An Introduction to Franchising and its
Importance for Entrepreneurs and Small and
Medium-Sized Industries
by
SAAD UR REHMAN GROUP
Kuala Lumpur, July
2008
Growth of Franchising
Singer Sewing Machine – first franchise (mid-
19th century)
Automobile (e.g. Ford), petroleum products
(e.g. Shell), soft drinks (e.g. Coca Cola)
Food and restaurants (e.g. McDonald’s,
Starbucks)
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
Brief Outline
What is franchising?
Types of franchising
Why franchise? Why is franchising important to
SMEs?
Considerations for franchisor/franchisee
Pitfalls/Be careful
Pakistan Experience
What is franchising?
“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.”
- Definition by International Franchise Association
What is franchising?
Legal and commercial arrangement concerning the
successful business of a franchisor
Use of franchisor’s trade name, format, system and/or
procedure under licence
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
What is 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
TYPES OF FRANCHISE
3 main types of franchise:
Product distribution franchise;
Business format franchise; and
Management franchise.
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, this type of
franchise will also include some form of
integration of the business activities.
PRODUCT DISTRIBUTION
FRANCHISES
Examples of famous product distribution franchise:
PRODUCT DISTRIBUTION
FRANCHISES
Produces the syrup
concentrate
Sells the syrup
concentrate
Produces the final
FRANCHISEE drink
Retail Stores
Restaurants & Vending
F&B Outlets Machine
Operators
BUSINESS FORMAT
FRANCHISING
In a business format franchise, the integration of
the business is more complete.
The franchisee not only distributes the
franchisor’s products and services under the
franchisor’s trade mark, but also implements the
franchisor’s format and procedure of conducting
the business.
Famous Examples
BUSINESS FORMAT
FRANCHISING -
outlet in outlet in
Sale, Australia Marseille, France
MANAGEMENT
FRANCHISE
A form of service agreement.
The franchisee provides the management
expertise, format and/or procedure for
conducting the business.
Famous Examples
Why is franchising important to
SMEs?
Leveraging on a recognised brand name
Enhancing business image
Ensuring consistent quality
Attaining higher productivity/better motivated
staff
Access to good locations
Economies of scale
Reducing risks of failure
WHY FRANCHISE?
Franchises offer important pre-opening
support:
site selection
design and construction
financing (in some cases)
training
grand-opening program
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
Common considerations of franchisors
Developing franchise concept
Market research
Familiarity with local laws and regulations
Providing training and support to franchisees
Common considerations of franchisors
Criteria for choosing franchisees
Control over franchisees
Supply of products/materials to franchisees
Intellectual property rights issues, e.g. trade mark
registration
Common considerations of franchisees
Demand
Profitability of franchise, and length of time
required to recoup investment
Track record of franchisor
Support rendered to other franchisees
Common considerations of franchisees
Experience and profitability of other franchisees
Existence of competition
Capital required
Demands of franchisor, e.g. income projections,
deadline to open more franchise outlets
Franchisor–Franchisee relationship
Regulated by contract which usually covers:
Initial fee
Royalty fee/Management fee
Capital required from franchisee
Territory/Area of operation
Duration of license and renewal
IPRs
Termination
BE CAREFUL
The franchisee is not completely independent.
In addition to the initial franchise fee, franchisee
must pay ongoing royalties and advertising fees.
Franchisee must be able to balance restrictions
and support provided by the franchisor with their
own ability to manage the business
BE CAREFUL
A damaged image or franchise system can
result if other franchisees perform poorly or
the franchisor has financial problems.
The duration of a franchise is usually limited
and the franchisee may have little or no say
concerning termination
Common Mistakes of Prospective
Franchisees
Not reading, understanding and/or asking
questions about the franchisee agreement
and other legal documents
Not understanding the responsibilities of a
franchisee and the rights and obligations of a
franchisor
Not seeking sound legal and financial advice
Not verifying oral representations of franchisor
Common Mistakes of Prospective
Franchisees
Not analyzing the local market in advance
Not analyzing the competition
Not making thorough due diligence of the
franchisor
Not choosing the right location
FRANCHISEES IN PAKISTAN
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
FRANCHISING IN PAKISTAN
Reason for Franchising
2/3 of franchisees felt that economies of scale in bulk purchasing
encouraged them to consider franchising
FRANCHISING IN PAKISTAN
Feasibility of Franchising
Franchising is a more feasible option of business expansion than starting own
outlets
FRANCHISING IN PAKISTAN
Success of the Franchise
FRANCHISING IN PAKISTAN
Success of Franchising
Franchisors’ Improvement in Average Monthly Sales since Franchising
FRANCHISING IN PAKISTAN
Success of Franchising
Franchisors’ Improvement in Average Monthly Net Profit since Franchising
FRANCHISING IN PAKISTAN
Success of Franchising
Franchisors’ Improvement in Average Monthly Sales since Franchising
FRANCHISING IN PAKISTAN
Franchising helps existing businesses do better.
Franchisees’Response to the Statement:
“Joining a Franchise has Helped Me to Do Better than Before.”
FRANCHISING IN pakistan
Business Performance
Percentage Increase in Average Monthly Sales for Franchisees who were
Previously Running a Business in the Same Trade
FRANCHISING IN PAKISTAN
Business Performance
Percentage Increase in Average Monthly Net Profit for Franchisees Previously
Running a Business in the Same Trade
Conclusion
Franchising – a great model for
SMEs
Proven formula for success
Due diligence
Central role of IPRs
Avoidance of dispute
Thank You