FRANCHISING

The main concept of Franchising KINDS OF BUSINESSES THAT ARE NOT CONSIDERED “REPLICABLE”
Franchising enables entrepreneurs (franchisees) to use an established 1. Creative Business: Require unique skills that are hard to teach.
business model, provided by the owner (franchisor), for a fee, benefiting from
support and guidance while leveraging the original brand's reputation and Example: Art and Design Studios.
recognition. 2. Technical Business: Require special knowledge and limited training
Intellectual Property Issues in Franchising provided.

It’s not just about copying a business, but also using its unique ideas and Example: Advance Software Development
methods with the guidance and support of the franchisor. Complex Engineering Firm
The intellectual property rights: 3. Low Margin Business: Thin profit/short-lived business
Example: Discount retail stores with minimal mark up on products.
 Trademarks – a kind of official stamp like logo or brand name
Trend-based product with limited market lifespan
 Copyrights - protects original works of authorship, such as books,
music, or artwork
PREPARING TO FRANCHISE
 Trade secrets - confidential business information, like formulas or
customer lists
 Due Dilligence
 Industrial Design - product's appearance and layout to improve its
 Initiating The Relationship
appeal and functionality
 Franchise Agreement
 Patents - protect inventions or discoveries, such as new products,
processes, or technologies.
1. Due Dilligence
One could say that franchising is a special type of licensing Before becoming a franchisee, do thorough research on the franchisor
arrangement and their business. Check the success and failure rates of other
franchisees. For new franchisors, lack of proper testing can be a red
Indeed, franchising can be seen as a unique form of licensing agreement flag.
because the franchisee gains access to not only the business model but
also the associated intellectual property rights, receiving support,  Selling A Franchise Feasibility Study And Pilot Testing
training, and guidance from the franchisor.  Buying a Franchise
Can All Business be Franchised?
Not all businesses are “franchisable”. In order for the business to be capable a. Selling A Franchise Feasibility Study And Pilot Testing
of being franchised, it has to be capable of being replicated/duplicated. Before turning your business into a franchise, it's important to do a
Example: Businesses that rely heavily on the personal skills or expertise such study with experts to see if it's a good idea. Pilot testing, where you try
as CONSULTING FIRM, FREELANCE SERVICES, CRAFTS, BAKERY, out the franchise idea with either a trial franchisee or your own
BARBER SHOPS, ETC. employees, helps figure out if it makes financial sense and allows you
to improve the franchise setup. Knowing how people decide on a
 franchise is really important. This involves looking at the company's
website, checking out other similar businesses, and doing general
research about franchises.
3. Franchise Agreement
b. Buying a Franchise
Not everyone who runs a franchise is the same, but those who do it  Laws That Apply To Franchising
well usually have help from their family, are very determined, good at  Main Provisions in a Franchise Agreement
selling things, have enough money, and are ready to follow the rules of
the franchise system. A. Laws That Apply To Franchising
 Franchise Disclosure Law
 Registration Requirements:
2. Initiating The Relationship  Franchise Relationship Laws
 Anti-Competition Laws:
Check Intellectual Property: Make sure the franchisor's rights to their
ideas and brand are legit. 1. Franchise Disclosure Law
What: Many countries, like the USA, require detailed info to be
Talk to Current Franchisees: Find out if they're making money, what shared with potential franchisees before they commit.
made them successful, how long it took to profit, and their thoughts on Includes: Information about how the business works, trial
the franchisor's support and manuals. operations, who runs the company, details about other people
doing the same business, competition, legal rules, and money-
Contact Former Franchisees: Ask those who left about their reasons related details.
for doing so. Why: Ensures transparency about the franchise, covering
potential risks and costs.
Pilot Scheme Inquiry: Check if the franchisor tested their system
before launching, and for how long. 2. Registration Requirements:
What: Some countries demand franchisors or agreements to be
Legal Check: Look into any lawsuits involving the franchisor, registered with a government agency.
understanding the cases and outcomes. Includes: In countries with civil law, there's a responsibility to act
honestly and fairly (good faith). This protects
Consult Professionals: Get advice from a franchising expert or franchisees and gives them the ability to take legal
lawyer on documents like the franchise agreement. Consult an action if the franchisor doesn't share required information.
accountant for financial information. Debate: Some people say that sharing information laws are
sufficient, and making franchisors officially register adds extra
Franchise Associations: Check if the franchisor is a member of any difficulty that is not needed.
relevant franchise associations in the area.
3. Franchise Relationship Laws
What: After you sign a franchise agreement, there are rules that
control when and how the agreement can end,
 whether you can extend it, and if you can transfer it to Identifies: Shows who's involved in the contract.
someone else.
Examples: Explain the rights of the franchisor to end the 2. Definition
agreement and the choices the franchisee has for What: Makes sure that words in the agreement have clear
extending or transferring the franchise. meanings that everyone understands.

