements contain a component which stipulates that the franchisee is

to conduct the business along prescribed guidelines and in accordance with the franchise

best operating practice. "he franchisor for his part is re#uired to maintain, distribute andupdate the manuals, operating procedures and #uality re#uirements when changes are

made 4 and to provide on-going training.

"he franchise arrangement will usually also re#uire the franchisee to protect the

1ntellectual 6roperty of the franchise system, and to operate in accordance with territorialor geographical obligations agreed. oth parties will be re#uired to conform to the agreed

accounting disclosure provisions.

"he franchising arrangement is a legal document relying on contract law and inevitablyon mutual trust between both parties.

ADVANTAG! " D#!ADVANTAG! $F F%AN&'#!#NG

"he main advantage of owning a franchise is the feeling of freedom that being self-

employed brings. "his freedom is tempered with the knowledge that the owner has

invested in a proven system and has the training, support and encouragement of other

franchisees and the franchisor.:wning a franchise should also provide a semi-monopoly environment in which to

conduct business in a particular area. &enerally, there is also an informed ready-made

customer base.$ost importantly though, being part of a franchise ensures the franchisee is part of an

instantly 8apitali+e8e brand, the product or service expectations that a brand brings, and

the reputation gained by the brand over time.' franchise also offers the franchisee with the ability to 8apitali+e on the know-how and

systems that have been proven to be successful. "he #uality of the product or service

provided is therefore in many ways guaranteed. ome of the advantages a franchise offers

are

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Advantages from the Franchisors point of vie();.Financial)Franchising creates another source of income for the franchisor, through

payment of franchise fees, royalty < levies in addition to the possibility of sourcingprivate label products to franchisees. "his capital in=ection provides an improved cash

flow, a higher return on investment and higher profits. :ther financial benefits that the

franchisor en=oys are reduced operating, distribution and advertising costs. :f course thatalso means more allocated funds for research and development. 6lus the bulk buying

offers economies of scale ..

*. $perational7 "he franchisor does not need to develop and own locations themselves.Franchising also means uniformity of procedures, which reflects on consistency,

enhanced productivity levels and better #uality. >ffective #uality control is another

advantage of the franchise system. "he franchisee is usually self motivated since he has

invested much time and money in the business, which means working hard to bring inbetter organi+ational and monetary results. "his also reflects on more satisfied customers

and improved sales effectiveness.

3. !trategic7 "o the franchisor, franchising means the spreading of risks by multiplying

the number of locations through other people!s investment. "hat means faster networkexpansion and a better opportunity to focus on changing market needs,

+. Administrative)ith a smaller central organi+ation, the business maintains a morecost effective labour force, reduction of turnover , more effective recruitment and greater

administrative control.

5.ulk buying advantages as economies of scale are reali+ed. "he franchisor gets aemi-monopoly defined territory or geographical boundaries become well defined .

? "here are enough opportunities for on-going research and development to improve

service and #uality.

@ ecause of the 6roven brand, trade mark, recognition the franchisor can easily fget thefranchisee to hare marketing, advertising, business launch campaign costs

; the franchisor has a good 1ndustry know-how so there is a reduced risk of failure

,. Advantages from a Franchisees point of vie()

;. 'ccess to proprietary products or services

8. Freedom of employmentA. 6roven product or service delivery and #uality

B. Cower financial risk, compared to other ventures, because investment costs are lower

and profit margins are higher.

5. usiness Format Franchising complete packages ensure a ready to go 2turn-key3franchised unit.

?. $anaging a small business whilst depending on the power of the franchisor company

which has a bigger organi+ation.@. "he franchisee has an opportunity to run a proven business concept with a successful

operational track record.

D. "he opportunity to learn the latest developments and changes in the local and globalmarket from the franchisor and focus entirely on developing the sales revenues.

E. "he benefit of operating under a recogni+ed trade name9trademark, which can have

better marketing results.

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;. "he franchisee has access to accumulated business experience and technical know-

how in managing the business.

;;. ' unified store design which leverages the business reputation in marketing theconcept.

;8. >asier purchasing, storing, and product display systems.

Disadvantages from a Franchisors point of vie()

;. ' huge capital investment is re#uired to build the franchise infrastructure andoperation in terms of e#uipment, training etc..

8. 't the beginning of the franchise program there is a broader risk that the trade name

can come to disrepute owing to ineffective selection of franchisees until such time the

franchisor is capable of selecting the right candidate for the business.A. "here is a risk that franchisees exercise undue pressure over the franchisor in order to

implement new policies and procedures.

B. "he franchisor has to disclose confidential information to franchisees and this may

constitute a risk to the business and the franchisor may have competition from his own exfranchisees later on

.

. Disadvantages from a Franchisees point of vie()

;. "he re#uirement to pay the franchise fees and royalty to the franchisor, which in somecases can be exaggerated and not =ustified.

8. "he transfer of all goodwill built in the local market to the franchisor upon expiration

or termination of the franchise contract so the good will of the franchisee will be carried

over to the next franchisee.A. "he strictness of the necessity of abiding by the franchisor!s operating systems,

standards, policies and procedures.

B 1nspite of hardwork a franchisee may have a limited corporate profit margin due topayment of royalties and levies.

's with licensing, franchising can be extremely flexible and can work very well for bothparties provided that the franchise agreement is drafted fairly. Franchisees pay a royalty

for the benefit of using the brand, the know-how and the franchisors expertise. 1n return

the franchisor gets the benefit of nationwide market penetration and can en=oy

considerable success from a royalty stream. Franchising is becoming an ever popularchoice due to the recent downturn in the economy and the number of redundancies on the

increase. 1t allows a person to start their own business and become their own boss, but

with the weight of a well known brand and methodology behind them.