CHAPTER 1 Definition of a Franchisor

INTRODUCTION TO FRANCHISING ●​ The entity or person owning the

rights or license of the business.
History of Franchising ●​ Authorization granted by a
●​ The earliest signs of franchising in manufacturer to a distributor or
the United States date back to 1850 dealer to sell his products.
just after Isaac Singer invested in a ●​ An individual or a company owning
Sewing Machine rights or a license of business.
●​ The problem was the lack of capital ●​ A franchisor is a person who grants
for manufacturing machines. the license or permission to various
●​ Singer's idea got noticed and over franchisees.
the next several decades many other
companies began to copy and Definition of Franchisee
enhance the franchising business ●​ An individual or a company who
model. purchases and runs a franchise.
●​ Later Companies such as Mcdonald's ●​ The party in a franchising agreement
and Burger King took franchising to is purchasing the rights to use
a whole new level. business trademarks, associated
marks & other proprietary
How Does Franchising Work? knowledge to open a branch.
A franchise is a type of license that grants a
franchisee access to a franchisor's business Difference between a franchisor and a
system such as: franchisee
●​ Proprietary business knowledge
●​ Processes, and trademarks
●​ Permission to sell a product or
service under the franchisor's
business name.
●​ In exchange for acquiring a
franchise, the franchisee usually pays
Franchise Payments
the franchisor an initial start-up fee
and annual licensing fees.
●​ The Franchise Rule requires
franchisors to disclose key operating
information to prospective
franchisees.
●​ Ongoing royalties paid to franchisors
vary by industry and can range
between 4.6% and 12.5% Reasons Why Businesses Resort to
Franchising
 ●​ When a business wants to increase strategy, operations, marketing and
its market share or geographical relationship models, etc.
reach at a low cost, it may franchise
its product and brand name. Job-Franchise
●​ Typically, this is a home-based or
What Is a Trademark? low-investment franchise that is
●​ The term trademark refers to a taken by a person who wants to start
recognizable insignia, phrase, word, and run a small franchised business
or symbol that denotes a specific alone.
product and legally differentiates it ●​ Franchisees usually have to
from all other products of its kind. purchase minimal equipment, limited
●​ A trademark exclusively identifies a stock, and sometimes a vehicle.
product as belonging to a specific
company and recognizes the Job-Franchise Examples
company's ownership of the brand. ●​ A wide and diverse range of services
●​ Trademarks are generally considered fall into this group,
a form of intellectual property and -​ like travel agencies,
may or may not be registered. -​ coffee van,
●​ Although trademarks do not expire, -​ domestic lawn care service
the owner must make regular use of -​ plumbing,
it to receive the protections -​ drain cleaning,
associated with them. -​ commercial and domestic
cleaning,
Famous Filipino Trademarks -​ cell phone accessories and
repair,
-​ real estate service,
-​ shipping service,
-​ pool maintenance,
-​ corporate event planning,
-​ children’s services, etc.