4. Anti-Competition Laws: Why: Helps avoid confusion by ensuring everyone knows what
What: Rules stop franchisors from doing things that aren't fair specific words mean when they are used.
and that make it hard for other businesses to compete.
Concerns: Make sure the franchisor doesn't use their power in 3. Rights Granted
a harmful way, keeping franchisees and customers Explanation: This part explains what the franchisee is allowed
safe. to do. It covers if they're the only one in the area (exclusive),
one of a few (sole), or not restricted (non-exclusive). It also
B. Main Provisions in a Franchise Agreement mentions the area they can operate in and the intellectual
 Parties property they can use.
 Definition
 Rights Granted 4. Fees
 Fees Explanation: Franchisees usually pay THREE KINDS OF
 Term FEES:
 Non-Agency
 Franchisor’s Obligations  Initial Fee(Franchise Fee): upfront fee at the start.
 Franchisee’s Obligations  Ongoing fees: are royalties based on sales.
 Accounting Records  Various one-off fees: like renewal or advertising fees,
administration fees may also apply.
 Advertising
 Insurance
5. Term
 Sales of Business Explanation: The agreement lasts for a specific time, often
 Non-Competition starting with 5 years. The franchisee may have the option to
 Intellectual Property renew.
 Termination
6. Non-agency
1. Parties Explanation: In simple terms, this part of the agreement makes
Who Does What: it clear that the person running the franchise is not an employee
or business partner of the company giving them the franchise.
Franchisor: Gives rights. Instead, they're working on their own, and they are responsible
Franchisee: Gets rights. for what they do.

Why It Matters: 7. Franchisor’s Obligations

 Explanation: In simple terms, the company that owns the Explanation: Franchisees need to keep records, use a specific
franchise helps the person running the franchise to begin and way of keeping track of things, and let the franchisor check them
keep the business going. They offer advice on choosing a place, during audits.
setting up, and give training. At the start, they help with things
like introducing the business to the public, providing a manual
on how to operate, and supporting with trademarks. As time
goes on, they continue to help with advice on running the 10. Advertising
business, supplying products, training the staff, and ensuring Explanation: Franchisees usually give money to a fund for
quality control. advertising that promotes the entire system. If they want to do
specific ads, they need permission from the franchisor's
approved agency.
8. Franchisee’s Obligations 11. Insurance
Leasing Premises: Franchisees must have approved business Explanation: Franchisees need to have good business
locations. insurance. They should tell the franchisor about the details of
Operations Manual: Follow the franchisor's guidelines for the insurance policy and how much they pay for it.
running the business.
Premises Maintenance: Keep locations up to standards and 12. Sales of Business
seek approval for any changes. Explanation: Franchisees usually need permission from the
Use Approved Materials: Only use provided stationery, franchisor to sell their franchise to someone else. The franchisor
invoices, and products. gets to decide if they want to buy the franchise themselves or
Adherence to Branding: Use approved signs, packaging, and approve the person the franchisee wants to sell to.
branding for the business.
Business Promotion: Actively promote and expand the 13. Non-competition
business. Explanation: Franchisees cannot start a similar business while
Operating Hours: Follow specified operating hours set by the they are part of the franchise and even after their time with the
franchisor. franchise has ended. This rule is in place to safeguard the
Staff Presentation: Ensure staff are well-dressed, clean, and overall franchise system.
polite.
Manager Qualifications: Employ only managers who 14. Intellectual Property
completed franchisor's training. Explanation: The franchisee is allowed to use the franchisor's
Assist Potential Franchisees: Provide information to potential owned ideas and logos. But if the partnership ends, the
franchisees as requested. franchisee can't keep using the franchisor's logo, and they have
Protect Trade Secrets: Safeguard franchisor's trade secrets to keep secret any special things they learned about the
and report any potential infringement. business.
Timely Fee Payments: Make payments to the franchisor on
time. 15. Termination
Explanation: If the franchisee doesn't start the business,
9. Accounting Records breaks the rules, keeps missing payments, lies, or has money
problems, the franchisor can end the agreement. After that, the
 franchisee has to stop using the brand's symbols, pay all the c. Operating Methods
money they owe, give back any materials, share their customer Tells you what you need to run a business, such as:
list, keep secrets secret, and not start a similar business.  Equipment
 How the equipment to be operated
 Equipment problems
 Stock requirements
MANAGING A FRANCHISE RELATIONSHIP  IT requirements (hardware and software)
 Vehicle requirements.
 The operational manual
 Improvements and training d. Operation Instructions
 Quality Control Clear information about how to run the business, covering things
like paperwork, money records, fees for being part of the franchise,
1. The operations manual managing money, what staff is needed, what uniforms to use, and
 Introduction the rules about employment.
 System
 Operating Methods e. Advertising and Marketing Recommendations
 Operation Instructions Suggestions for advertising mean ideas on how to promote the
 Advertising and Marketing Recommendations business to customers. This includes things like ads in newspapers
 Outlet Suggested Location of Store or online, ways to get good publicity, steps to introduce the
 Standard Forms business to the public, materials used to market the business, signs
and promotions inside the store, rules about advertising locally, and
 Legal Issues
advice on building a good relationship with the public.
 Franchisor’s Directory
f. Outlet Suggested Location of Store
The operations manual is like a guidebook for franchisees, helping
Information about where the store is, how it's set up inside, how
them run the business smoothly. It ensures that all franchise locations
things are displayed, how clean it is, and how they deal with
follow the same rules and maintain quality. Here's what it typically
complaints.
includes:
a. Introduction
g. Standard Forms
Inside this part, you'll find a brief summary of the business, what the
All the regular documents needed for the business, such as
person running the franchise needs to do, what the franchisor
business name notices, financial forms, order forms, stationery, and
offering the franchise provides, information about other franchises
employment contracts.
already in operation, the franchisor's way of doing business, and
details about its ideas and creations.
h. Legal Issues
Make sure to follow the rules about sharing information if they exist.
b. System
If not, give a short summary of the important laws, licenses, and
A thorough explanation of how the whole business works,
permits.
explaining each part.
 i. Franchisor’s Directory  Post Termination
A list of franchisor employees, their roles, and contact details,
including useful phone numbers. 1. Contract duration and renewal

