Polytechnic University of the Philippines

Pulilan, Bulacan Campus

ENTR 40023

Submitted by: Submitted to:

Galuza,Bryan James V. Prof. Marvin Espiritu

Year and Section:

3-1

1.How does franchising differ from a traditional trading or distributorship business?

Franchise Agreement

A franchise is the right to market or sell goods or services under the trademarked name, or patented process, of
an established business. A franchise agreement is a legal contract between the business, called the franchisor,
and the purchaser of the franchise, called the franchisee. The franchisee purchases the right to market and sell
the items under the trademarked name of the franchisor. A franchise agreement is a legally binding contract
between the franchisor and franchisee that details the rights, responsibilities, obligations and compensation of
both parties in relation to the purchase and operation of the franchise.

Distribution Agreement

A distributor is a company that buys and sells products from another company. The distributor usually warehouses
these products at a facility it owns or leases. It then sells the products to retailers and/or directly to consumers. A
distribution agreement is a legally binding contact between the owner of the products and the distributor. This
agreement specifies the rights, costs and responsibilities of the parties in relation to the distribution of the
products. The distributor purchases the products from the company that makes the products, but does not have
any ownership in the company itself.

Differences

Under a franchise agreement, the franchisee is permitted and encouraged to use the trademarks and brand name
of the franchisor as part of its everyday business practices. The franchisor also provides marketing and training
support to help the franchisee succeed. A franchisee must follow specific guidelines in the marketing and selling
of the products to maintain the brand identity of the franchisor. A distributor is not permitted to operate under the
trademarked name of the company whose products it distributes. Instead, the distributor operates under its own
business name. It functions as a reseller of the products but does not conduct business on behalf of the company
that makes the items. Also, a franchisee pays an initial fee and ongoing royalties to the franchisor for the right to
operate the business under the trademark name of the franchisor. A distributor simply pays for the items it buys
from the company that makes the products.

2.Enumerate and describe the benefits of franchising business scheme?

CAPITAL

The franchisor’s capital requirements will be lower because the franchisees provide the capital to open each
franchised outlet.

MOTIVATED AND EFFECTIVE MANAGEMENT

The local management of each franchised unit will be highly motivated and very effective. They treat the franchise
units as their own and that will usually lead to higher sales and profit levels.

FEWER EMPLOYEES

The number of employees which a franchisor needs to operate a franchise network is much smaller than they
would need to run a network of company owned units.

SPEED OF GROWTH

The franchise network can grow as fast as the franchisor can develop its infrastructure to recruit, train and support
its franchisees.

REDUCED INVOLVEMENT IN DAY-TO-DAY OPERATIONS

The franchisor will not be involved in the day-to-day operations of each franchised outlet.
LIMITED RISKS AND LIABILITY

The franchisor will not risk its capital and will not have to sign lease agreements, employment agreements, etc.

INCREASING BRAND EQUITY

Levereging off the assets of franchisees helps franchisors grow their market share and brand equity more quickly
and effectively.

ADVERTISING AND PROMOTION

Franchisor will reach the target customer more effectively through co-operative advertising and promotion
initiatives.

CUSTOMER LOYALTY

Franchisors use the power of franchising as a system to build customer loyalty- to attract more customers and to
keep them.

INTERNATIONAL EXPANSION

International expansion is easier and faster, since the franchisee posesses the local market knowledge.

3.Enumerate and describe the cons of franchising business scheme?

At first, it might seem that franchising has only benefits, however, there are some drawbacks to be considered as
well.

 Developing a franchise network can be expensive, in terms of management time and initial capital
outlay.
 Your investment cannot be recovered until franchisees are appointed and you start to receive fees
from them.
 As your franchisees are independent business people, they might sometimes disregard their
obligations related to the franchise system.

There are certain risks involved at each stage of franchising, therefore, developing a successful franchise requires
careful planning, continuous monitoring and support from professionals.

4.Enumerate and differentiate the fees or charges involved in franchising?

A franchise fee is the payment a franchisee makes to the franchisor for the right to use the company's brand,
products, and intellectual property. This can be done up front or on an ongoing basis according to the terms of the
franchise agreement. Instead of creating a business from scratch, a franchisee benefits from the brand recognition
and systems that the franchisor has already built. But these benefits come with a cost.

Multi-Unit Development

When a franchisee agrees to open multiple locations throughout a defined period, this is traditionally called
a multi-unit development or master franchise agreement. In this type of agreement, it is not uncommon for
franchisors to reduce the franchise fee for locations the franchisee is scheduled to open later on in the
development schedule. For example, the franchisee will be required to pay the normal $35,000 franchise fee for
the first two units it opens, but only $30,000 for units three through five. This operates as an incentive for the
franchisee to open up more than one unit. It is also becoming more common for multi-unit franchisees that sign a
development agreement also to pay a lower continuing royalty fee.
Transfer Fee

While technically not an initial franchise fee, a transfer fee is paid when a franchisee sells their business and
transfers their rights as a franchise to another party. That “new” franchise will pay the franchisor a transfer fee,
which is normally either a fixed amount or a percentage of the franchisor's typical franchise fee.

Renewal Fee

At the end of the term of the franchise agreement, depending on the franchisee’s right to re-up with the
relationship per the terms of their contract, they may elect to renew the relationship with the franchisor. The initial
fee they pay when entering into the successor agreement is generally referred to as a renewal or successor
fee. Similar to the transfer fee, the renewal fee usually is a lower amount than charged to new franchisees.

Founders Club

Some new franchisors, when they first begin to offer franchises, recognize that their initial franchisees may look at
their opportunity differently than they might look at a more established franchisor. To overcome any perceived
additional risk and to prime the pump for franchise sales, some franchisors offer a reduced fee for what is often
referred to as a “founders club.”

For example, franchisors may discount their franchise fee for their first five or 10 franchises, or more frequently for
those prospective franchisees that sign an agreement before a certain date. These reduced fees are disclosed in
their offering documents and provide a clear deadline or other parameters.

5. Identify some legal issues in franchising?

Legal Issues with Franchising

While the idea of franchising appears to be intriguing and basic, there are a few issues that must be managed
before starting a sound franchising game plan. In spite of the fact that there is no particular law relating to
franchising in India, franchising as business addresses different business laws and industry explicit laws inside the
nation. 

It is essential to see how these various laws can influence a franchising business in India and what the issues are
that could emerge thereunder.

Validity of franchising Agreements

Essentially, every Franchising arrangement is a relationship formed out of a Contract, which attracts the
provisions of the Indian Contract Act, 1872. Under the Act, a “Contract” is an agreement enforceable at law and
requires certain conditions to be fulfilled to be valid:

1. an offer and an acceptance of the offer;

2. lawful consideration;
3. lawful object;
4. free consent of both parties;
5. capacity to enter into agreements.
Each franchising agreement, therefore, would need to essentially meet the above five criteria so as to be
legitimately enforceable. For instance, if the franchising understanding is executed for appropriating arms and
weapons in India, such an understanding may not be for a legitimate object and consequently invalid. 

While the Contract Act doesn’t stipulate that an agreement must be recorded in writing, it is prudent to have a
formal and written franchising consent to decisively set out the rights and commitments of the franchisor and the
franchisee. This would help with settling any future gridlocks and questions.