An Introduction to Franchising Kuala Lumpur, July 2008

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

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)

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 For example an independent garage will use and promote only Maaco products, while a school may agree to sell only Coca-Cola products in its cafeteria and at all sporting events. Examples of famous product distribution franchise:

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 Sale, Australia outlet in Marseille, France

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

Famous Examples

Why is franchising important to SMEs? Leveraging on a recognized 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

Franchisor–Franchisee relationship Regulated by contract which usually covers: Initial fee Royalty fee/Management fee Territory/Area of operation Duration of license and renewal 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 choosing the right location

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

FRANCHISING IN SINGAPORE Reason for Franchising 2/3 of franchisees felt that economies of scale in bulk purchasing encouraged them to consider franchising

FRANCHISING IN SINGAPORE Feasibility of Franchising Franchising is a more feasible option of business expansion than starting own outlets

FRANCHISING IN SINGAPORE Success of the Franchise

FRANCHISING IN SINGAPORE Success of Franchising Franchisors’ Improvement in Average Monthly Sales since Franchising

FRANCHISING IN SINGAPORE Success of Franchising Franchisors’ Improvement in Average Monthly Net Profit since Franchising

FRANCHISING IN SINGAPORE Success of Franchising Franchisors’ Improvement in Average Monthly Sales since Franchising

FRANCHISING IN SINGAPORE Franchising helps existing businesses do better. Franchisees’Response to the Statement: “Joining a Franchise has Helped Me to Do Better than Before.”

FRANCHISING IN SINGAPORE Business Performance Percentage Increase in Average Monthly Sales for Franchisees who were Previously Running a Business in the Same Trade

FRANCHISING IN SINGAPORE 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 Tan Tee Jim, S.C. tanteejim@leenlee.com.sg Kuala Lumpur, July 2008