Franchising

Franchising

A system of distribution in which semi-independent

business owners (franchisees) pay fees and
royalties to a parent company (franchiser) in return
for the right to become identified with its
trademark, to sell its products or services, and
often to use its business format and system.
The Franchising Relationship
 The US leads the World in Franchising
 The world’s first known franchise was developed by
the Singer Sewing Machine Company in the US in
1851. (for Usage and maintenance)
 General Motors Started its franchise in the late
1900’s, laid the foundations for a franchised motor
dealership network.
 The soft drinks bottling industry in the US is also
credited with early successful franchise formations.
Pepsi, 7-Up, and Coca-Cola used the concept as an
economical way of selling and distributing their
brands on a wide scale.
The US leads the World in Franchising
 Interestingly, the US still leads the world in
franchising; there are more than 3,000
franchise systems in the US, the franchise
industry accounts for 40% of all retail sales in
the country, and almost 4% of all small
businesses in the US are franchises.
Top 10 Franchises in the World
Franchising in Pakistan – A mix of local
and foreign brands
 The Pakistan franchise market is delightful mix of local and
foreign brands. Mostly specializing in food, fashion, retail,
education and health services.
 According to the World Franchise Association, franchised food
outlets in Pakistan make up $120 million annual sales.
 Most of foreign food franchises in Pakistan are American
companies, which have also been the first ones to enter the
local market.
 Franchising provides companies with a quick way to enter the
market without major capital commitment.
Pakistani Franchises Operating Locally
and Globally
 Types of Franchising
1. Trade Name Franchising
a system of franchising in which a franchisee purchases
the right to use the franchiser’s trade name without
distributing particular products exclusively under the
franchiser’s name. e.g. shaheen chemist

2. Product Distribution Franchising a system of

franchising in which a franchiser licenses a franchisee
to sell its products under the franchiser’s brand name
and trademark.
e.g. K&N’S
3. Pure Franchising
a system of franchising in which a franchiser
sells a franchisee a complete business format
and system. E.g. McDonald
 Operating Costs of a Franchise
 Initial Franchise Fee.
 Startup Cost: associated with beginning a franchise,
e.g. costs of renting facility, equipping the outlet, and
purchasing inventory.
 Royalty Fee: weekly or monthly payments to
franchisor. (usually are a percentage of sale).
 Advertising Fee: paid to the franchisor to support
television, magazine, or other advertising.
 Training Fee.
 Franchise Models
 Direct Franchising: is the purest form of franchising under
which the franchisor grants the franchisee the right to open
one franchise at one location.
 Area Development: the franchisor grants the franchisee the
exclusive right to open and operate several franchises within a
much broader geographic area.
 Master Franchising: is similar to area development franchising
model. This model is typically employed by the franchisors
expanding internationally so that the franchisee can expand
system in areas unfamiliar to the franchisor.
 Joint Venture Franchise: the franchisor also takes a financial
stake in the project, the model is more common in
international franchise agreement.
 Franchise Models
 Multibranded Franchising (piggybacking): a method of
franchising in which two or more franchises team up to sell
complementary products or services under one roof.

