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) to conduct 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 to local 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 wellknown, 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 is a 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 specify things such as staff training and layouts. Franchising encompasses products and services from the manufacture, supply for manufacture, 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 been found 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 with the business5 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 competitive advantage 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 her business along the lines prescribed by the franchisor. "his will usually include the use of

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 improvement obligation 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 the franchisee 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 and update 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 territorial or 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 inevitably on 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 selfemployed 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

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 sourcing private 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 that also 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 in better 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 network expansion and a better opportunity to focus on changing market needs, +. Administrative) -ith a smaller central organi+ation, the business maintains a more cost 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 a )emi-monopoly5 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 the franchisee 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 employment A. 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-key3 franchised 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 global market 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.

; . "he franchisee has access to accumulated business experience and technical knowhow in managing the business. ;;. ' unified store design which leverages the business reputation in marketing the concept. ;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 and operation 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 ex franchisees later on . . Disadvantages from a Franchisees point of vie() ;. "he re#uirement to pay the franchise fees and royalty to the franchisor, which in some cases 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 to payment of royalties and levies. 's with licensing, franchising can be extremely flexible and can work very well for both parties provided that the franchise agreement is drafted fairly. Franchisees pay a royalty for the benefit of using the brand, the know-how and the franchisorFs 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 popular choice 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.