Elective 2 Franchising

• 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
• Legal and commercial arrangement concerning the successful

  business of a franchisor

  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


  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

  Franchising
• Black’s Law Dictionary 7th edition 1999 defines Franchise as, “the

  sole right granted by the owner of a trademark or trade name to

  engage in business or to sell a good or service in certain area.”


  Legal definition of Franchise:
• defines Franchise as, “the sole right granted by the owner of a trademark or trade name to engage in business or to sell a good or service in certain area.”

  Black’s Law Dictionary 7th edition 1999
• Definition by International Franchise Association:

  “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.”

  Franchise Operation
• A network of interdependent business relationships that allows a number of people to share:

  1. A brand identification
  2. A successful method of doing business
  3. A proven marketing and distribution system

  Franchising
• the person or company that grants the

  franchisee the right to do business

  under their trademark or tradename

  Franchisor / Franchiser
• the person or company that gets the

  right from the franchisor to do

  business under the franchisor’s

  trademark or tradename and benefits

  from it.

  Franchisee
• the legal, written contract between the

  franchisor and franchisee which tells each

  party what each is supposed to do

  Franchise Agreement
• an agreement where the franchisor grants

  the franchisee the rights to open and

  operate ONE franchise unit

  Single-Unit Franchise Agreement
• an agreement where the franchisor grants

  a franchisee the rights to operate MORE

  THAN ONE unit

  Multi-Unit Franchise Agreement
• an agreement where the franchisee has

  the right to open more than one unit

  during a specific time, within a specific

  area


  Area Development Franchise Agreement
• an agreement where the franchisee is given

  more rights than an area development

  agreement; such as sub-franchising or the right

  to sell franchises to other people within a

  territory

  Master Franchise Agreement
• the Uniform Franchise Offering Circular is

  the disclosure document that provides the

  information about the franchisor and

  franchise system to a prospective

  franchisee.

  UFOC / Disclosure Statement
• the payment given to the franchiser for

  joining the network.

  It can be seen as an

  entry fee paid for the “secrets of the

  business”.

  Franchise Fee
• represents the amount the franchisee pays the

  franchiser every month (or whenever agreed)

  for commission of its sales. In return, the franchiser provides continuous training, market studies and release of new products.

  Royalty Fee
• the monthly fee paid by the franchisee for a

  common fund, managed by the franchiser

  for promoting the brand

  Advertising / Marketing Fund
• the usage of the brands & products / special

  services / methods of production, etc.

  patented by the franchiser are authorized to

  the franchisees and will be protected from

  abusive usage by potential customers.

  Copyright & Registered Trademark
• Basic Characteristics of a

  Franchise

  1. The business format is comprehensive and complete
  2. It is also an established and proven success
  3. The franchisor offers immediate help & advice
  4. Initial fee is to cover up the cost of setting up the franchise

  and should not be a source of profit for a reputable franchisor
• Basic Characteristics of a Franchise...

  • An operating manual is supplied by the franchisor
  • The franchisee pays a continuing royalty or management service fee to the franchisor in return for back-up services
  • A binding franchise agreement is drawn up & signed by the franchisor & franchisee
  • The franchisor & franchisee are legally independent of each other