WHAT IS A FRANCHISE?

A franchise is the agreement or license between two legally independent parties which gives:
• a person or group of people (franchisee) the right to
market a product or service using the
trademark or trade name of another business (franchisor)
• the franchisee the right to market a product or service
using the operating methods of the franchisor
• the franchisee the obligation to pay the franchisor fees
for these rights
• the franchisor the obligation to provide rights and
support to franchisees
WHAT IS A FRANCHISE?
A franchise is the agreement or license between two legally independent parties which gives:
• a person or group of people (franchisee) the right to
market a product or service using the
trademark or trade name of another business (franchisor)
• the franchisee the right to market a product or service
using the operating methods of the franchisor
• the franchisee the obligation to pay the franchisor fees
for these rights
• the franchisor the obligation to provide rights and
support to franchisees
WHAT IS A FRANCHISE?
A franchise is the agreement or license between two legally independent parties which gives:
• a person or group of people (franchisee) the right to market a product or service using the
trademark or trade name of another business (franchisor)
•the franchisee the right to market a product or service
using the operating methods of the franchisor
•the franchisee the obligation to pay the franchisor fees
for these rights
•the franchisor the obligation to provide rights and
support to franchisees. FRANCISE AGREEMENT
FRANCHISEE
FRANCHISOR
Owns trademark or trade name Uses Trademark or trade name
Provides support: Expands the business
♥(sometimes ) Financing With franchisor’s support
♥Advertising & marketing
♥Training
Receives Fees Pays fees

TYPES OF FRANCHISE:
1. Job Franchise
Typically, this is a home-based or low investment franchise that is taken by a person who wants to start and
run a small franchised business alone. Franchisee usually has to purchase minimal equipment, limited stock
and sometimes a vehicle. A wide and diverse range of services fall into this group, like travel agency, coffee
van, domestic lawn care service, plumbing, drain cleaning, commercial and domestic cleaning, cell phone
accessories and repair, real estate service, shipping service, pool mainatanance, corporate event planning,
children’s services, etc.
2. Product Franchise
Product-driven franchises are based on suplier-dealer relationships, where franchisee distributes the
franchisor’s products. The franchisor licenses its trademark but usually does not provide franchisees an entire
system for running their business. Product franchises deal mainly with large products, such as cars and car
repair parts, vending machines, computers, bicycles, appliances, etc. Product distribution franchising
represents the highest percentage of total retail sales. Some well-known product distribution franchises are
Exxon,Texaco, GoodYear Tires, Ford, Chrysler, John Deere and other automobile producers. Sometimes
 franchisor licenses not only distribution, but also part of the manufacturing process, like in the cases of soft
drink manufacturers Coca-Cola and Pepsi.
3. Business format Franchise
The business format franchisee also gets to use the franchisor’s trademark, but more importantly, it gets the
entire system to operate the business and market the product and/or service. The franchisor offers a detailed
plan and procedures on almost every aspect of the business, provides initial and ongoing training and support.
Business format franchising is the most popular type of franchise system and the one generally referred to
when talking franchising. Businesses from more than 70 industries can be franchised, and the most popular
are fast food, retail, restaurant, business services, fitness and other.
4. Investment Franchise
Typically, these are large scale projects which require a large capital investment, such as hotels and the larger
restaurants. The franchisees usually invest money and engage either their own management team or franchisor
to operate the business and produce a return on their investment and capital gain on exit.
5. Conversion Franchise
Conversion franchising is a modification of standard franchise relationships. Many franchise systems grow by
converting independent businesses in the same industry into franchise units. The franchisees adopt
trademarks, marketing and advertising programs, training system and critical client service standards. They
also usually increase procurement savings. The franchisor in this model has a potential for very rapid growth
in terms of units and royalty fee income. Examples of industries that extensively use conversion franchising
are real-estate brokers, florists, professional services companies, home-services, like plumbing, electricians,
air conditioning, and so on.

Types of Franchise Arrangements

Because so many franchisors, industries and range of investments are possible, there
are different types of franchise arrangements available to a business owner.
Two types of franchising arrangements:
Under an area development franchise, a franchisee has the right to open more than one
unit during a specific time, within a specified area. For example, a franchisee may agree
to open 5 units over a five year period in a specified territory.
Types of Franchise Arrangements
Because so many franchisors, industries and range of investments are possible, there
are different types of franchise arrangements available to a business owner.
Two types of franchising arrangements:
Types of Franchise Arrangements
Because of so many franchisors, industries and range of investments are possible, there are different types of
franchise arrangements available to a business owner.

Two Types of franchising arrangements:

Single-Unit (direct-unit franchise)
Multi-unit franchise:
♥area development
♥master franchise (sub-Franchising)

A single-unit Franchise is an agreement where the franchisor grants a franchise the rights to open and operate
ONE franchise unit. This is the simplest and most common type of franchise. It is possible, however, for the
franchisee to to purchase additional single-unit franchisees once the original franchise unit begins to prosper. This is
considered a multiple, single-unit relationship.
A multi-unit Franchise is an agreement where the franchisor grants a franchisee the rights to open and
operate MORE THAN ONE UNIT.

