Franchising

Course Description: The course introduces franchising as a method of retail business in which the
investor/franchisee makes an investment in the form of a franchise fee in exchange for the right to
promote goods, services, and/or processes directly to the public. A franchise usually has a
recognizable name or trademark. Franchising involves the integration of independent companies at
different levels and in different areas of production and distribution. This integration permits more
effective sales and advertising.

Topic1: Franchise Business Planning and Strategy

Learning objectives

 Determine how to build a franchise strategy

 Define the context of Franchise Business Planning and Strategy in a larger ecosystem
 Understanding Franchise Financials
 Understanding the fees connected in buying a franchise
 Determine factors that needs to be considered in formulating a good decision and strategy
 Determine alternatives to franchising

Franchise Business Planning and Strategy (Anderson 2017)

Vision

A vision statement is a description about where the company needs to go and is meant to be a
roadmap to decision making for the organization 1. The Vision Statement represents the priorities
needed in the strategic development process of the franchise. Goals may differ from quarter to
quarter and from year to year, but the Vision will stay the same.

 A vision should be forward looking

 Should drive motivation and inspire people to work
 Represents the company’s culture and values of the organization
 Justifies why the company is existing

Core Values

According to franchiseblast.com this refers to the norms and beliefs of the organization. Connecting
core values to franchise business planning is an incredible guide to encourage franchisees to be part of
the franchise chain.

 Adhere to the rules

 Set the same standards and norms
 Establish respect for one another

Strategic Initiatives

As defined by franchiseblast.com this allows firms to be a more reliable company when you are
undergoing changes. Business franchise planning is a straightforward way to make strategic decisions

1
https://www.franchiseblast.com/franchise-business-planning-strategy/
  Advertising to notify local consumers online about the new features.
 Education to help shop employees know about modern distribution process

Collaboration and Relationships2

This refers to the communication, collaboration of ideas and suggestions between the franchisor and
the franchisee. Aside from communicating with our franchisees we also need to develop a good
working relationship with them to make sure that we are working together to achieve the same goals
and objectives.

Focused Communication

As stated by franchiseblast.com over communication from the main office is always an issue in
franchise systems. Franchisees become 'exhausted' and avoid engaging when there is so many e-
mails, webinars and training sessions. Establishing a clear business plan allows franchisors to keep
their attention on a few crucial issues, rather than burdening franchisees with more.

What do you need to know about franchise financials? (International Franchise Association)

Balance Sheet

According to International Franchise Association a balance sheet is a statistical snapshot of how much
a company is valued on any given day. It records franchisor's financial situation (solvency).This
includes:

 Assets-anything that a company owns (current assets, non-current assets and intangible
assets)
 Liabilities- anything that a company owes (short term and long term debt)
 Owner’s Equity- net worth of the company

Things you want to see in the franchisor’s balance sheet (International Franchise Association)

 Increased assets
 Increased stockholder’s equity
 Higher amount of cash than liability
 Amount of current debt should be lower than ½ of total assets
 Amount of current debt should be lower than 1/3 of stockholder’s equity

Income Statement

As stated by International Franchise Association an income statement records profit or loss for a
business. It indicates the revenue, cost and net profit of an enterprise — also known as the "bottom
line" or earnings.

International Franchising Association stated that Income Statement includes the following:

 Revenues
 Cost and expenses like: cost of sales, selling, general administrative, interest expense
 Income before taxes
 Provision for income taxes
2
www.franchiseblast.com
  Net income
 Net income per share

Things you want to see on a franchisor’s income statement (International Franchise Association):

 Higher profit
 Higher revenue from royalties and system profits than from the sale of franchises
 Higher revenue trends
 Higher net income trends
 Franchisor is profitable

Franchise Fees

The Franchise Fee (also known as the "initial franchise fee") is the one-time charge that a franchisee
pays to the franchisor for entering the franchise system, usually after signing the franchise agreement.
A franchisor typically aims to set the franchise fee at a point that allows them to market their chances
to potential franchisees, charge fees to franchise salespeople, and then provide them with the
resources needed to offer initial assistance to franchisees 3.