For example, Yum! Brands, whose stable of franchises includes

Taco Bell, KFC, Pizza Hut, A&W, and Long John Silver, is building
hundreds of combination outlets, a concept that has proved to
be highly successful.
 Franchising and the Law
• Pakistan does not have any specific law governing the
issues relating to franchising.
• Nevertheless, Pakistan’s Supreme Court has endorsed the
definition of franchise.
• In Pakistan the relationship between the parties and their
respective rights and liabilities are principally governed by
contractual arrangements that, by law, are subject to strict
interpretation of the terms of the contract, which in turn is
influenced by Pakistan’s general civil contract law, namely,
Contract Act of 1872.
• The initial franchise fee in Pakistan is limited to $100,000
and the continuing fee is just five percent of the franchise
monthly net sales referring to State Bank regulations.
 Franchising and the Law
• Franchise Agreement: Document that is legally binding on both
parties, laying out the rights and obligations of each. A sample
agreement may either be attached to the disclosure statement or
presented separately. Either way, you are entitled to receive it five
business days before signature.
• A franchise agreement should achieve three fundamental
objectives:
1.Given the absence of specific franchise legislation, it should contractually
bind the franchisor and the franchisee and accurately reflect the terms
agreed upon.
2. It should seek to protect for the benefit both of the franchisor and the
franchisee, the franchisor's intellectual property.
3. It should clearly set out the rules to be observed by the parties.
• In agreement a franchisee will look for promises:
1. To train the franchisee and his staff.
2. To supply goods and / or services.
3. To be responsible for advertising, marketing and
promotions.
4. To assist the franchisee to locate and acquire property
and have it fitted out and converted into a franchised
outlet. (Similar considerations apply with regard to the
acquisition of vehicles, fitting them out, equipping the
franchisee etc.)
5. To assist, improve, and develop the business system, and
6. To provide certain support management and possibly
accounting services.
• Franchisors will be concerned to ensure the
franchise agreement clearly sets out the obligations
of the franchisee. A franchisor will therefore wish
to:
1. Monitor the performance of the franchisee;
2. Protect his intellectual property; and
3. Impose obligations and restrictions on the franchisee
with regard to the exercise of the rights granted by him to
the franchisee.
 Franchising and the Law
Franchise Disclosure Document (FDD): A document that every
franchiser is required by law to give prospective franchisees before
any offer or sale of a franchise.

Franchise Disclosure Document should include the following:

1. Information identifying the franchiser and its affiliates and
describing their business experience and the franchises being
sold.
2. Information identifying and describing the business experience
of each of the franchiser’s officers, directors, and managers
responsible for the franchise program.
3. A description of the lawsuits in which the franchiser and its
officers, directors, and managers have been involved. Although
most franchisers will have been involved in some type of
litigation, an excessive number of lawsuits, particularly if they
relate to the same problem, is alarming. Another red flag is an
excessive number of lawsuits.
4. Information about any bankruptcies in which the franchiser and
its officers, directors, and managers have been involved.
5. Information about the initial franchise fee and other payments
required to obtain the franchise, the intended use of the fees,
and the conditions under which the fees are refundable.
6. A description of any continuing payments franchisees are
required to make after start-up, including royalties, service fees,
training fees, lease payments, advertising or marketing charges,
and others.
7. Information about quality requirements of goods, services,
equipment, supplies, inventory, and other items are required.
8. All relevant information about the franchiser’s trademarks,
service marks, trade names, logos, and commercial symbols,
including where they are registered. Prospective franchisees
should look for a strong trade or service mark that is registered
with the U.S. Patent and Trademark Office.
9. A description of the involvement of celebrities and public figures
in the franchise.
10.The franchiser’s financial statements.
11. A copy of all franchise and other contracts (leases, purchase
agreements, etc.) that the franchisee will be required to sign.
12. Names, addresses, and telephone numbers of at least ten
previous purchasers who live nearest to you.
13. The responsibilities you and the seller will have once you have
invested in the opportunity.
 The Right Way to Buy a Franchise
1. Evaluate Yourself

2. Research Your Market

3. Consider Your Franchise Options

4. Evaluate Franchise

5. Make Your Choice

 1. Evaluate Yourself

The goal is to find the franchise that is right—for you!