There are two ways a multi-unit franchise can be achieve:

♥An area development franchise or
♥A master franchise.
 Under an area development franchise, a franchisee has the right to open more than one unit during a
specific time, within a specified area. For example, a franchisee has the right to open more than one unit during a
specific time, within a specified area. For example, a franchisee may agree to open 5 units over a five year period in a
specified territory.
A MASTER FRANCHISE AGREEMENT gives the franchisee more rights than an area development agreement in
addition to having the right and obligation obligation to open and operate a certain number of units in a defined area,
the master franchisee also has the right to sell franchises.
ADVANTAGES OF FRANCHISING:
1. Business assistance
2. Brand Recognition
3. Lower Failure rate
4. Buying power
5. Profits
6. Lower Risk
7. Built-In customer base
8. Be your own Boss

DisAdvantages
1. Restricting regulations
2. Initial Cost
3. Ongoing Investment
4. Potential for conflict
5. Lack of financial Privacy

7 Biggest Challenges to Franchising a Business

Entrepreneurs share many things in common. They’re risk-takers, they aren’t lacking in ideas, and they dream big.
They strive to conquer unknown territory via national—even global—expansion and often turn to franchising to
do so. However, with new franchise concepts popping up constantly, not all are destined to succeed, and even
franchisors—despite their bold fearlessness—aren’t always able to overcome the hurdles that come with building
a franchise.

1. Having sufficient capital

Many businesses fail due to undercapitalization, and the same is true for new franchises. “This is usually a challenge
in the first year since the cost of creating the franchise system and the cost of supporting new franchisees usually
exceed royalty revenues and franchise fees in the beginning

“Typically, it will take at least 20 profitable [franchise] units to begin generating enough royalty to support the
franchise structure,” says Ellis. “It could take a couple of years to reach that point. In the meantime, the franchisor
must be able to self-fund the business.”

2. Building a solid infrastructure

Systems, procedures, and support form the backbone of a franchise, yet these issues are not always at the top of the
priority list for new franchisors. “Growing before you have your systems and processes figured out means that you
can't provide the support that your franchisees need,” says Faulconer. “A good way to measure your success is the
profitability of your corporate operations. I am always surprised at the number of people who think they are ready to
franchise a business that is losing money at its corporate stores. If you can't make money at it, it will be hard to train a
franchisee to be successful.”
In order to build a solid infrastructure, Ellis advises new franchisors to conduct an analysis of the systems, processes,
procedures, and support they currently have and what they will require to support franchisees. In addition,
“franchisors will likely need to add operational support and training staff, technology, marketing, and administrative
support to their internal team,” she says. “They need to consider their strategy for adding franchisees. [For example],
if they add franchisees [located] close to their corporate office, the cost to support those franchisees is less than if they
add franchisees across the country. Doing a proper gap analysis at the outset will help the franchisor identify the needs
associated with becoming a franchisor.”

3. Bringing the right franchisees on board

The long-term success of your franchise will depend largely on the quality of your franchisees. The challenge is
finding the right people with the right qualifications.

“Many emerging franchisors award franchises to friends and family in their early stages in an effort to grow the
business,” says Faulconer. “While this may work in some cases, in most cases your friends and family are not the
most qualified franchisees.”

4. Building solid relationships

Finding the right franchisees is just the first step. Next, you have to invest time to nurture a positive relationship with
them.

“The franchisor needs to recognize that the relationship they build with their franchisees is the key to their long-term
success,” says Ellis. “If the franchisor just keeps in mind that they need to treat franchisees as they would want to be
treated and always do the right thing by them, they will reap happy, successful franchisees. Franchisors that are only
in it to make money will end up with unhappy franchisees. Without the franchisees’ validation, it is tough to add new
franchisees. If things get really bad, franchisors could face costly legal issues [from dissatisfied franchisees].”

5. Bringing the right staff on board

“Awarding franchises to the right people is critical, but so is hiring the right people,” says Faulconer. “As an emerging
franchisor, it is likely that franchisees will interact with every person in your company at some level. Your employees
need to reflect the brand and represent the company's core values. ‘Hire slow, fire fast’ are words to live by.”

6. Understanding your role as franchisor

In order to be a successful franchisor, you need to understand your role. “Running a business is a different role than
running a franchise,” says Ellis. “A business owner is focused on the performance of the business, staffing, and
expense control. The franchisor is focused on adding, training, and supporting franchisees. Making the shift from
business owner to franchisor is often a critical step for the success of the franchise business.”

7. Finding the right time

So much in life is about timing—and it’s no different with a franchise. Faulconer cautions against waiting too long to
launch your franchise. “While it is important to nail down the processes and systems, it is also important to recognize
that you will have to continue to adapt the system to meet the changing market,” he says. “Your system should always
be looking for ways to improve; thus, it is never ‘done.’ If you wait until things are perfect to grow, you may end up
missing the market opportunity.”

Activity:
What is a good franchise business???
Give the qualities to consider to be a good franchisee
Cite the things to consider before buying a franchise.