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The concepts of franchising.

Franchising is a long-term cooperative relationship between two entitiesa
franchisor and one or more franchiseesthat is based on an agreement in which the
franchisor provides a licensed privilege to the franchisee to do business. The
franchisor grants the franchisee the right to use a developed concept, including
trademarks and brands name production, service and marketing methods and the
entire business operation model, for a fee. The franchisee then provides the time,
capital, and desire to utilize the brand and services provided by the franchisor to build
a thriving business.
The franchisor owns the overarching company, trademarks, and products, but gives
the right to the franchisee to run the franchise location, in return for an agreedupon fee. Fast-food companies are often franchised.
The franchisee is the one who purchases a franchise. The franchisee
then runs that location of the purchased business. He or she is responsible for
certain decisions, but many other decisions (such as the look, name, and products) are
already determined by the franchisor and must be kept the same by the franchisee.
The franchisee will pay the franchisor under the terms of the agreement, usually either
a flat fee or a percentage of the revenues or profits, from the sales transacted at that

The basic types of franchise;

A Product name franchise licenses the franchisee to sell specific products under the
manufacturers brand name and trademark through a selective, limited distribution
network. This system is commonly used to market automobiles (Chevrolet,
Oldsmobile, and Chrysler) gasoline products (Exxon, Sunoco, Texaco), soft drinks
(Pepsi Cola, Coca-Cola), bicycles (Schwimm), appliances, cosmetics, and other
A Business Format franchise provides the franchisee with a complete business
format, including a license for a trade name, the products or services to be sold, the
physical plant, the methods of operation, a marketing strategy plan, a quality control
process, a two-day communications system, and the necessary business service.That
is, the franchisee purchases the right to use all the elements of a fully integrated
business operation. A Pure franchise is the most rapidly growing of all types of
franchise and is common among fast-food restaurants, lodging establishment,
business service firms, educational institutions, beauty aid retailers, and other
promising growth industries.

Conversion Franchising provides the owner of an existing business becomes a

franchise to recognize brand or trademark or a customer referral network, apparent in
construction, electronics, non-food retailing, home repair.
Factors affecting negotiation process.

Cultural and Language Differences

Physical Distance
Communications Systems
Ability to Train Franchisees and Their Employees
Differences in Legal Systems
Nature of Products and Services
Level of Economic Activity

The preliminary steps for franchising abroad are;

Protection of Your Intellectual Property in the Foreign Country. Malaysian

trademark registration is not much help beyond Malaysian borders. A
franchisor should explore international trademark registration as soon as
possible in the process.
Select Business Model; Local law in the relevant country and the applicable
international tax treaties may have a significant impact on selection of the
business model.
Selecting and Hiring Competent Local Legal Counsel in the Relevant Country;
The franchisor will need to have the international franchise agreement and the
modified unit franchise agreement reviewed by a local franchise lawyer whom
will point out any problem areas under the documents and local laws.
Compliance with Local Laws; crucial for the franchisor to make sure that the
choice of law provision and the dispute resolution provisions in franchise
agreement will be recognized and enforced by the courts in the foreign
Adapting to Foreign Customs and Cultures; All franchise systems will need
some adaptation to local customs and cultures.

Steps should a business owner address before trying to invest in a franchise.

Evaluate yourself
Research your market
Consider your franchise options
Get a copy of the franchisers UFOC

Talk to existing franchisees

Ask the franchiser some tough questions
Make your choice

Benefit of Franchising
For Franchisor
Operation of Nonunion Business
Bulk Purchasing
Freedom to use part of companys capital for
purpose other than expansion

For Franchisee
Established product or service
Technical and Managerial Assistance
Quality Control standard
Less Operating Capital
Opportunities for Growth

Typical elements covered in a franchising agreement between a franchisor and a


Operation of the Business; the rules, restrictions and obligations of the

franchiser and franchisee regarding the successful operation of the business
from the franchisers perspective.
Territory; where your specific business will operate and any exclusivity rights
that may apply. .
Duration and Renewal; the initial duration of the agreement and your
renewal options. The initial term can range from 5-20 years, more frequently
toward the shorter end with multiple renewal periods.
Royalties; typically ongoing and usually 4-8% of monthly sales.
Selling; what your rights are regarding the sale or transfer of your franchised
unit. Usually this contains an option for the franchiser to buy back the unit or
have right of first refusal.
Dispute Resolution & Termination; the franchise regulations regarding the
policy for resolving disputes between franchiser and franchisee, as well as the
process for termination of the franchise agreement, if necessary.