YOUR ABILITIES
 Does the franchise require technical experience or relevant
education, such as auto repair, home and office decorating, or
tax preparation?
 What skills do you have? Do you have computer, bookkeeping,
or other technical skills?
 What specialized knowledge or talents can you bring to a
business?
 Have you ever owned or managed a business?
 1. Evaluate Yourself
YEAR GOALS
 What are your goals?
 Do you require a specific level of annual income?
 Are you interested in pursuing a particular field?
 Are you interested in retail sales or performing a service?
 How many hours are you willing to work?
 Do you want to operate the business yourself or hire a
manager?
 Will franchise ownership be your primary source of income or
will it supplement your current income?
 Would you be happy operating the business for the next 20
years?
 Would you like to own several outlets or only one?
 1. Evaluate Yourself
YOUR INVESTMENT
 How much money do you have to invest?
 How much money can you afford to lose?
 Will you purchase the franchise by yourself or with partners?
 Will you need financing and, if so, where can you obtain it?
 Do you have a favorable credit rating?
 Do you have savings or additional income to live on while
starting your franchise?
 2. Research Your Market
 Research the market in the area you plan to serve.
– How fast is the overall area growing?
 Developing a profile of the customers in your target area.
– Who are your potential customers?
– What are their characteristics?
– What are their income and education levels?
– What kinds of products and services do they buy?
 Competitor analysis.
 What gaps exist in the market? These gaps represent potential
franchise opportunities for you.
 Market research also should confirm that a franchise is not
merely part of a fad that will quickly fade.
 2. Research Your Market
Before Papa John’s Pizza allows franchisees to
open a franchise, the company requires them to
spend six months to a year evaluating the
market potential of the local area. “We don’t
just move into an area and open up 200 stores,”.
3. Consider Your Franchise Options

Help you to find a suitable franchise within your price

range.
 Small Business Magazines
 World Wide Web (businesses, magazines and Franchise
Association/Dealers/Matchmakers etc)
 Franchise Association, Dealers etc
 Franchise Trade Shows
 4. Evaluate Franchise
 Study the disclosure document and proposed contract carefully.
 Interview current owners listed in the disclosures document carefully.
 Investigate the franchisor’s history and profitability.
 Determine the potential earnings.
 Investigate claims about your potential earnings.
 Marketing approaches.
 Training programs.
 Listen carefully to sales presentations.
 Shop around.
 Get the seller’s promises in writing.
 Determine what will happen if you want to cancel the franchise
agreement.
 Length of agreement.
 Remember that it is okay to ask for advice from professionals.
 5. Make Your Choice
 Once you have done your research, you can make an
informed choice about which franchise is right for
you.
 Then it is time to put together a solid business plan
that will serve as your road map to success in the
franchise you have selected.
 The plan is also a valuable tool to use as you arrange
the financing for your franchise.
The Benefits of Buying a Franchise
 Business System
 Management Training and Support
 Brand Name Appeal
 Standardized Quality of Goods and Services
 National Advertising programs
 Financial Assistance
The Drawbacks of Buying A Franchise
 Franchise Fees and Ongoing Royalties
 Strict Adherence to Standardized Operations
 Restriction on Purchasing
 Limited Product Line
 Contract Terms and Renewal
 Unsatisfactory Training Programs
 Less Freedom
 Franchisee may end up as a competitor
How To Franchise Your Business
 How To Franchise Your Business
 Franchise Readiness
 Self Assessment
 Franchise Plan
 Marketing Plan
 Operation Plan
o Standard Operating Procedures
o Training Programs
o Supply Chain
 Legal Documentation
o Trademark Protection
o Franchise Contract
o Franchise Disclosure Document
 Hurdles for Franchise Business in
Pakistan

 Absence of franchising law

 Intellectual property law
 Control system
 Financing
 Weak brands
 More emphasize on family business
 Govt Support
 Limited awareness of franchise
 Financial institutions support
 Franchising and Economy
 Job creation
 Efficient use of resources
 Foreign Direct Investment/Positive balance of payment
account
 Better life style
 Assignment
Visit a local franchise operation.
 Is it a trade name, product distribution, or pure
franchise?
 To what extent did the franchisee investigate
before investing?
 What assistance does the franchiser provide?
 How does the franchisee feel about the franchise
contract he or she signed?
 What would he or she do differently now?