AN INTRODUCTION TO FRANCHISING

FRANMA Dorelene Villanueva Dimaunahan, MScM, CFE

Franchising

Franchising is a form of business organization in which a firm that already has a SUCCESSFUL product or service (FRANCHISOR) licenses its trademark and method of doing business to another business or individual (FRANCHISEE), in exchange for a franchise fee and ongoing royalty payment

International Franchise Association (IFA): “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.”

Franchising is MORE than just distributorship because it extends to an ENTIRE operation or method of dong business, involves greater assistance, control and longer duration, whereas the distributor merely re-sells products to retailers or customers

Growth of Franchising

The word “franchise” comes from an old dialect of French and means privilege or freedom

Singer Sewing Machine - first franchise (mid 19th century)

Automobile - Ford, Petroleum Products - Shell, Softdrinks - Coca Cola, Food & Restaurants - McDonalds & Starbucks

Home markets became saturated, resulting in attractive opportunities overseas, paired with the expansion of international trade and media

Lack of regulations in most countries

Types of FranchisesProduct & Trademark Business Format Management Franchise

An arrangement under which the franchisor grants to the franchisee the right to buy its products and use its trade name

Here, the franchisee merely sells the franchisor’s products, including some form of integration of the business’ activities

It is very much like a supplier-dealer relationship

An arrangement under which the franchisor provides the formula for doing business to the franchisee along with training, advertising and other forms of assistance

Here, the franchisee not only distributes the franchisor’s products and services under the franchisor’s trademark, but also implements the franchisor’s f o r m a t a n d p r o c e d u r e o f conducting business

An arrangement under which the franchisee provides the management expertise, format and/or procedures in conducting the business

It is a form of “service agreement”

Types of Franchises

Product & Trademark

Business Format

Management

Types of Franchise Agreements

Individual Franchise - involves the sale of a single franchise for a specific location

Area Franchise - allows a franchisee to own and operate a specific number of franchisees in a particular geographic area

Master Franchise - allows a franchisee to own and operate a specific number of franchises in a particular geographic area PLUS provides the franchisee the right to sell to others (subfranchisees) who find and manage their own franchise

Types of Franchise Agreements

Individual Franchise Area Franchise

Types of Franchise Agreements

Master Franchise

Advantages and Disadvantages of Franchising

Advantages Disadvantages

Rapid, low-cost market expansion

Income from franchise fees and royalties

Franchisee motivation

Access to ideas and suggestions

Cost savings

Increased buying power

Profit-sharing

Loss of control

Friction with franchisees

Managing growth

Differences in required business skills

Legal expenses

Advantages and Disadvantages of Buying a Franchise

Advantages Disadvantages

Proven product or service within an established market

Established trademark or business system

Franchisor’s training, technical support and managerial expertise

Established marketing network

Availability of financing (varies)

Potential for business growth

Cost of the franchise

Restrictions on creativity

Duration and nature of commitment

Risk of fraud, misunderstanding, lack of franchisor commitment

Poor performance on the part of other franchisees

Potential for failure

Misconceptions about Franchising

Franchising is a safe investment

A strong industry ensures franchise success

A franchise is a “proven” business system

There is no need to hire a franchise lawyer or an accountant

The best systems grow rapidly and it is best to be part of a rapid-growth system

I can operate my franchise outlet for less than the franchisor predicts

The franchisor is a nice person - he’ll help me out

Franchising in the World

Franchising in the US

Nearly 910,000 franchise outlets operate in the US

Franchises account for 1/3 of all retail sales

Franchising in the Philippines

Evolved from the US franchise system

However, no laws regulate franchising

Companies and franchise developers use franchise practices as reference and guide in pursuing franchising

Franchising for years has been the monopoly of the food sector; It was only in the mid-1990s that service and retail entrepreneurs used franchising

Franchise Conferences & Seminars started only in the mid-1990‘s; Franchise Associations were formed with the vision of professionalizing franchising

Goal: To make the Philippines the Center for Franchise Development in Asia

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