MKT114 FRANCHISING 2.

Royalty fee
— represents the amount the franchisee pays the
Chapter 1: Introduction to Franchising franchiser every month (or whenever agreed) for
commission of its sales
— in return, the franchiser provides continuous training,
History of Franchising market studies and release of new products
— the earliest signs of franchising in the United States dated
back to 1850’s just after Isaac Singer invested in a Sewing Reasons Why Businesses Resort to Franchising
Machine — when a business wants to increase its market share or
— the problem was lack of capital for manufacturing machine. geographical reach at a low cost, it may franchise its product
— singer’s idea got noticed and over the next several decades and brand name
many other companies began to copy and enhance the
business model of franchising Trademark
— later Companies such as Mcdonald’s and Burger King took — refers to a recognizable insignia, phrase, word, or symbol
franchising to a whole new level that denotes a specific product and legally differentiates it
from all other products of its kind.
How Does Franchising Work? — exclusively identifies a product as belonging to a specific
company and recognizes the company's ownership of the
Franchise — a type of license that grants a franchisee access to a brand
franchisor’s business system such: — generally considered a form of intellectual property and may
o proprietary business knowledge or may not be registered
o processes, and trademarks — an easily recognizable symbol, phrase, or word that denotes
o permission to sell a product or service under the a specific product
franchisor's business name — it legally differentiates a product or service from all others of
its kind and recognizes the source company's ownership of
— in exchange for acquiring a franchise, the franchisee usually the brand
pays the franchisor an initial start-up fee an annual licensing — trademarks may or may not be registered and are denoted
fees by the ® and ™ symbols respectively.
— the Franchise Rule requires franchisors to disclose key — although trademarks do not expire, the owner must make
operating information to prospective franchisees regular use of it in order to receive the protections
— ongoing royalties paid to franchisors vary by industry and associated with them
can range between 4.6% and 12.5% — examples: starbucks, teleperformance, mang inasal, jollibee,
subway, dell
Franchisor
— the entity or person owning the rights or license of the TYPES OF FRANCHISE
business — there are different kinds of franchise setups; they can be
— authorization granted by a manufacturer to a distributor or categorized according to different factors, like investment
dealer to sell his products level, franchisor’s strategy, operations, marketing and
— an individual or a company owning rights or license of relationship models, etc.
business
— a person who grants the license or permission to various 1. Job Franchise
franchisees — typically, this is a home-based or low investment
franchise that is taken by a person who wants to start
Franchisee and run a small franchised business alone
— an individual or a company who purchases and runs a — franchisee usually has to purchase minimal equipment,
franchise limited stock and sometimes a vehicle
— the party in franchising agreement that is purchasing the — examples: travel agencies, plumbing, drain cleaning,
rights to use business trademarks, associated marks & other real estate service, shipping service
proprietary knowledge in order to open a branch
2. Business Format Franchise
Difference Between a Franchisor and a Franchisee — the most popular form of franchising
— agreements under this type of franchise offers
o sue of trademark
o advertising
— examples: fast food chains such as McDonalds and
Jollibee
— it is estimated that around 55% of franchises are food-
related businesses while 45% are in retail

FRANCHISE PAYMENTS 3. Product / Trade Name Franchise

— only involves distributing products.
1. Franchise fee — agreements under this Franchisor offers:
— the payment given to the franchiser for joining a network o allows using of Trademark
— can be seen as an entry fee paid for the secrets of the o the manufacturer grants a franchisee the
business authority to distribute the goods
 — product-driven franchises are based on supplier-dealer
relationships, where franchisee distributes the
franchisor’s products
— the franchisor licenses its trademark but usually does
not provide franchisees an entire system for running
their business
— examples: well-known product distribution franchises are
GoodYear Tires, Ford, Chrysler, John Deere and other
automobile producers 10. Multiple Franchisee — some franchisees operate not just one
— sometimes franchisor licenses not only distribution, but unit but several
also part of the manufacturing process, like in the cases
of soft drink manufacturers Coca-Cola and Pepsi

