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- 19 th century) Automobile (e.g. Ford), petroleum products (e.g. Shell), soft drinks (e.g. Coca Cola) Food and restaurants (e.g. McDonalds, Starbucks)

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

5. 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. PRODUCT DISTRIBUTION FRANCHISES

6. 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 franchisors products and services under the franchisors trade mark, but also implements the franchisors 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 franchisee 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 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

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 and economies of scale

15. Common considerations of franchisors Developing franchise concept Market research Familiarity with local laws and regulations Providing training and support to franchisees

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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 BE CAREFUL

22. 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

23. Not analyzing the local market in advance Not analyzing the competition Not making thorough due diligence of the franchisor Not choosing the right location Common Mistakes of Prospective Franchisees

24. 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 FRANCHISEES IN SINGAPORE

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

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

27. FRANCHISING IN SINGAPORE Success of the Franchise

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

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

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

31. FRANCHISING IN SINGAPORE Franchising helps existing businesses do better. FranchiseesResponse to the Statement: Joining a Franchise has Helped Me to Do Better than Before.

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

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

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

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