FRANCHISING AND LEASING By- Advitya Abhishek Arora Ankit Saini

CONTENTS Describe the significance of franchising Identify the major advantages and limitations of franchising Discuss the features of franchising Describe the franchisor/franchisee relationship.

Franchising Terms Franchising Franchise contract Franchise A marketing system revolving around a two-party legal agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchise contract The legal agreement between franchisor and franchisee Franchise The privileges conveyed in the franchise contract

Contd… Franchisee An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party

Types of Franchises Product and Trade Name Franchise Grants the right to use a widely recognized product or name Business Format Franchise Provides an entire marketing system and ongoing guidance from the franchisor Manufacturing Franchising Grants manufacturer the rights to produce and sell goods using name and trademark

Features of Franchising A license A shared development and improvement obligation Franchisor’s right to define rules regarding operations Two parties and agreement Specified period Support system

The Advantages of Franchising (Franchisor) Financial assistance Operating assistance Strategic Administrative Research and development Cost saving Risk reduction

Financial Assistance Start-up business costs are normally high and thus by teaming up with a franchise organization, the individual can increase her/his chance of receiving financial help. The franchisor might chose to use liberal payment schemes to the franchisee in order to get over the initial financial hurdle.

Operating Assistance The franchisor provides a range of operating services including site selection, bulk purchasing of equipment, and inventory. Other areas of assistance include the use of an established, nation-wide brand

Disadvantages Capital investment share Risk (Goodwill) Undue influence IPR Risk (intellectual property rights) Shared profit Reduction in control

Pros and Cons of Franchising (Franchisee) Limitations Franchise costs Initial franchise fee Investment costs Royalty payments Advertising costs Restrictions on Business Operations Restricted profits Transfer of goodwill Loss of independence Advantages Probability of success Proven line of business Pre-qualification of franchisor Training Franchisor-provided Financial assistance Franchisor assistance Lesser risk Operating benefits Franchisor-aided

-A contractual arrangement LEASING -A contractual arrangement

DEFINITION It is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset.

Lessor and Lessee - Meaning The Lessor is the legal owner of the asset.  The Lessee obtains the right to use the asset in return for rental payments

Elements of a Lease Agreement Date and duration of the agreement. Conditions for renewal or non-renewal Security deposit and its return Names of the parties Object Being Leased Specific consideration Other Conditions Termination Clause

Sample Lease Agreement

Types of Lease 1. Operating Lease 2. Finance Lease

Operating Lease vs. Finance Lease Lessor is the legal and the economic owner Lessor is the legal owner Lessee is the economic owner Risks and rewards associated with the asset not substantially transferred Risks and rewards associated with the asset are substantially transferred Risks include losses due to idle capacity, technological obsolescence & changing economic conditions. Rewards include expectation of profitable operation over economic life of asset and gain from appreciation in value or realization of residual value. Source: Accounting Standard 19 issued by the Institute of Chartered Accountants of India

Advantages of Leasing No Large Outlay – The cost is spread over a number of years Security – The asset is owned by the lessor therefore, no further security needed Tax Advantages – Lease rental costs are often tax deductible Budgeting -  Lease agreement is almost always a fixed contract, it is relatively easy to budget and forecast with. 

Disadvantages of Leasing  No Ownership Long Term Expense – Cheaper in short term, more expensive in long term Maintenance – Even though you don’t own it, maintenance is still your responsibility

FRANCHISING VS. LEASING

DIFFERENCES FRANCHISING LEASING Right to use the brand name. Good working relationship between both parties. Proper training from franchisor. Money paid as royalties. Includes securities laws and legal formalities. No right to use the brandname Good relationship is not necessary. No training from parent company. Money paid as leasing cost. Simple contract or agreement.

CASE STDY-1 MCDONALDS

MCDONALDS Founded by Dick and Mac in 1940 in California. Ray Kroc a Chicago based salesman realised the potential. The best way was- FRANCHISING!!! Today 70% stores are franchised.

….contd First outlet opened in Basant Lok, New Delhi in 1996. Potential franchisers must have atleast liquid assets of $750000 (4,80,00,000 INR). In addition franchise fees $45000 (2880000 INR) 4% monthly service fees on gross sales And a certain percentage as rent.

Figures speaks…

CASE STUDY-2 AMUL

AMUL AMUL(Anand milk federation union limited) was found in 1946 at Anand in Gujarat. It is owned by Gujarat co-operative milk marketing federation ltd(GCMMF). It has a annual turnover of $3.4 billion dollars(21,67,07,330 INR). More than 6400 outlets of Amul.

Contd… Franchisee requires 300sq feet of area at a premium location. Approx investment of 5-10 lacs. Training, renovation,designing done by franchisor. No royalties.

FIGURES SPEAKS….

THATS ALL FOLKS!! THANK YOU!!