4. Investment Franchise
— typically, these are large scale projects which require a
large capital investment, such as hotels and the larger
restaurants
— franchisees usually invest money and engage either
their own management team or franchisor to operate the 11. Developers — but sometimes large corporation with the
business and produce a return on their investment and appropriate financial muscle may prefer to exploit their territories
capital gain on exit by opening outlets themselves

5. Conversion Franchise
— a modification of standard franchise relationships.
— many franchise systems grow by converting
independent businesses in the same industry into
franchise units
— the franchisees adopt trademarks, marketing and
advertising programs, training system and critical client
service standards Advantage of Franchise
— example: real-estate brokers, florists, professional
services companies, home-services, like plumbing a) Increase the number of outlets with minimum exposure of
— benefit for the franchisor capital.
o the franchisor in this model has a potential for b) Fast name recognition and awareness
very rapid growth in terms of units and royalty c) Running small business units under a franchise agreement can
fee income lessen the efforts of a business while being beneficial through
— benefit for the franchisee receiving of royalty fees.
o gaining access to the existing market share of
the franchisor plus the free advertisements the Disadvantage of Franchise
franchisor provides
a) It has limited to almost no control over the daily business
6. Dealership / Distributorship, Licenses, Agencies operations.
— Also, the most popular form of Franchising. b) Limitation on the efficiency of coordinating independent
— this format allows franchisee to sell product under the business networks,
franchisor’s own trademark c) It is almost impossible to safeguard the interest of both parties
— agencies format franchise own the rights to sell products and it is complex.
on behalf of a supplier d) Complexity in choosing the appropriate franchise partner.

7. Manufacturing and Unit Franchise Business Model

— provides an organization with the right to manufacture — explains how the organization seeks to earn a profit by
the products selling its goods
— unit Franchise grants the right to operate a single unit or — types of business models: retailer, manufacturer,
branch of the particular brand subscription, freemium, bundling, affiliate, franchise

8. Master Franchise — grants the rights to a substantial territory, IS YOUR BUSINESS FRANCHISABLE?
usually a whole country
a) Is Your Business Marketable? — clearly, you must start by
creating a business that people will want to buy, own, and
operate

b) Is Your Business Cloneable? — franchising starts with a

successful concept, not every successful concept can be
duplicated; some businesses are too complex, some are too
9. Regional Franchise — in a geographically large area, master regional, some are too regulated
franchisee may opt to appoint a regional franchisee
c) Is Your Business Profitable? — a profitable prototype is not FRANCHISE CONTRACT PRINCIPLES
enough; a franchise business must allow enough profit after a
royalty, or any other fees or incremental product markups 1. Principle of Autonomy — allows parties to freely stipulate to
whatever terms and conditions provided they are not contrary to
FACTORS AFFECTING A FRANCHISE’S SUCCESS law, morals, good customs, public policy or public order

Market Trends 2. Principle of Relativity — binds only those who entered into the
— Is the market growing or consolidating? agreement and cannot favor or prejudice a third person, even if
— How will that affect your business in the future? he is aware of such contracts and has acted with knowledge
— Who are your competitors? thereof
— How are they positioned?
— Is your offer unique ? 3. Principle of Adhesion — penalizes the one caused the
— Who will be your competitors in the future? ambiguity in the contracts and thus interpretation will be against
— How will you differentiate yourself at the franchise level and such party
the consumer level?
— How will trends in the market and the competitive 4. Principle of Mutuality — binds both contracting parties with its
environment affect your franchisee’s likelihood of long-term validity or compliance not left solely to the will of one of them
success?
FRANCHISE RECRUITMENT PACKAGE
Capital
— a franchisor needs the capital and resources to implement a Objectives of the Franchisor Firm
franchise program and support the franchisees operating — Explain the reason why the Franchise exists. What is its
under the brand. purpose? Mission and Vision.