Conversion franchising
●​ Conversion franchising is a type of
franchising arrangement where an
Types of Franchise independent business is converted
●​ There are different kinds of franchise into a franchise under the brand and
setups. They can be categorized system of an established franchisor.
according to different factors, like ●​ This model allows the franchisor to
investment level, franchisor’s rapidly expand their network by
bringing existing, typically
 successful, businesses under its Business Format Franchise
banner. ●​ Business Format Franchise is the
●​ Existing Businesses Join the most popular form of Franchising
Franchise Network​ ●​ Agreements under this type of
-Independent businesses adopt the franchise offers:
franchisor's branding, operational -Use of trademark
systems, and standards. -Advertising
●​ Win-Win Arrangement
-​ For the Franchisor: Rapid Business Format Franchise Examples
growth and an expanded ●​ Notable examples are fast food
network with minimal capital chains such as McDonalds and
investment. Jollibee.
-​ For the Franchisee ●​ It is estimated that around 55% of
(formerly independent franchises are food-related
business): Access to a proven businesses while 45% are in retail.
business model, brand
recognition, marketing Product or Trade Name Franchise
support, and operational ●​ Product Franchise or Trade
resources. Franchise only involves distributing
-​ Retaining Existing products.
Operations​ ●​ Agreements under this Franchisor
The converted franchise may offers:
retain some elements of the -​ Allows use of Trademark
original business (e.g., -​ The manufacturer grants a
customer base or specific franchisee the authority to
services) while aligning with distribute the goods.
the franchisor's systems and ●​ Product-driven franchises are based
branding. on supplier-dealer relationships,
-​ Examples of Industries where the franchisee distributes the
Using Conversion franchisor’s products.
Franchising ●​ The franchisor licenses its trademark
but usually does not provide
Real estate (e.g., local franchisees with an entire system for
agencies joining a national running their business.
real estate brand).
Home services (e.g., Product or Trade Name Franchise
cleaning or maintenance Examples
businesses). ●​ Some well-known product
Professional services like distribution franchises are Goodyear
accounting or insurance.
 Tires, Ford, Chrysler, John Deere, Benefit for the Franchisee
and other automobile producers. Gaining access to the existing market share
●​ Sometimes franchisor licenses not of the franchisor plus the free
only distribution but also part of the advertisements the franchisor provides.
manufacturing process, like in the ●​ Proven Business Model
cases of soft drink manufacturers ●​ Established Brand
Coca-Cola and Pepsi. ●​ Support
●​ Economies of Scale – Marketing,
INVESTMENT FRANCHISE Advertising, Customer base
●​ Typically, these are large-scale
projects which require a large capital Example of Conversion Franchise
investment, such as hotels and larger ●​ Examples of industries that
restaurants. extensively use conversion
●​ The franchisees usually invest franchising are real-estate brokers,
money and engage either their florists, professional services
management team or franchisor to companies, home-services, like
operate the business and produce a plumbing, electricians, air
return on their investment and capital conditioning, and so on.
gain on exit.
Dealership or Distributorship, Licenses,
CONVERSION FRANCHISE Agencies
●​ A modification of standard franchise ●​ Dealership and distributorship
relationships. format franchise is also the most
●​ Many franchise systems grow by popular form of Franchising.
converting independent businesses in ●​ This format allows franchisees to sell
the same industry into franchise products under the franchisor’s
units. trademark.
●​ The franchisees adopt trademarks, ●​ Agencies format franchises own the
marketing and advertising programs, rights to sell products on behalf of a
training systems and critical client supplier.
service standards
Manufacturing and Unit Franchise
Benefit for the Franchisor ●​ Manufacturing Franchise provides
The franchisor in this model has the an organization with the right to
potential for very rapid growth in terms of manufacture the products.
units and royalty fee income. ●​ Unit Franchise grants the right to
●​ Rapid Expansion operate a single unit or branch of the
●​ Shared Financial Risk particular brand.
●​ Increased Brand Recognition
Master Franchise
 ●​ A master franchise grants the rights
to a substantial territory, usually a
whole country
-This is a Master Franchise structure
that is usually adopted by many
businesses

Advantage of Franchise
●​ Increase the number of outlets with
minimum exposure of capital.
●​ Fast name recognition and awareness
Regional Franchise ●​ Running small business units under a
●​ In a geographically large area, franchise agreement can lessen the
master franchisees may opt to efforts of a business while being
appoint a regional franchisee. beneficial through receiving royalty
fees.

Business Model
●​ A business model explains how the
organization seeks to earn a profit by
selling its goods.

