Franchising - Types, Business Models, and Agreements PDF

FRANCHISING FRANCHISING Is a business model where a company (the franchisor) allows an individual or another company (the franchisee) to operate a business using its brand, products, services, and operating systems. In exchange, the franchisee typically pays the franchisor initial fees and on...

FRANCHISING FRANCHISING Is a business model where a company (the franchisor) allows an individual or another company (the franchisee) to operate a business using its brand, products, services, and operating systems. In exchange, the franchisee typically pays the franchisor initial fees and ongoing royalties. OPERATIONAL DEFINITION OF FRANCHISING refers to a clear, practical description of what franchising is, including how it functions in the context of business relationships. This definition focuses on the key operational components and how the franchising system works in real-world scenarios. TYPES OF FRANCHISE A. Product Distribution Franchise B. Business Format Franchise C. Manufacturing Franchise D. Single-Unit Franchise E. Multi-Unit Franchise F. Area Development Franchise G. Master Franchise PRODUCT DISTRIBUTION FRANCHISE simplest forms of franchising. franchisee sells the products of the franchisor but does not necessarily follow the franchisor’s operational procedures or offer services. The primary relationship is based on product distribution. The franchisee receives the rights to distribute the franchisor’s products in a specific geographic area. BUSINESS FORMAT FRANCHISE most common type of franchise model, especially in industries like fast food, retail, and service businesses. In a business format franchise, the franchisee buys the rights to operate a business using the franchisor's brand, trademark, operating systems, and support. The franchisee receives a complete business model, including detailed guidelines on how to operate the business, training, marketing, and support. MANUFACTURING FRANCHISE franchisee is granted the right to manufacture the franchisor's product and then sell it. The franchisee doesn’t necessarily operate a retail location, but rather focuses on producing and distributing the product. The franchisor allows the franchisee to produce and sell a product under the franchisor’s name and trademark. SINGLE-UNIT FRANCHISE most straightforward type of franchise. The franchisee operates only one franchise location. The franchisee signs a franchise agreement to operate a single location, and everything about that location (from products to operations) is controlled by the franchisor. MULTI-UNIT FRANCHISE involves the franchisee owning and operating multiple franchise locations. The franchisee may either open several locations themselves or hire managers to run each unit. The franchisee signs agreements for more than one location, either immediately or over time. This model is often used by experienced franchisees who want to expand quickly.  AREA DEVELOPMENT FRANCHISE type of multi-unit franchise where the franchisee is granted the rights to open multiple franchise locations within a specific geographic area or territory over a set period of time. The franchisee agrees to open a number of units (often within a certain timeframe) within a defined territory. The franchisee pays a larger initial fee and is often required to develop a specific number of units within the region.  MASTER FRANCHISE type of franchise arrangement where the franchisee (the master franchisee) not only operates their own units but also has the right to sell franchises to others within a certain territory. The master franchisee acts as a sub-franchisor. They can sell franchise rights to others, manage franchise operations, and offer support, essentially becoming the franchisor’s representative in the region. TYPE OF PRIMARY NUMBER OF CONTROL/SUP EXAMPLE FRANCHISE FOCUS UNITS PORT LEVEL 1. PRODUCT Distribution of Typically 1 unit Low control, High Beverage DISTRIBUTION products flexibility Distributors 2. BUSINESS FORMAT Full Business Typically 1+ units High Control and McDonalds model, Products, support & systems 3. MANUFACTURING Production of Typically 1+ units Moderate Control Coca-Cola, Products PepsiCo 4. SINGLE-UNIT One franchise 1unit High Control and McDonalds location Support 5. MULTI-UNIT Multiple locations Multiple units High Control and Dunkin Donuts, Support Subway 6. AREA Multiple locations Multiple units in a High Control and Starbucks, Subway DEVELOPMENT in a region region Support 7. MASTER Franchising within Multiple units+ Very High Control Anytime Fitness, FRANCHISE a region or selling franchises and responsibility Dunkin Donuts, country Hilton Hotels  TOP 10 FRANCHISES BY VARIOUS CATEGORIES. FAST FOOD FRANCHISES 1. Jollibee – over 1,300 stores, (1,170 stores) 2. Dunkin' Donuts - Over 800 stores (80-90% franchised) 3. McDonald's - Over 700 stores (80-90% franchised) 4. Chowking – Over 500 stores (mostly franchised) 5. Mang Inasal - Over 500 stores (80-90% franchised) 6. Red Ribbon - Over 450 stores 7. KFC - Over 300 stores 8. Greenwich Pizza - Over 300 stores 9. Shakey's Pizza - Over 300 stores (80-90% franchised) 10. Burger King - Over 200 stores  TOP 10 FRANCHISES BY VARIOUS CATEGORIES. RETAIL FRANCHISES 1. 