Management Initial Capital, Franchise Fees, Royalty Fees

— the single most important aspect contributing to the success — Explain the reason why you put up such fees. In the royalty
of any franchise program is the strength of its management fee section, explain the type of support you provide the
team franchisee.

A Good Franchise Agreement Anticipated benefits of becoming a Franchisee

— Describe what benefits the franchisee will gain when
availing for the franchise.

FRANCHISE FEASIBILITY STUDY

Executive summary
— story of the franchise
— this summarizes the story of the franchise venture to spark
the interest of a prospect franchisee.
— franchise trademark and important logos
— why do you believe that your business is franchisable?

Chapter 2: The Franchising Document Marketing segment

— demographics, psychographic, geographic, and behavioral
segments
The Franchise Regulation in the Philippines — major marketing objectives (SMART)
— there are no specific laws governing franchising in the o Specific — target a specific area for improvement
Philippines to generate sales
— franchise agreements are considered contracts and o Measurable — quantify or at least suggest an
governed by the Civil Code indicator of progress
— franchising arrangements could also be considered as o Assignable — specify who will do it
technology transfer arrangements and covered by the o Realistic — state what results can realistically be
pertinent provisions in the Intellectual Property Code achieved, given available resources
— the Philippine Franchise Association (PFA) acts as a o Time-related — specify when the result(s) can be
voluntary self-regulating governing body for franchising achieved
o it has developed the Fair Franchising Standards — marketing plan: describe the type of advertising and
based on United States franchising laws that marketing campaign ads you will include to make the
serve as criteria when accrediting franchise business successful. example: radio advertising
businesses — pricing strategy: create a costing of the product and the
o its members are bound by the Fair Franchising whole setup of the business.
Standards (FFS), the Association’s code of ethics, — franchising location criteria selection: create a map to plot
which exhorts members to practice transparency the locations of prospect franchisees. explain how you can
and fairness in the conduct of sale of their prevent franchisee competition
franchises — marketing to franchisee: franchise sales brochure
 o create a brochure to convince a prospect — royalty fees
franchisee. must contain a sample brochure and — advertising / marketing fees
be creative — other fees

Management segment 5. Obligations and Duties of the Franchisor

— various departments you have to establish for the franchise — describes in detail all the services which the franchisor
to work will provide
— proposed headquarters: explain why you choose such o training
location for your head office o operations support
— franchise organization philosophy: explain the culture you o advertising
should adopt in your franchise business
— personnel management: explain the different positions that 6. Obligations and Duties of the Franchisee
the business will need. this is the organizational chart — describes the franchisee’s responsibility
— operations manual: discuss the operation of the company o subscription to training
how the inputs can be transformed into outputs and final o business participation
product o record keeping
— training manual: describe the type of training your
employees must undergo and the duration of this training 7. Restrictions in the Goods and Services Offered
— policy: describe the policies that applies to your employees — describes any restrictions placed on the goods and
— procedures: describe the step by step process on how the services offered
business will materialize o required quality standards
o approved suppliers
Legal requirements o approved advertising
— discuss the needed documents that the franchisee must o hours of operation
obtain; Business permit, DTI permit, Barangay Permit, SEC o pricing
registration, etc.
8. Renewal, Termination, and Transfer of Franchise
Finance and Accounting Agreement
— Pro forma Income Statement (Projected) — franchisor will place terms and conditions upon renewal
— Pro forma Balance Sheet (Projected) o renewal or successor agreement fee
— Pro forma Cash Flows (Optional) o remodel / refurbish / update site location
o sign the “then-current” form of franchise
Business Structure agreement
a) Sole Proprietorship
b) Partnership 9. Termination
c) Corporation — suspend performance under the agreement when there
is a “material breach” of contract by the other party.
Appendix — terminate the agreement when a material breach has
— visuals occurred and not been resolved within a reasonable
— diagrams time after a demand for resolution has been made.

