An%20Introduction%20to%20Franchising%20and%20its%20Importance%20for%20Entrepreneurs%20and%20Small%20and%20Medium-Sized%20Industries%20%20by%20%20Tan%20Tee%20Jim,%20S.C.%20Senior%20Partner,%20Head,%20IP%20

1
An Introduction to Franchising and its Importance
for Entrepreneurs and Small and Medium-Sized
Industries by Tan Tee Jim, S.C.Senior
Partner,Head, IP IT,Lee Lee
Kuala Lumpur, July 2008
2
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. McDonalds, Starbucks)

3
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

4
Brief Outline

• What is franchising?
• Types of franchising
• Why franchise? Why is franchising important to
  SMEs?
• Considerations for franchisor/franchisee
• Pitfalls/Be careful
• Singapore Experience

5
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

6
What is franchising?

• Legal and commercial arrangement concerning the
  successful business of a franchisor
• Use of franchisors 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

7
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

8
TYPES OF FRANCHISE

• 3 main types of franchise
• Product distribution franchise
• Business format franchise and
• Management franchise.

9
PRODUCT DISTRIBUTION FRANCHISES

• A product distribution franchise model is very
  much like a supplier-dealer relationship.
• Typically, the franchisee merely sells the
  franchisors products. However, this type of
  franchise will also include some form of
  integration of the business activities.

10
PRODUCT DISTRIBUTION FRANCHISES

• Examples of famous product distribution franchise

11
PRODUCT DISTRIBUTION FRANCHISES
12
BUSINESS FORMAT FRANCHISING

• In a business format franchise, the integration
  of the business is more complete.
• The franchisee not only distributes the
  franchisors products and services under the
  franchisors trade mark, but also implements the
  franchisors format and procedure of conducting
  the business.

13
Famous Examples
14
BUSINESS FORMAT FRANCHISING -
outlet in Sale, Australia
outlet in Marseille, France
15
MANAGEMENT FRANCHISE

• A form of service agreement.
• The franchisee provides the management expertise,
  format and/or procedure for conducting the
  business.

16
Famous Examples
17
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

18
WHY FRANCHISE?

• Franchises offer important pre-opening support
• site selection
• design and construction
• financing (in some cases)
• training
• grand-opening program

19
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

20
Common considerations of franchisors

• Developing franchise concept
• Market research
• Familiarity with local laws and regulations
• Providing training and support to franchisees

21
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

22
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

23
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

24
FranchisorFranchisee 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

25
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

26
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

27
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

28
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

29
FRANCHISEES IN SINGAPORE

• 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

30
FRANCHISING IN SINGAPORE
Reason for Franchising 2/3 of franchisees
felt that economies of scale in bulk purchasing
encouraged them to consider franchising
31
FRANCHISING IN SINGAPORE
Feasibility of Franchising Franchising is a more
feasible option of business expansion than
starting own outlets
32
FRANCHISING IN SINGAPORE
Success of the Franchise
33
FRANCHISING IN SINGAPORE
Success of Franchising Franchisors Improvement
in Average Monthly Sales since Franchising
34
FRANCHISING IN SINGAPORE
Success of Franchising Franchisors Improvement
in Average Monthly Net Profit since Franchising
35
FRANCHISING IN SINGAPORE
Success of Franchising Franchisors Improvement
in Average Monthly Sales since Franchising
36
FRANCHISING IN SINGAPORE
Franchising helps existing businesses do better.
FranchiseesResponse to the Statement Joining
a Franchise has Helped Me to Do Better than
Before.
37
FRANCHISING IN SINGAPORE
Business Performance Percentage Increase in
Average Monthly Sales for Franchisees who were
Previously Running a Business in the Same Trade
38
FRANCHISING IN SINGAPORE
Business Performance Percentage Increase in
Average Monthly Net Profit for Franchisees
Previously Running a Business in the Same Trade
39
Conclusion

• Franchising a great model for SMEs
• Proven formula for success
• Due diligence
• Central role of IPRs
• Avoidance of dispute

40
Thank You Tan Tee Jim, S.C.tanteejim_at_leenle
e.com.sg
Kuala Lumpur, July 2008