7-Eleven – over 3,000 stores (1,610 stores) 2. The Generic Pharmacy – over 3, stores (most are franchised) 3. Robinsons Supermarket – over 300 stores (over 50 stores) 4. Puregold – over 400 stores (50-100 stores) 5. Mercury Drug – over 1,000 stores (over 200 stores) 6. AlfaMart – over 1,000 stores (over 300 stores) 7. Save more Supermarket – over 200 stores (100 stores) 8. Ace Hardware – over 300 stores (150 stores) 9. Prince Hypermart – over 100 stores (70-80 stores) 10. Super8 Grocery Warehouse – 60 stores (30 stores) IDENTIFYING FRANCHISING OPPORTUNITIES 1. Industry Trends and Market Demand 2. Proven Business Model 3. Profitability and ROI Potential 4. Support Systems and Training 5. Brand Strength and Recognition 6. Location and Market Saturation 7. Scalability and Flexibility 8. Franchisee Satisfaction 9. Franchisor’s Commitment to Innovation 10. Legal and Regulatory Considerations 1. INDUSTRY TRENDS AND MARKET DEMAND ✔ Research Growing Industries - Look for industries that are currently expanding or have shown consistent growth. ✔ Customer Preferences - Monitor shifts in consumer preferences, such as increased demand for eco-friendly products, plant-based diets, or digital/tech-related services. 2.PROVEN BUSINESS MODEL ✔ Look for Proven Success - A successful franchise opportunity often comes from businesses that have already proven their business model on a local or regional scale. ✔ Franchise Disclosure Document (FDD) - This is a legally required document that provides valuable insight into the business, including costs, financial performance, and the franchise's obligations and rights. 3.PROFITABILITY AND ROI POTENTIAL ✔ Look for High ROI - Evaluate the financial projections and compare them with industry averages to assess the potential return on investment (ROI). ✔ Hidden Costs - Besides the initial franchise fee, consider other costs such as equipment, real estate, inventory, and marketing fees. ✔ Benchmarking - Compare similar franchise brands in the same industry to determine whether the opportunity stands out in terms of profitability. 4.SUPPORT SYSTEMS AND TRAINING ✔ Training and Ongoing Support: Franchisors that provide comprehensive training and support systems for franchisees typically have higher success rates. This includes: ❑ Pre-opening support: Site selection, store design, initial inventory setup, etc. ❑ Ongoing support: Marketing, staff training, operational troubleshooting, and technology systems. ✔ Operational Manuals: A franchise with detailed operational guides and clear procedures will help maintain consistency and minimize errors. 5. BRAND STRENGTH AND RECOGNITION ✔ Reputation: A strong, well-established brand is one of the key reasons to invest in a franchise. Customers trust recognizable brands, which can lead to higher traffic and easier marketing. ✔ Customer Loyalty: Look for businesses with a loyal customer base or a unique selling proposition (USP) that sets them apart from competitors. ✔ Marketing Materials: Franchisors often provide ready-made marketing materials to help franchisees attract customers. Evaluate the brand’s online presence, advertising campaigns, and social media reach.  6. LOCATION AND MARKET SATURATION ✔ Untapped Markets: Identify regions or areas where the franchise brand has little to no presence. Expansion into new markets can be a great opportunity for growth. ✔ Market Saturation: Avoid investing in areas where the franchise is already oversaturated. Too many franchisees in a small area can lead to high competition and decreased profitability. ✔ Real Estate Considerations: Consider the type of real estate required. Certain franchises may need high-traffic locations (e.g., retail stores, food establishments) while others (e.g., home services) can work from less visible locations.  7. SCALABILITY AND FLEXIBILITY ✔ Multiple Units: Some franchise opportunities allow franchisees to scale by owning multiple units, while others may only permit single-location franchises. If you have ambitions to expand, look for franchises that offer multi-unit or area development opportunities. ✔ Adaptability: The franchise should have the ability to adapt to local preferences or changes in the market. This flexibility can be crucial for long-term growth and relevance.  8. FRANCHISEE SATISFACTION ✔ Talk to Existing Franchisees: One of the best ways to gauge the potential of a franchise opportunity is to speak directly to current franchisees. Ask about: ✔ Their experiences with the franchisor. ✔ The challenges they face. ✔ How satisfied they are with support and communication. ✔ Franchisee Reviews: Look for online reviews or forums where franchisees discuss their experiences, which can provide valuable insight into the inner workings of the franchise. 9. FRANCHISOR’S COMMITMENT TO INNOVATION ✔ Product/Service Evolution: A franchise with a commitment to innovation is likely to have staying power in a competitive market. Consider if the franchisor is: ✔ Updating products or services to meet changing consumer needs. ✔ Implementing new technologies or systems to improve efficiency. ✔ Regularly refreshing marketing and branding strategies. 