Introduction to

Franchising
 Overview
Franchising

Franchising
A method of business expansion characterized by a trademark license,
payment of fees, and significant assistance and/or control

Franchise
A license that describes the relationship between the franchisor and
franchisee including use of trademarks, fees, support and control
 Franchisor
Franchisee
This is the proprietor of
This entity is granted
the franchised system.
by franchisor the right
It owns the know-how
to carry on business
of the concept of the
using the franchisor’s
brand name. It grants
know –how under the
franchises to 3rd parties
franchisor’s brand.
COMMON FRANCHISE TERMS

business format franchise – this type of franchise includes

not only a product, service and trademark, but also the
complete method to conduct the business itself, such as
the marketing plan and operations manuals

disclosure statement – also known as the UFOC, or Uniform

Franchise Offering Circular, the disclosure document
provides information about the franchisor and franchise
system
 COMMON FRANCHISE TERMS

franchise agreement – the legal, written contract between

the franchisor and franchisee which tells each party what
each is supposed to do

product distribution franchise – a franchise where the

franchisee simply sells the franchisor’s products without
using the franchisor’s method of conducting business
 COMMON FRANCHISE TERMS

Royalty – the regular payment made by the franchisee to

the franchisor, usually based on a percentage
of the franchisee’s gross sales

Trademark – the franchisor’s identifying marks, brand name

and logo that are licensed to the franchisee

UFOC- the Uniform Franchise Offering Circular, UFOC, is one

format for the disclosure document which provides
information about the franchisor and franchise system to the
prospective franchisee
 COMMON FRANCHISE TERMS

franchise agreement – the legal, written contract between

the franchisor and franchisee which tells each party what
each is supposed to do

product distribution franchise – a franchise where the

franchisee simply sells the franchisor’s products without
using the franchisor’s method of conducting business
Types of Franchises

Product
Business Format
Distribution
Product distribution franchises

simply sell the franchisor’s

Business format franchises
products and are supplier-
dealer relationships. In
on the other hand, not only
product distribution
use a franchisor’s product,
franchising, the franchisor
service and trademark, but
licenses its trademark and
also the complete method to
logo to the franchisees but
conduct the business itself,
typically does not provide
such as the marketing plan
them with an entire system for
and operations manuals.
running their business. The
Business format franchises are
industries where you most
the most common type of
often find this type of
franchise.
franchising are soft drink
distributors, automobile
dealers and gas stations
Today reported that the 10 most popular franchising
opportunities are in these industries:

◆ fast food ◆ retail

◆ service ◆ automotive
◆ restaurants ◆ maintenance
◆ building and construction ◆ retail—food
◆ business services ◆ lodging
Types of Franchise Arrangements

single-unit (direct-unit) franchise

multi-unit franchise:
• area development
• master franchise (sub-franchising)
A single-unit (direct-unit)
franchise is an agreement where
the franchisor grants a franchisee
the rights to open and operate
ONE franchise unit. A multi-unit franchise is an agreement
where the franchisor grants a
franchisee the rights to open and
operate MORE THAN ONE unit.
two ways a multi-unit franchise can area development
be achieved: franchise, a franchisee
an area development franchise or has the right to open
a master franchise. more than one unit during
Under an area development a specific time, within a
franchise specified area. For
example, a franchisee
may agree to open 5 units
over a five year period in
a specified territory.
master franchise agreement gives the
franchisee more rights than an area
development agreement. In addition to
having the right and obligation to open
and operate a certain number of units in
a defined area, the master franchisee
also has the right to sell franchises to
other people within the territory, known
as sub-franchises. Therefore, the master
franchisee takes over many of the tasks,
duties and benefits of the franchisor,
such as providing support and training,
as well as receiving fees and royalties.
Benefits of Franchising
 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.
Benefits of Franchising
 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- Leveraging 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- This can be easier and faster since the franchisee
possesses the local market knowledge
 Drawbacks of Franchising:
1. At first, it might seem that franchising has only benefits; however, there are some drawbacks
to be considered as well such as:

❑ Developing a franchise network can be expensive, in terms of management time and initial
capital outlay.
❑ A franchisee’s investment cannot be recovered until franchisees are appointed and start
receiving fees from them.
❑ As franchisees are independent businesspeople, they might sometimes disregard their
obligations related to the franchise system.

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