Chapter 8 Franchising Flashcards
Define franchising
FASA defines franchising as an arrangement between two parties, where one is selling or granting a privilege and the other is purchasing or receiving the privilege to do business using the name and idea of the first party.
Types of franchising
Business-format franchise
- The franchisor offers the franchisee a clearly defined package of deliverables and services, including a corporate identity, a fully functioning system to conduct business at optimal efficiency, hands on assistance.
E.g.
Quick service restaurants
Automotive services
Home repair services
Types of franchising
Product and trade name franchising
- this is an arrangement in which a supplier supplies a product family to a dealer who may also take on the identity of the franchisor
Franchising models
The development model
-The expansion of the franchisor network
Company-owned unit
- franchises retain at least one unit indefinitely to test market acceptance and iron out all possible glitches
Joint venture
- business set up at arms length with prospective franchisees.
Good for BEE
Advantages of being a franchisee
On going advise, training, research and development.
Reduced capital outlay with increased profits
Brand awareness
Buying power
Infrastructure
Business synergy
Increased success rate
Exit strategy
Disadvantages of being a franchisee
Not completely independent
Restrictions of p/s on offer including price and geographical territory
Payment of ongoing royalties
Maintaining balance of management of restrictions and support between franchisee and franchisor
A damaged, system wide image can result in all franchisees performing badly
The term of franchise agreement is limited and usually not negotiable
Expensive and sometimes non existent franchisor services
Finding most suitable franchisee
FASA
Advertisements
Personal referrals
International franchise and Entrepreneur expo
Evaluating a franchising opportunity
Initial screening
-compile list and familiarize yourself with product and history
Assess the franchises history
- how many sold? Hoe long have they been in operation? Talk to existing franchisees
The product or service
Financial aspects
-is it financially stable ? Investigate
Market research
Change of ownership
Franchisee support
-Determine amount of support available
Franchisee can expect
Operations and procedures manual
Assistance in finding the right franchisee facility
Guidance during establishment of new unit
Franchising a business
- preliminary planning
has the business been profitable for at least one year ?
Are there clearly defined operating procedures and manuals
Business processes have been standardized and simplified
Establish network potential
- identifying target areas for expansion
Financial projections
- dev pro forma financial statements
Setting up franchising fees
- upfront fee
- renewal fee
- ongoing fee ( management service fee or royalty)
5 step franchising recruitment approach
Generate enquiries
-introduce and present yourself at seminars and expos
Set up follow up procedures
Invitation to a meeting
Enter into concrete negotiations
Formal agreement
The franchise package
The disclosure document
The franchise agreement
Operations and procedures manual
Cooling off period
The disclosure document
- FASA requires prospective franchisees to be issuer with a DD.
- responsibility of franchisor to issue but in self interest of the prospective franchisee
- contains:
Directors and executives business experiences
Company’s track record
Description of franchise
Initial investment required
Ongoing payments due
Number of existing franchisees and their success rate
Franchise agreement
The founding document in terms of which the franchisee is licensed to operate the franchised business in accordance to a predetermined business system.
Contains : the parties involved (signatories)
Period of agreement
Set up requirements such as obtaining finance
The rights to sell or transfer ownership
Obligations to franchisor
Terms and conditions to termination of contract
Precise price, rental fees, commissions involved
Operations and procedures manual
The document that ensures operational consistency throughout the network
Should include:
- an introduction to the franchise (general business)
- step-by-step guidelines
- the production equipment
- all details regarding stockholding, systems and controls
- the business operation where the franchisee must meet specific operational requirements
- the accounting and administration system to be used
- the duties of franchisor
- industrial relations
COOLING OFF PERIOD
A cooling off period of 14 days must elapse between the day the Prospective franchisee receives the disclosure document and copy of franchisee agreement and the day on which the binding agreement can be entered into or which franchisor accepts any payment of franchisee .
Favors both franchisee and franchisor as it helps eliminate people who have not planned properly and helps the franchisee by eliminating pressure to buy.
Start up assistance package
Once FA is signed and upfront fee paid then prospective turns into a franchisee.
The start up assistance package helps iron out doubts to first business owners
5 elements of Start up assistance package
Pre opening assistance
- franchisee provided necessary finance now franchisor could assist in development of an action plan
Statutory requirements
- franchisee needs help with licensing requirements
Staff election and training
- franchisor helps with initial staff complement
Moral support
- franchise should fully support franchisee, especially during first few weeks, a representative should be elected to spend time at franchisee and make sure everything is in order .
Opening promotion
- the franchisor should design, develop and provide promotional material that will make target market aware of opening.
Franchisor should make standard advertising artwork available to franchisee
Ongoing franchisee support
Training
- a training schedule should be available
Group purchase arrangements
- group buying arrangements could be made in behalf of the network
Marketing and advertising
- advertising is financed through advertising fees levied to franchisee
Trouble shooting
Franchisee is bound to encounter routine problems where prompt assistance is crucial for cementing a franchise relationship
Market and product research
Franchise should use its network to gain information and formulate it into an appropriate strategy to build up the brand name
Administrative systems:
All aspects of daily running such as petty cash float should be covered my means of a checklist
Communication
The franchisor should enhance their success by providing formal/ informal means of communication
Competition legislation and franchising
Competitions act of 1998 regulates activities such as:
- Price setting arrangements
- no penalty, sanction or disincentive is meted out to franchisees
- Tying arrangements
- Franchisors may not insist that the franchisee should enter into a range of other agreements
- Exclusive dealing
- Franchisees may not be prevented from dealing with third parties if goods of a similar quality are available and the franchisor’s trade mark dies not suffer any harm
-Territorial restrictions
Franchisors need proof that territorial restrictions will be beneficial to competition
- Clauses protecting intellectual property and know how
Restricting Franchisees from engaging in a similar trade, business or occupation only acceptable if it protects a legitimate interest.
International Franchisees
Assess feasibility
- if franchise is established and there is room for more capacity and resource deployment then international borders may be widened
Develop a master license
- a franchise that grants the licensee the rights to open up a business in an entire country . The licensor then sells that license to master licensee in another country
Asses the county
- size of potential market?
- is there sufficient people there to buy into franchise
- are the attainable margins sufficient to cover expenses
Investigate the licensee
- can they uphold the system of the franchise and its network
- do the ethics’ of the licensee overlap with the ethics of the franchise
Sipper systems for international franchises
Legal professionals with international links and knowledge of international legislation
Training consultants with international links and expertise
Financial consultants with expertise in international accounting procedures and principles
FASA which is a member of the world franchise council and has many links with franchise associations around the globe
Franchising industry sectors
Pet services
Education and training
Automotive franchises
Cleaning franchises
Sports and recreation
