Chapter 1

Franchising
Is a technique of selling goods or services that involves a franchisor who creates
the brand's trade name and business model and a franchisee who pays a royalty and
frequently an upfront fee to have the right to use the franchisor's name and system.
An agreement between a franchisor and a franchisee is known as a franchise.
The original company is the franchisor. It offers to license the use of its name and
concept. The franchisee purchases the right to use an established brand and business
model to market and sell the franchisor's goods and services.

Purpose of Franchise
Franchising provides individuals with the opportunity to run their own business
with the assistance and support of a larger organization that has a recipe for success
while allowing larger businesses to expand out and grow.

Benefits of Franchising

CAPITAL

The franchisor’s capital requirements will be lower because the franchisees

provide the capital to open each franchised outlet.

MOTIVATED AND EFFECTIVE MANAGEMENT

The local management of each franchised unit will be highly motivated and very
effective. They treat the franchise units as their own and that will usually lead to higher
sales and profit levels.

FEWER EMPLOYEES

The number of employees which a franchisor needs to operate a franchise

network is much smaller than they would need to run a network of company owned
units.
SPEED OF GROWTH

The franchise network can grow as fast as the franchisor can develop its
infrastructure to recruit, train and support its franchisees.

REDUCED INVOLVEMENT IN DAY-TO-DAY OPERATIONS

The franchisor will not be involved in the day-to-day operations of each

franchised outlet.

LIMITED RISKS AND LIABILITY

The franchisor will not risk its capital and will not have to sign lease agreements,
employment agreements, etc.

INCREASING BRAND EQUITY

Levereging off the assets of franchisees helps franchisors grow their market
share and brand equity more quickly and effectively.

ADVERTISING AND PROMOTION

Franchisor will reach the target customer more effectively through co-operative
advertising and promotion initiatives.

CUSTOMER LOYALTY

Franchisors use the power of franchising as a system to build customer loyalty-

to attract more customers and to keep them.

INTERNATIONAL EXPANSION

International expansion is easier and faster, since the franchisee posesses the

local market knowledge.
Chapter 2
TYPES OF FRANCHISES

JOB FRANCHISE
Usually, a person who wishes to launch and manage a small franchised business alone
chooses a home-based or low-investment franchise. Franchisee often needs to invest in
a small amount of stock, equipment, and perhaps a car. This category includes a wide
variety of services, including plumbing, coffee trucks, home lawn care services, and
travel agencies.

PRODUCT (OR DISTRIBUTION) FRANCHISE

Franchises that are product-driven are built on supplier-dealer partnerships, where the
franchisee sells the franchisor's goods. Although the franchisor often does not give
franchisees a complete operating system for their business, it does license its
trademark. Large products like automobiles and auto repair parts, vending machines,
computers, bicycles, appliances, etc. are the focus of most product franchises.
Franchises for product distribution account for the largest share of total retail sales.
Exxon, Texaco, GoodYear Tires, Ford, Chrysler, John Deere, and other automakers are
some well-known product distribution franchises. Franchise owners will occasionally
grant licenses for not only distribution but also a portion of the production process, as is
the case with the makers of Coca-Cola and Pepsi soft drinks.

BUSINESS FORMAT FRANCHISE

In addition to using the franchisor's brand, the business format franchisee also receives
the whole system to run the company and promote the good or service. The franchisor
provides initial and continuous training as well as assistance, as well as a
comprehensive plan and processes for practically every area of the firm. When
discussing franchising, the most well-known and frequently used sort of franchise
system is business structure franchising. Franchise opportunities exist in more than 70
different industries, with fast food, retail, restaurants, business services, fitness, and
other sectors being the most common.

INVESTMENT FRANCHISE
These are often large-scale ventures that demand a considerable upfront expenditure,
such hotels and the bigger restaurants. Franchisees often invest money in the firm, hire
either their own management team or the franchisor to run it, and then sell it for a profit.

CONVERSION FRANCHISE
A change from typical franchise arrangements is conversion franchising. Many franchise
networks expand by turning independent companies operating in the same sector into
franchise units. Franchisees embrace brand names, marketing and advertising
strategies, a system of training, and crucial client service standards. They typically
boost procurement savings as well. In this arrangement, the franchisor has the potential
for very rapid unit and royalty fee revenue development. Real estate agents, florists,
businesses that provide professional services, and home-service providers including
plumbers, electricians, and air conditioners are a few examples of industries that
frequently use conversion franchising.

Common Terms of Franchise

1. Franchisor

A Franchisor is the owner of the franchise brand and business system. Franchisors can
license their franchise to various franchisees.

2. Franchisee

A Franchisee is a person or group who licenses the right to carry out business under a
particular franchise trademark.

3. Franchise Agreement (FA)

A Franchise Agreement is a document that includes the rights, responsibilities, and

obligations of the franchisor and franchisee.
4. Franchise Disclosure Document (FDD)

A Franchise Disclosure Document is a legal document that a franchisor should provide

every prospective franchisee.

It is mandated by the Federal Trade Commission and contains details pertaining to the
franchisor’s finance, history, contract obligations, investment cost, etc.

5. Franchise Fee

The Franchise Fee is the fee that needs to be paid to the franchisor immediately after
signing the franchise agreement.

6. Royalty Fee

The Royalty Fee is a regular payment made to the franchisor on a yearly, monthly,
weekly, or daily basis by the franchisee.

It is usually a percentage of sales for letting the franchisee use their franchise system,
training, support, etc.

7. Initial Investment

The Initial Investment is the money required for a franchisee to open, setup, and
operate a franchise business in a particular location for 3 months or more.

It includes start-up and operating expenses.

8. Term of Agreement

The Term of Agreement is the duration of franchise agreement ranging from 5 to 20

years.