Multiple Franchisee
●​ Some franchisees operate not just
one unit but several

Types of Business Models

●​ Retailer
Developers ●​ Manufacturer
●​ But sometimes large corporations ●​ Fee-for-Service
with the appropriate financial muscle ●​ Subscription
may prefer to exploit their territories ●​ Freemium
by opening outlets themselves. ●​ Bundling
 ●​ Marketplace other fees or incremental product
●​ Affiliate markups.
●​ Razor Blade - Example: HP (printers
and ink) Factors Affecting a Franchise’s Success
●​ Reverse Razor Blade - Example: ●​ Market Trends
Apple (iPhones + applications) -​ Is the market growing or
●​ Franchise consolidating?
●​ Pay-As-You-Go -​ How will that affect your
●​ Brokerage business in the future?
-​ Who are your competitors?
Disadvantage of Franchise -​ How are they positioned?
●​ It has limited to almost no control -​ Is your offer unique ?
over the daily business operations. -​ Who will be your competitors
●​ Limitations on the efficiency of in the future?
coordinating independent business -​ How will you differentiate
networks, yourself at the franchise level
●​ It is almost impossible to safeguard and the consumer level?
the interest of both parties and it is -​ How will trends in the market
complex. and the competitive
●​ Complexity in choosing the environment affect your
appropriate franchise partner. franchisee’s likelihood of
long-term success?
So Is Your Business Franchisable? ●​ Capital
●​ Is Your Business Marketable? You -​ A franchisor needs the capital
must start by creating a business that and resources to implement a
people will want to buy, own, and franchise program and
operate. support the franchisees
●​ Is Your Business “Cloneable”? operating under the brand.
Franchising starts with a successful ●​ Management
concept. -The single most important
-Not every successful concept can be aspect contributing to the
duplicated. success of any franchise
-Some businesses are too complex. program is the strength of its
Some are too regional. Some are too management team.
regulated
●​ Is Your Business Profitable? A A Good Franchise Agreement
profitable prototype is not enough.
-A franchise business must allow
enough profit after a royalty, or any
 ●​ Its members are bound by the Fair
Franchising Standards (FFS), the
Association’s code of ethics, which
exhorts members to practice
transparency and fairness in the
conduct of the sale of their
franchises.

Franchise Contract Principles

CHAPTER 2 ●​ Principle of Autonomy – allows the
THE FRANCHISE DOCUMENT parties to freely stipulate whatever
The Important Elements of a Valid terms and conditions provided they
Franchise Business Plan and Agreement are not contrary to law, morals, good
customs, public policy, or public
The Franchise Regulation in the order.
Philippines ●​ Principle of Relativity – binds only
●​ There are no specific laws governing those who agreed and cannot favor
franchising in the Philippines or prejudice a third person, even if he
●​ Franchise agreements are considered is aware of such contract and has
contracts and are governed by the acted with knowledge thereof.
Civil Code. ●​ Principle of Adhesion – penalizes
●​ Franchising arrangements could also the one causing the ambiguity in the
be considered technology transfer contract and thus interpretation will
arrangements and covered by the be against such a party.
pertinent provisions in the ●​ Principle of Mutuality – binds both
Intellectual Property Code. contracting parties with its validity
●​ The Philippine Franchise or compliance not left solely to the
Association (PFA) acts as a will of one of them.
voluntary self-regulating governing
body for franchising. Franchise Feasibility Study
●​ It has developed the Fair ●​ This will be your final project
Franchising Standards based on
United States franchising laws that
serve as criteria when accrediting
franchise businesses

The Philippine Franchise Associaton

(PFA)
●​ As a voluntary self-regulating body
for franchising in the Philippines.
 ●​ Executive summary - Story of the the franchisee will gain when
Franchise availing of the franchise.
-​ This summarizes the story of
the Franchise Venture to Marketing
spark the interest of a ●​ Major Marketing Objectives
prospective Franchisee. (SMART)
-​ 1. Franchise Trademark and -​ 1. Specific – target a specific
Important Logos area for improvement to
-​ 2. Why do you believe that generate sales.
your business is -​ 2. Measurable – quantify or
Franchisable? at least suggest an indicator
●​ Marketing Segment of progress.
-​ The demographics, -​ 3. Assignable – specify who
psychographic, geographic, will do it.
and behavioral segments. -​ 4. Realistic – state what
●​ Management Segment results can realistically be
-​ The various departments you achieved, given available
have to establish for the resources.
franchise to work -​ 5. Time-related – specify
●​ Legal Requirements when the result(s) can be
-​ Discuss the needed achieved.
documents that the franchisee ●​ Marketing Plan
must obtain. Business permit, -​ Describe the type of
DTI permit, Barangay advertising and marketing
Permit, SEC registration, etc campaign ads you will
include to make the business
Franchise Recruitment Package successful. Example: radio
●​ Objectives of the Franchisor Firm advertising
- Explain the reason why the ●​ Pricing Strategy
Franchise exists. What is its -​ Create a costing of the
purpose? Mission and Vision. product and the whole setup
●​ Initial Capital, Franchise Fees, of the business.
Royalty Fees - Explain the reason ●​ Franchising location criteria
why you put up such fees. In the selection
royalty fee section, explain the type -​ Create a map to plot the
of support you provide the locations of prospective
franchisee. franchisees. Explain how you
●​ Anticipated benefits of becoming a can prevent franchise
Franchisee - Describe what benefits competition
●​ Marketing to franchisee
 -​ Franchise Sales Brochure - Business Structure
Create a brochure to convince ●​ Discuss why the business should be
a prospective franchisee. any of this setup:
Must contain a sample -​ Sole Proprietorship
brochure and be creative. -​ Partnership
-​ Corporation
Management Systems
●​ Proposed Headquarters - Explain Sample Franchising Agreement
why you choose such a location for 1.​ Use of Trademarks
your head office. 2.​ Location of the Franchise
●​ Franchise Organization 3.​ Term of the Franchise
Philosophy - Explain the culture you 4.​ Franchisee’s Fees and Other
should adopt in your franchise Payments
business. 5.​ Obligations and Duties of the
●​ Personnel Management - Explain Franchisor
the different positions that the 6.​ Obligations and Duties of the
business will need. This is the Franchisee
organizational chart. 7.​ Restrictions in the Goods and
●​ Operations Manual - Discuss the Services Offered
operation of the company and how 8.​ Renewal, Termination, and Transfer
the inputs can be transformed into of Franchise Agreement
outputs and the final product.
●​ Training Manual - Describe the Appendix
type of training your employees must ●​ Visuals
undergo and the duration of this ●​ Diagrams
training.
●​ Policy - Describe the policies that The Franchise Agreement
apply to your employees. ●​ Sample Franchise Agreement
●​ Procedures - Describe the
step-by-step process of how the
business will materialize.