10. LEGAL AND REGULATORY CONSIDERATIONS ✔ Compliance with Regulations: Make sure the franchisor complies with all local regulations, including zoning laws, health and safety standards, and labor regulations. Some franchises may also require specific licensing. ✔ Risk Assessment: Understand any potential legal risks, such as pending lawsuits or franchise disputes. A transparent franchisor will provide clarity on any existing or past legal challenges. ADVANTAGES AND DISADVANTAGES FOR THE FRANCHISOR ADVANTAGES DISADVANTAGES 1. Rapid Expansion with Lower 1. Limited Control Over Capital Investment Operations 2. Leveraging Local 2. Potential for Franchisee Conflict Knowledge 3. Shared Risk 3. Ongoing Royalty Income 4. Dependence on Franchisee 4. Brand Consistency Success 5. Shared Marketing Costs 5. Ongoing Support Costs 6. Motivated Operators ADVANTAGES AND DISADVANTAGES FOR THE FRANCHISEE ADVANTAGES DISADVANTAGES 1. Proven Business Model 1. High initial investment and ongoing fees 2. Brand Recognition and 2. Limited control and creativity Customer Trust 3. Support and Training 3. Shared profits with franchisor 4. Shared Advertising and 4. Strict obligations and restrictions Marketing 5. Dependency on franchisor’s 5. Easier Financing performance 6. Reduced Risk 6. Potential for franchise saturation TYPICAL ELEMENTS IN FRANCHISING AGREEMENT Franchise agreements are legal documents between a franchisor and a franchisee They generally include franchise disclosure documents (FDDs) governed by the Federal Trade Commission's FTC Franchise Rule. It typically includes several key elements to ensure both parties understand their responsibilities, rights, and obligations.  TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ❑ Franchise Grant ❑ Territory/ Territorial Rights ❑ Franchise Fees ❑ Termination and Exit Clauses ❑ Terms and Renewal ❑ Dispute Resolution ❑ Franchisee’s Obligations ❑ Transfer and Sale of Franchise ❑ Franchisor’s Obligations ❑ Inventory and Supplies ❑ Intellectual Property ❑ Confidentiality ❑ Training and Support ❑ Indemnification ❑ Quality Control and Standards ❑ Insurance Requirements ❑ Advertising and Marketing ❑ Non-Compete Clause TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ✔ Franchise Grant: ❑ This section outlines the franchisor's grant of rights to the franchisee to operate a franchise under the franchisor’s brand name. It includes the geographical area in which the franchisee can operate. ✔ Franchise Fees: ❑ initial franchise fee, as well as ongoing fees such as royalty fees (a percentage of revenue) and advertising fees, are detailed here. Payment terms and due dates are often included. ✔ Term and Renewal: ❑ This defines the length of time the franchise agreement will be in effect (e.g., 5 to 10 years). It may also include renewal terms and conditions. TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ✔ Franchisee’s Obligations: ❑ Details of the franchisee's responsibilities, such as maintaining operational standards, paying fees, and following the franchisor's system, rules, and guidelines. ✔ Franchisor’s Obligations: ❑ The franchisor’s duties, such as providing training, marketing support, ongoing guidance, and ensuring brand protection, are outlined here. ✔ Intellectual Property: ❑ This section details the franchisor’s ownership of trademarks, patents, logos, trade secrets, and other intellectual property, as well as the franchisee’s rights to use them. TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ✔ Training and Support: ❑ Describes the training provided by the franchisor to the franchisee and their employees. This could include initial training, ongoing training, and support in operations, marketing, and management. ✔ Quality Control and Standards: ❑ Specifies the operational standards and procedures the franchisee must adhere to in order to ensure consistent quality and brand reputation. ✔ Advertising and Marketing: ❑ Covers the franchisee’s obligations to contribute to advertising funds and comply with the franchisor’s marketing guidelines. It may also include co-op advertising programs.  TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ✔ Territory/ Territorial Rights: ❑ Describes the geographic area in which the franchisee can operate. It may also include provisions about exclusive or non-exclusive territories and restrictions on opening additional franchises in certain areas. ✔ Termination and Exit Clauses: ❑ Conditions under which the agreement can be terminated, such as breach of contract, failure to meet standards, or other specific causes. It may also detail the procedure for terminating the relationship and the obligations that follow. ✔ Dispute Resolution: ❑ Specifies how disputes between the franchisor and franchisee will be handled, often through mediation, arbitration, or litigation.  TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ✔ Transfer and Sale of Franchise: ❑ Details the terms under which the franchisee can sell or transfer the franchise, including any restrictions on who can purchase the franchise. ✔ Inventory and Supplies: ❑ Requirements for purchasing inventory and supplies, often from the franchisor or approved suppliers. ✔ Confidentiality: ❑ Outlines the franchisee’s obligation to protect the franchisor's trade secrets, business information, and other confidential material.  TYPICAL ELEMENTS IN FRANCHISING AGREEMENT ✔ Indemnification: ❑ States that the franchisee agrees to indemnify the franchisor against certain liabilities and legal claims. ✔ Insurance Requirements: ❑ Insurance coverage the franchisee must maintain. ✔ Non-Compete Clause: ❑ Prohibits the franchisee from operating a similar business in the same location or competing with the franchisor for a certain period after the franchise agreement ends. THANK YOU !!! ☺