Types of international franchising;

master franchise, also known as sub-franchisor; the master franchisee is

granted a franchise for all or part of a particular country.
area development franchise; the franchisor grants the Area Developer the
right to develop an entire country or part of it. Unlike the master franchise, the
Area Developer focuses on running the business, rather than selling franchises.

single-unit franchises; a single-unit franchisee is granted the right to open one


Disadvantages of buying the existing franchises.

Termination of Agreement; franchisors do not have to renew an agreement at

the end of the franchise term.
Restriction of Freedom of Ownership; buying a franchise means entering
into a formal agreement with your franchisor. Franchise agreements dictate
how you run the business, so there may be little room for creativityrestrictions on where you operate, the products you sell and the suppliers you
Performance of Other Franchisees; bad performances by other franchisees
may affect your franchise's reputation.
Service Cost; services provided by franchisor have costs must be borne by

Advantages of buying the existing franchises.

The difficult start-up work has already been done. The business should have
plans and procedures in place.

Buying an established business means immediate cash flow.

The business will have a financial history, which gives you an idea of what to
expect and can make it easier to secure loans and attract investors.

You will acquire existing customers, contacts, goodwill, suppliers, staff, plant,
equipment and stock.

A market for your product or service is already established.

Existing employees and managers will have experience they can share.

Current trends in franchising

Changing face of franchisees
Multiple-unit franchising
International opportunities
Smaller, non-traditional location
Master franchising
Conversion franchising
Piggybacking or combination or multi-branded franchising
Serving dual-career couples and aging baby boomers

Different mode of entry for international expansion strategies

Direct entry via company-owned operations

Joint-venture relationship
Direct single-unit franchising
Area development franchising
Master franchising

Common vehicles for protecting intellectual property;

Trademarks; a name, word, slogan, phrase, logo, image, symbol, or design, or

some combination of any of these, that is used by business or person (or
government) to identify and distinguish its products or services from those of
others, and to indicate the source of the goods. What we call a "brand name"
is one kind of trademark.
Copyright; a set of rights granted to the creator of an original work such as a
book, song, photograph, painting, sculpture, movie, play, recording or
computer program. The creator, or author, generally has the exclusive right to
reproduce the copyrighted work, to prepare derivative works, to distribute
copies, to perform the copyrighted work publicly, or to display the copyrighted
work publicly.
Patents; a right granted to an inventor to exclude others from making, using,
offering for sale, or selling the invention or importing the invention for a
limited time in exchange for public disclosure of the invention when the patent
is granted. There are three types of patents, with the one most familiar to most
people being the "utility patent," which covers "any new and useful process,
machine, article of manufacture, or composition of matter, or any new and
useful improvement thereof."
Trade secret; is a formula, technique, process or collection of information that
is not generally known or easily ascertained by the public, and that is used by
a business to gain an economic advantage over competitors. A trade secret
only has value as long as it is kept secret.

The importance of developing and maintaining financial records in a franchised

Decision making
Business survive and thrive because of good decision making. For a good
decision to be made, accurate and complete financial statement are required,
which in turn are as a result of good accounting records. If a business is in
crisis, financial statement are used to identify where the problem is emanating

from. If there are no financial records, it is difficult to come up with a proper

diagnosis of the problem at hand (ie: comparing your business performance to
set goals and with businesses become difficult.)

To manage cash better

Cash is the blood of the business. for there to be proper cash management,
there has to be good financial / accounting records.

Compliance with regulation and laws

It is a requirement of the law to keep good financial/ accounting records. If
claims and payment are made on false financial statements, there will be a
penalty for any shortfall. Other regulations also require the keeping of proper
accounting records.

Financial institution
Financial institutions use financial record to make decision whether to grant a
loan or not. They may also require the financial statements to be audited. The
auditors will not issue a good report where there are no good accounting

Expense Management
This can only be done effectively where there are good accounting records.
Expenses can only be known when there are properly accounted and recorded.

Most logical markets to begin international expansion are the market with; (eg; Latin
America, India, China)

Desire/need for product/service

Greatest numbers of areas with likely customers
Lowest risks of political and economic instability
High growth and qualified prospects
Low effective tax rates
Developed legal system allowing for enforcement of contracts
Logistic/distribution/supply chain infrastructure cultural fit of product or service