Finance and Accounting

●​ Pro forma Income Statement
-​ Projected
●​ Pro forma Balance Sheet
-​ Projected
●​ Pro forma Cash Flows
Important Key Elements
-​ (Optional)
●​ Use of Trademarks
●​ Location of the Franchise
 ●​ Term of the Franchise ●​ Describes the exclusive rights in a
●​ Franchisee’s Fees and Other certain territory
Payments
●​ Obligations and Duties of the Terms of the Franchise
Franchisor ●​ Specifies the duration of the
●​ Obligations and Duties of the agreement
Franchisee ●​ Shows how long it lasts, and the
●​ Restrictions in the Goods and rights of the franchisee to renew
Services Offered ●​ May show rights of the franchisor to
●​ Renewal, Termination, and Transfer purchase the franchise before
of Franchise Agreement expiration
Describes the Mandatory Fees
Use of Trademark ●​ Franchise fees
●​ Lists of trademarks, service marks, ●​ Initial fees and what the franchisee
and/ or logos the franchisee is will receive for that fee
entitled to use ●​ Royalty fees
●​ Lists of the restrictions on its use by ●​ Advertising / Marketing Fees
the franchisor or franchisee ●​ Other Fees

Obligations and Duties of the Franchisor

●​ Describe in detail all the services that
the franchisor will provide
-​ Training
-​ Operations support
-​ Advertising, etc.

Duties of the Franchisee

●​ Describes the Franchisee’s
Responsibility
-​ Subscription to Training
-​ Business Participation
-​ Record Keeping, etc

Restrictions
●​ Describe any restrictions placed on
the goods and services offered
Location of the Franchise
-​ Required Quality Standards
●​ Describes the exclusive area or
-​ Approved Suppliers
territory granted to the franchisee
-​ Approved Advertising
 -​ Hours of Operation ●​ Read and understand the agreement
-​ Pricing thoroughly before signing
●​ At least allocate a week to review
Renewal (Obtaining a Successor and weigh the pros and cons before
Franchise) you sign the contract
●​ The franchisor will place terms and ●​ Make sure you have a legal expert to
conditions upon renewal: consult
-​ Renewal or successor
agreement fee
-​ Remodel/ Refurbish/ Update
site location
-​ Sign the “Then-Current”
form of the Franchise
Agreement

Termination
●​ Suspend performance under the
agreement when there is a “material
breach” of contract by the other
party.
●​ Terminate the agreement when a
material breach has occurred and has
not been resolved within a
reasonable time after a demand for
resolution has been made.

Transfer
●​ The agreement should give you the
right to sell: “Transfer” usually
encompasses more than simply the
complete sale of the asset of your
business:
-​ Transfer of lease
-​ Membership Interests
-​ Ownership Percentage
The franchisor has the right to
approve the sale

Tips Before Signing a Franchise

Agreement