Example: Potato Corner

www.pinoy moneytalk.com

3
www.msaworldwide.com
4
https://www.pinoymoneytalk.com/
www.pinoymoneytalk.com

Royalty Fee

A royalty fee is a charge that the franchisee pays the franchisor continuously. The franchisor utilizes
the royalty payments to help its current franchisees to keep the franchise program in place to expand.
The royalty fee is normally charged weekly or monthly and is generally measured as a percentage of
gross revenue. In certain systems the percentage increases or decreases according to sales level 6.

https://franchisemarket.ph

5
www.pinoymoneytalk.com
6
https://www.msaworldwide.com/
7
https://franchisemarket.ph/
Advertising Fund or Brand Fund Fee

According to franchiseblast.com franchise systems set up an Advertising Fund and/or a Promotion

Fund to compensate for advertisement production and promotion and to cover the operating costs of
the franchisor related to "retail"/"brand" ads. Fees are measured as a percentage of gross revenue
and are collected at the same time as the royalty fee.

8
www.pfa.org.ph/

Market Introduction Program cost

As a franchisee you are expected to invest a certain minimum amount on your Market Introduction
Program to open your franchisee site/location, including large-scale ads and activities. A business
launch plan typically starts at least a few weeks prior opening and continues to several months after
opening day9.

Other considerations for setting up a franchise10

Getting your Location

According to Michael Seid, the managing director of MSA worldwide we need to consider the
following in getting a good location together with the other considerations in opening a franchise:

 Looking for a good location and the cost of finding it

 Deposits for rent( lease or buy)
 Professional fees such as: architectural fees, payment for engineers, lawyers and other
business professionals
 Setting plans in action and building your site

Other considerations:

 Inventory and supplies

8
http://www.pfa.org.ph/homegrown-franchises/
9
www.msaworldwide.com
10
www.msaworldwide.com
  Insurance
 Computer hardware and software and also point of sales
 Other professional fees
 Pre-opening workforce
 Working Capital

Other Start up costs

 Contractor Fees
 Décor finding/ signages
 Equipment and fixtures
 Freight and sales tax
 Improvements and construction
 Landscaping
 Real property and occupancy charges
 Zoning expenses

How does the Franchisor make money? ( Murray 2017)

Royalty Self Sufficiency

According to Murray (2017) this refers to the level in which all franchise network overheads are
protected by franchisee royalties. Below are the five main strategies for optimizing franchisee
royalties:

 Invest in acquiring new franchisees

 Be diligent in contacting franchisees and have interesting discussions with them
 Present "boost" services for struggling franchisees
 Be able to provide distinctions for franchisors with good results
 Identify low level performers as soon as possible

Franchisee ROI

As a franchisee one thing that we must always consider before buying a franchise is its profitability. In
order for us to evaluate this we need to take in consideration the return of investment. Below is a
formula to compute for the percentage of the ROI:

Adjusted Cash Flow / Total Cost Investment =ROI

After a royalty (or any other charges or gradual product markups) a franchise business must provide
sufficient income for the franchisees to gain an reasonable return on their investment in time and
resources (Siebert 2016).

As stated by Siebert (2016) below are the following adjustments for franchising:

 Manager’s salary
 Adjustment of expense items
 When your franchisee purchases equipment or products from you at a mark up
 Alleviate any costs that a franchisee would not incur
 Eradicate any regular or one-time investment expenditures
  Alleviate financing expenses like interest
 Alleviate all non-cash costs, such as amortization and depreciation
 Eradicate all income-tax allocations
 Limit the costs applied to those related to company activities

Other Factors Affecting Success (Siebert 2016)

 Market trends and conditions

o Is the market growing?
o Who are your competitors?
o Is your franchise unique?
o How will it affect the business in the future?
o Who will be your future competitors?
 Capital
o A franchisor requires the money and resources required to enforce a franchise system
and help the franchisors working under the brand (Siebert 2016).
 Management
o Better management will change companies to meet the franchisability requirements.
This will establish and enhance the value proposition of the franchise. A large support
team will be assembled and internal or external resources will be used to build and
execute a franchise system (Siebert 2016).

According to Philippine Franchise Association the mother company (franchisor)must provide the
following assistance to its franchisee:

 Construction management of the layout and design, equipment requirements, furniture and
fittings
 Innovative Marketing and Promotional campaigns
 Development of new products
 Production and storage facilities
 Consulting services
 Labor Force
 Hiring and training of management team

Basic Requirements for Franchise Application (Philippine Franchise Association):

 Letter of Intent (LOI) – This includes exact address of your proposed site, your exact mailing
address and contact numbers.
 Vicinity Map of Proposed Site - for on-site evaluation
 Legal document certifying applicant's ownership of the site
 Detailed resume or bio-data

Alternatives to the Franchise (Siebert 2016)

 Company Owned Operations

For several businesses, the most obvious expansion strategy is to create new company-owned
channels utilizing internal or personal loaned funds or publicly or privately generated capital.
 Most notably, company-owned development enables owners to retain 100 per cent of the
income of each business instead of splitting those profits with franchisees (Siebert 2016).

