1. An Introduction to Franchising
Kuala Lumpur, July 2008

2. 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

3. 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)

4. TYPES OF FRANCHISE 3 main types of franchise:
Product distribution franchise;
Business format franchise; and
Management franchise.

5. 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.

6. 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:

7. 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.

8. Famous Examples

9. BUSINESS FORMAT FRANCHISING -
outlet in
Sale, Australia
outlet in
Marseille, France

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

11. Famous Examples

12. 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

13. WHY FRANCHISE? Franchises offer important pre-opening support:
site selection
design and construction
financing (in some cases)
training
grand-opening program

14. 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

15. 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

16. 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

17. 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

18. 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

19. Common Mistakes of Prospective Franchisees
Not analyzing the local market in advance
Not analyzing the competition
Not choosing the right location

20. 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

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

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

23. FRANCHISING IN SINGAPORE
Success of the Franchise

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

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

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

27. 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.”

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

29. FRANCHISING IN SINGAPORE
Business Performance
Percentage Increase in Average Monthly Net Profit for Franchisees Previously Running a Business in the Same Trade

30. Conclusion Franchising – a great model for SMEs
Proven formula for success
Due diligence
Central role of IPRs
Avoidance of dispute

31. Thank You Tan Tee Jim, S.C. tanteejim@leenlee.com.sg
Kuala Lumpur, July 2008