IMPORTANT KEY ELEMENTS IN FRANCHISING AGREEMENT 10. Transfer

— agreement should give you the right to sell
1. Use of Trademarks — usually encompasses more than simply complete sale of
— lists of trademarks, services marks, and/ or logos the the asset of your business:
franchisee is entitled to use o transfer of lease
— lists of the restrictions on its use by the franchisor or o membership interests
franchisee o ownership percentage
— franchisor has the right to approve sale
2. Location of the Franchise
— describes the exclusive area or territory granted to the Tips Before Signing a Franchise Agreement
franchisee — read and understand the agreement thoroughly before
— describes the exclusive rights in a certain territory signing
— at least allocate a week to review and weigh the pros and
3. Term of the Franchise cons before you sign the contract
— specifies the duration of the agreement — make sure you have a legal expert to consult
— shows how long it lasts, and the rights of the franchisee
to renew
— may show rights of the franchisor to purchase the Chapter 3: The Franchise Operations
franchise before expiration

4. Franchisee’s Fees and Other Payments Franchise Operating Manual

— franchise fees — a document that provides a detailed description of the
— initial fees and what the franchisee will receive for that processes, procedures, and policies that are required to
fee operate a franchise unit
 — this document serves as a guide for franchisees to ensure Physical Site Characteristics / Site Quality — parking, foot traffic,
that they are operating their business in accordance with the vehicular traffic, accessibility, visibility, signage, branding opportunity
franchisor's standards and guidelines
— helps franchisors maintain consistency across their Demographics — total population, median age, persons /
franchise system, which is essential for building a strong households, household income, total number of household
brand and maintaining customer loyalty
Trade Area — cotenancy, restaurants, theaters, groceries, hospitals,
FRANCHISE OPERATIONS MANUAL CONTENT military, universities, hotels, convention, office

1. Product or service offering Franchise Marketing and Advertising

— includes a description of the products or services that — franchisors typically develop marketing and advertising
are offered by the franchise unit materials that are designed to promote the franchise brand
— also includes details on how the products or services are and attract customers to the franchise units
produced or delivered, as well as any relevant standards — these materials may include branding elements such as the
and guidelines following:
— logos, slogans, color schemes
2. Marketing and advertising — as well as advertising materials such as:
— it includes guidelines for advertising and promoting the — television commercials, print ads, social media
franchise unit. posts
— it may include instructions on how to use the following — one of the benefits of franchise marketing and advertising is
o franchisor's branding and advertising that it allows franchisees to benefit from the brand
materials, guidance on local advertising and recognition that has already been established by the
promotional activities franchisor
— may also include local marketing efforts
3. Training — franchisees may be provided with guidance and support to
— outlines the training programs that are available to develop local marketing campaigns that are tailored to their
franchisees and their staff. specific market
— may include details on the following: — this may include targeted advertising, promotional events,
o how to run the franchise unit, customer service and other marketing activities.
procedures, marketing and sales, other areas
of the business such as HR and finance FRANCHISE TRAINING AND SUPPORT
— are critical elements of the franchising process
4. Operating procedures — they are designed to help franchisees operate their
— outlines the day-to-day operational procedures that are businesses successfully and to ensure that they are able to
required to run the franchise unit maintain the standards and systems of the franchisor
— may include the following:
o opening and closing procedures, inventory Franchise Training
management, cash handling procedures, — franchise training is typically provided to franchisees before
customer service protocols they open their business and may continue throughout the
life of the franchise
5. Human resources — training programs may cover a wide range of topics,
— includes guidelines on how to hire, train, and manage including:
staff and also include information on employee benefits, • business operations — includes training on how
compensation, and performance management to run the franchise unit, including operational
procedures, inventory management, cash
6. Safety and Security handling, and customer service
— includes guidelines on how to maintain a safe and • products and services — franchisees are trained
secure environment for customers and staff. on how to produce or deliver the franchisor's
— it may include the following: products or services, ensuring consistency across
o procedures for handling emergencies, fire all franchise units
safety, proper product handling, security • marketing and sales — franchisees are trained
protocols during emergency threats on how to promote their business and attract
customers, including using the franchisor's
7. Legal and regulatory compliance branding and advertising materials
— includes information on legal and regulatory • technology — franchisees may receive training
requirements that apply to the franchise unit. on the use of technology, including point-of-sale
— may include the following: (POS) systems, online ordering systems, and
o licensing and permits, tax obligations, other tools that can help them operate their
employment laws business more efficiently