A. Contract duration
Franchise agreements usually go on for 5 to 10 years. If it's a
shorter period, it lets the franchisor make updates and decide
not to renew if the franchisee isn't doing well. Big franchises,
2. Improvements and trainings such as McDonald's, sometimes offer longer contracts that
 Improvements match the time they're renting the place and the high initial
 Training costs.

A. Improvements B. Contract Renewal

Both the company offering the franchise (franchisor) and the person If you sign up for a franchise agreement that lasts five years,
buying the franchise (franchisee) will think of better ways to do you can usually expect to renew it twice. For a ten-year
things as time goes on. The agreement between them makes sure agreement, you'd typically get one renewal. When someone
that the improvements made by the company must be used by the new buys a franchise from someone who had it before (resales),
people who own the individual franchises. Also, the franchise they should get a guaranteed time to operate the franchise, just
owners need to share and give permission to the company to use like someone starting fresh, not just the time left from the
any good ideas they come up with. This helps keep a continuous previous owner.
flow of good ideas between the company and the franchise owners.
2. Default and Termination
B. Training In franchising, having the power to end the agreement is really
Franchisees who don't know much get the first training for free. important to keep the brand safe. The rule about ending the
Later on, they can continue training, but they have to pay for it. The agreement should be clear about when it can happen and how it
idea is to make sure all the franchisees are well-trained, not to should be done. If there's a major problem, the agreement might
make extra money for the business offering the franchise. end right away. But for less serious issues, some help might be
given before deciding to end the agreement.
3. Quality Control
Keeping the quality the same is super important for people to like the 3. Dispute Settlement
franchise and for the brand to be valuable. It's also a rule and really Disagreements will happen, so dealing with and solving them is
important for the whole franchise to do well that the quality stays good very important. Mediation and arbitration are usual ways to do this,
in all the franchise businesses. and they cost less and take less time than going to court.
Arbitration gives a clear decision, while mediation helps both
TERMINATION parties agree without the mediator making the final decision. It's a
 Contract duration and renewal good idea to include both ways in the agreement.
 Default and Termination
 Dispute Settlement
 MEDIATION - A neutral person (mediator). They don't decide who's Remember: Be fair, not for too long, only about the franchise,
right or wrong; they assist in finding a solution that works for both and in the right place.
sides.

ARBITRATION - Arbitration is like having a private judge make a

decision outside of a courtroom.

4. Post Termination

In-Term and Post-Term Non-Compete:

Franchise deals have rules while you're part of the franchise (in
term) and after it's over (post term). Non-compete rules stop you
from joining a similar business during and after being in the
franchise.

Reasonable Restrictions (Fair Limitations) Non-Compete Rules

After your time with the franchise is done, the rules about not
joining similar businesses must make sense to be followed.

They check three things:

Duration: Usually, one year is the longest suggested period.

Scope: The rule should only stop the ex-franchisee from doing the
same kind of business. For example, if it's a burger restaurant, they
shouldn't be restricted from other types of food businesses.

Geographical Area: The rule is that the ex-franchisee can't start a

similar business only in the area mentioned in the agreement or
where most of their customers live. For instance, if most customers
are within 5 kilometers of the franchise, the rule only applies to that
area.