At the end of the term, if the franchisee is performing well then the franchisor may
decide to renew your agreement.

9. Single & Multi-unit Franchisee

A Single-unit Franchisee is a person or group who has purchased one franchise

location. A Multi-unit Franchisee is a person or group who has purchased two or more
franchise locations.
10. Area Developer
An Area Developer is a franchisee who has purchased the rights to open multiple
franchise units within a certain area and time frame.

Advantages and Disadvantages of Franchising

Advantages of franchising

1. The risk of business failure is reduced by franchising

2. Products and services will have already established a market share.
3. You can use a recognized brand name and trade mark.
4. The franchisor gives you support
5. No prior experience is needed as the training received from the franchisor should
ensure the franchisee establishes the skills required to operate the franchise.
6. A franchise enables a small business to compete with big businesses, more so
than an independent small business, due to the pool of support from the
franchisor and network of other franchisees.
7. You usually have exclusive rights in your territory.
8. Financing the business may be easier.
9. You can benefit from communicating and sharing ideas with, and receiving
support from, other franchisees in the network.
10. Relationships with suppliers have already been established.

Disadvantages of franchising

1. Costs may be higher than you expect.

-As well as the initial costs of buying the franchise, you pay continuing
management service fees and you may have to agree to buy products from the
franchisor.
2. The franchise agreement usually includes restrictions on how you can run the
business.

3. You might not be able to make changes to suit your local market.

4. You may find that after some time, ongoing franchisor monitoring becomes
intrusive.

5. You may find it difficult to sell your franchise - you can only sell it to someone
approved by the franchisor.

6. All profits (a percentage of sales) are usually shared with the franchisor.

Three types of franchise agreements
Chapter 3 - Franchise Agreement

Franchise Agreement
The franchise agreement is essentially a legal document between the franchisor and
you (the franchisee). It is a legal binding agreement. It explains in detail what the
franchisor expects from you, as a franchisee, in the way you operate every facet of the
business. There is no standard form of franchise agreement because the terms,
conditions, and the methods of operations of various franchises vary widely depending
on the type of business.
Every franchisee is required to sign the franchise agreement, and the franchisor will
also sign the document. A word of caution, a franchise agreement is a binding legal
document and you may want to have a franchise attorney review it on your behalf prior
to signing.
Now, more about what you will find in the pages of the franchise agreement.

Fundamental provisions outlined in some form or fashion in every franchise

agreement

Location/territory
The franchise agreement will designate the territory in which you will operate and
outline any exclusivity rights you may have.

Operations
This section details how franchisees are expected to run their units.
Training and ongoing support. Franchisors offer training and training programs for
franchisees and their staff. Training may take place at corporate offices or out in the
field. All ongoing administrative and technical support will also be outlined in the
agreement.
Duration. The document will detail the length of the duration of the franchise agreement.
Franchise fee/investment. There will generally be an upfront initial franchise fee that
grants the franchisee the right to use the franchisor's trademark and operating system.
Those costs will be clearly outlined.

Royalties/ongoing fees.
Here you will find the details of the franchisor's royalty structure. Most franchisors
require franchisees to pay an ongoing royalty, usually a percentage of total sales, which
is often paid on a monthly basis.

Trademark/patent/signage
This section will outline how a franchisee can use the franchisor's trademark, patent,
logo and signage.

Advertising/marketing
The franchisor will reveal its advertising commitment and what fees franchisees are
required to pay towards those costs.

Renewal rights/termination/cancellation policies

The franchise agreement will describe how the franchisee can be renewed or
terminated. Some franchisors include an arbitration clause. This requires, in the event of
any legal action, that an arbitrator review the case before it goes to court.

Exit strategies
Every franchise has its own resale policy. Some allow franchisees to sell their
franchises at their discretion. Other agreements include buy back or right of first refusal
clauses. These allow the franchisor to buy back the franchise at a rate determined by
them or to match any potential buyer's offer.
Types of franchise agreements

Single-Unit Franchise Agreement

In a single-unit agreement, the arrangement grants the franchisee the right to
open and operate a single franchise unit.
This type of agreement is the simplest and most frequently used. New
franchisors are particularly keen on these franchise arrangements, as they’re an easy
way to take the first step into the world of franchising. As time goes on, if a franchisee is
prospering, the franchisor can consider the possibility of expanding the contract to
include additional units.
Multi-Unit Franchise Agreement
A multi-unit agreement is an arrangement that grants the franchisee the right to
open and operate more than one franchise unit.
A multi-unit arrangement is not bound to a specific territory. Franchisees may have units
in different areas of town. In some cases, these franchise arrangements come with
deadlines, in which the franchisee must adhere to a schedule for developing a
predetermined number of units.
Area Development Franchise Agreement
An area development agreement is similar to a multi-unit agreement, as the
franchisee is granted the right to open and operate multiple units during a specified time
frame.
However, with these franchise arrangements, the franchisor also grants the franchisee
exclusive rights for development in a particular territory.
Factors to Consider when Selecting a Franchise

Proven sales record

The benefit of investing in a franchise is to capitalize on a successful enterprise.
A good sign is a franchise that can provide you with proven sales success with their
existing franchisees.

Growing market
You want to move into a market or industry that is growing, not fading. For
example, now is not the time to open a video tape rental franchise. However, industries
like massage are blossoming, with room to grow even larger.

Competition
One of the signs that a franchise is an excellent opportunity is the lack of
competition. While there may be a coffee shop on every corner, there are many
communities that still are in need of wellness services like massage therapy.

Healthy living
If health and well-being are important to you, then your business should reflect
those values. Choose a franchise that promotes health, which just happens also to be a
profitable.

Personal interest
A vital sign that a franchise may be right for you is if you are passionate about
the product or service it provides