Site Selection Process Franchise Support

a) Trade Access — another critical element of the franchising process
b) Consumer/Market Proximity — it provides franchisees with ongoing assistance and
c) Business Community and Culture guidance to help them succeed
d) Proximity to Talent Sources — franchise support may include:
 • site selection — franchisees may receive THE FRANCHISOR OPERATIONS: ACCOUNTING AND
assistance from the franchisor in selecting the FINANCIAL STATEMENTS AND FINANCIAL SOURCES
best location for their business
• marketing and advertising — franchisors may Bookkeeping
provide franchisees with marketing and — the core function of franchise accounting (or accounting for
advertising materials, as well as guidance on how any business for that matter)
to promote their business locally — the process of recording, storing, and retrieving financial
• product development — franchisors may transactions for an organisation
continue to develop new products or services that
franchisees can offer, helping to keep the The Purpose of the Balance Sheet
business fresh and relevant — assets, liabilities, owner’s equity
• training and education — franchisees may have
access to ongoing training and education Income Statement
programs to help them stay up-to-date on new — referred to as ‘profit and loss’ statement
technologies, industry trends, and best practices — net income = (revenue + gains) – (expenses + losses)
• operational support — franchisees may receive
ongoing operational support from the franchisor, Cash Flow Income Statement
including assistance with ordering supplies, — operating, investing, financing
managing inventory, and other day-to-day
activities BUSINESS FINANCING

Franchise Technology Transfer Financing

— the process of transferring the technology, systems, and — the process of providing funds for business activities,
processes that are used by the franchisor to the franchisee making purchases, or investing
— this technology transfer is essential to ensuring that the — financial institutions, such as banks, are in the business of
franchisee is able to operate their business in a way that is providing capital to businesses, consumers, and investors to
consistent with the franchisor's standards and guidelines help them achieve their goals

Optimizing the Operations 1. Debt Financing — usually offered by a financial institution and
— successful franchise operations require a delicate balance is similar to taking out a mortgage or an automobile loan,
between centralized control and local autonomy requiring regular monthly payments until the debt is paid off

Importance of Standardization 2. Equity Financing — either a firm or an individual makes an

— standardization ensures consistency across the franchise investment in your business, meaning you don’t have to pay the
network, reinforcing the brand's identity and reputation money back, but the investor now owns a percentage of your
— it enables efficient training, simplifies inventory business, perhaps even a controlling one
management, and enhances customer experiences
— standard operating procedures (SOPs) serve as the 3. Mezzanine Capital — combines elements of debt and equity
foundation for consistent execution and quality assurance financing, with the lender usually having an option to convert
unpaid debt into ownership in the company
Leveraging Technology
— technology plays a pivotal role in streamlining franchise
operations
— implementing cloud-based POS systems, inventory
management software, and CRM solutions enhances
efficiency and data accuracy
— mobile apps and digital platforms enable seamless
communication and collaboration between franchisors and
franchisees

Effective Supply Chain

— effective supply chain management is critical for ensuring
product availability, minimizing costs, and optimizing
inventory levels
— establishing partnerships with reliable suppliers and
negotiating favorable terms enhances operational efficiency
— just-in-time inventory practices and automated
replenishment systems help prevent stockouts and reduce
carrying costs