 Business Opportunities or Licensing (Biz Op)

It is a comprehensive business network that provides everything from start-up support to all
the required procedures, facilities, sales and marketing resources and full training 11.The
benefit of the biz op path is that the licensor does not really need to conform to the franchise
registration rules, which reduces time and makes the selling procedure less complicated
(Siebert 2016). Normally, biz op operates under a different name, and the licensor cannot
regulate the operation of the licensee.(Example: Rack Jobbing, Distributorship, vending
machine)

 Trademark Licenses

In trademark licensing, a trademark owner (Licensor) gives authority to a (Licensee) to use the
trademark on certain terms and conditions agreed by both parties. Trademark licensing is
good for popular brands but not for startup businesses because they still need to build
reputation and acquire a good market position (Siebert 2016).

Dealerships and Distributorships

According to Sibert (2016), dealerships and distributorships include the supply of goods at a genuine
wholesale price to third party sellers.(ex. Car dealers, product distributors and etc.)

Agency Relationships

This is formed when an individual seller is offering a service on the company’s behalf. This type of
relationship is only suitable for businesses that meet the requirements. The contract will be issued by
the company, and not by the agent (Siebert 2016).

Joint Venture

A joint venture relationship is defined not by fees but by equity and income sharing.Each party
contributes assets to the joint venture and decides on how revenues and expenditures will be divided
(Siebert 2016).

Please watch video: https://www.youtube.com/watch?v=j8weokZzRDA

Assessment: Assignment: Analytic Paper

Below are 2 short documentaries about Disney’s strategy. I want you to evaluate their strategy and
discuss and provide an in depth analysis of how franchise business planning and strategy helps Disney
maintain their position today.

https://www.youtube.com/watch?v=_wut8calH_o

11
http://cdn2.hubspot.net/
https://www.youtube.com/watch?v=Y9bbLJ9uHaI

Answer (Answer (point is 5

clear and
substantial)
Reason (Answer is supported 5
and is clearly emphasized)
Analysis (Theoretical 5
concepts
and discussions are observed
and applied)
Conclusion (States a 3
conclusion
with justification based on
reasonable interpretation)
Grammar( spelling, sentence 2
construction and etc.)
Total 40pts.

References:

Chaffey, D., 2015, Digital Business and E-Commerce Management: Strategy, Implementation and
Practice, Sixth Edition, Pearson Education Limited, United Kingdom

Anderson, J.,2017, How to Franchise Your Business: A step by step approach to turn your business, or
idea into a franchise, Kindle Edition,

Webber,R.,2017, An Introduction to Franchising kindle edition,Red Globe Press

Barringer, B.R.,& Ireland, D.R,2018, Entrepreneurship: Successfully Launching New Ventures (6th
Edition) (What's New in Management), Pearson

Chadirijan,C.,2018,The Business of Trademarks: A Practical Guide to Trademark Management for

Attorneys and Paralegals, Universal-Publishers

Franchise Your Business: The Guide to Employing the Greatest Growth Strategy Ever Paperback –
January 12, 2016 by Mark Siebert (Author), John Leonesio (Foreword)

Philippine Franchise Association

https://www.franchiseblast.com/franchise-business-planning-strategy/

https://www.msaworldwide.com/blog/franchise-fees-the-basics/

https://www.pinoymoneytalk.com/how-to-franchise-potato-corner-philippines/

https://franchisemarket.ph/franchise-listing/mr-softy-ice-cream#:~:text=Royalty%20Fee%3A
%203%20%25,Investment%20Capital%3A%20PHP%20500k
Murray (2017) https://www.franchisedirect.ie/information/howdoesthefranchisormakemoney/

http://cdn2.hubspot.net/hubfs/1915832/What_Is_A_Licensed_Business_Opportunity.pdf?
t=1466214619234

https://www.wipo.int/export/sites/www/sme/en/documents/pdf/
ip_panorama_12_learning_points.pdf

https://www.thebalancesmb.com/what-is-a-joint-venture-and-how-does-it-work-397540