Midterm Reviewer

Monday, 15 January 2024 12:01 pm

Lesson 1
BUSINESS MODELS AND
FRANCHISEE-FRANCHISOR RELATIONSHIP

CONCEPT OF BUSINESS MODELS

A business model refers to a company's strategy for generating profit

Significance of Business Models

• Clearer Target Market
A clear business model identifies customer problem-solving and target audience, serving as a
strategic roadmap.
• Creating the Right Stuff
Clear business plans ensure products match customer needs, like a roadmap for precise
creation.
• Preparing a strategy becomes easier
Choosing the right business model simplifies strategy, planning, and execution, offering a
customized, effective roadmap.
• Anticipating Competition
A well-defined business model establishes a competitive advantage by clarifying market
position, anticipating rivals, and guiding strategic alignment.

DIFFERENT TYPES OF BUSINESS MODELS

1. Retailer Model:
• In the retailer model, businesses sell products directly to consumers. Retailers typically
purchase goods from wholesalers at a lower price and sell them at a higher price to make a
profit.
• Examples: Clothing stores, grocery stores, department stores, e-commerce platforms.
• Key Points: High competition, focus on pricing, quality, and brand identity.

2. Manufacturing Model:
• This model involves the creation of goods from raw materials. It can include both handcrafted
and mass-produced items. Manufacturers rely on wholesalers and distributors to get their
products to the end consumer.
• Examples: Factories producing electronics, handmade crafts, custom furniture.
• Key Points: Requires access to raw materials, skilled labor, and efficient production processes.

3. Subscription Model:
• Businesses operating on a subscription model provide a product or service to customers on a
recurring basis in exchange for a set fee. This model is often used for digital services and
content.
• Examples: Netflix (video streaming), Spotify (music streaming), and subscription boxes.
• Key Points: Predictable revenue, emphasis on customer retention, continuous service delivery.

4. Product-as-a-Service (PaaS) Model:

• This model involves bundling services with physical products. Customers not only purchase the
product but also subscribe to ongoing services related to the product, such as maintenance or
upgrades.
• Examples: Auto and Aircon dealers offering maintenance packages.
• Key Points: Ensures sustainable income, enhances customer experience, and builds long-term
relationships.

5. Franchise Model:

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5. Franchise Model:
• Franchising involves selling the rights to operate a business under an established brand. The
franchisee follows a proven business model and brand identity provided by the franchisor.
• Examples: Fast-food chains (McDonald's, Subway), and retail outlets (7-Eleven).
• Key Points: Low risk for franchisees, standardized operations, and brand recognition.

6. Affiliate Model:
• Businesses using the affiliate model rely on third-party publishers (affiliates) to market and sell
their products or services. Affiliates earn a commission for each sale they generate.
• Examples: E-commerce businesses with affiliate marketing programs, and online retailers.
• Key Points: Expand reach through affiliates, and performance-based compensation.

7. Freelance Model:
• Freelancers provide services to businesses or individuals on a contract basis. They can operate
independently or scale by hiring subcontractors to handle additional work.
• Examples: Graphic designers, writers, consultants.
• Key Points: Low overhead, flexibility, and potential for scaling with subcontractors.

PURPOSES OF FRANCHISING
The main purposes that are set to be achieved through businesses include the following:
• To restore individual entrepreneurship
• To provide an easily recognized and accepted product or service
• To compete with big business
• To allow consumers to buy good quality items or services at the right price
• To provide entrepreneurs a means to enter business with a low capital investment and risk

TYPES OF FRANCHISING
Why do we need to learn the different types of Franchising?
• It provides insights and information through decision-making by distinguishing the
characteristics, advantages and disadvantages of each type
• The awareness of the different types of aids in risk management
• Understanding the legal and contractual aspects associated with each type of franchise

1. Job Franchise - This is a home-based or low investment franchise that is taken by a person
who wants to start and run a small franchised business alone.
Example: The Shawarma Shack, Big Brew
2. Investment Franchise - It is a large-scale operation, requiring significant capital expenditure.
Example: Anytime Fitness
3. Distribution (Product) Franchise - In distribution franchises, the franchisee will operate and
sell the franchisor's product under their own identity rather than adopting the franchisor's
name and operational systems.
Example: sari-sari stores, car repair parts, bicycles
4. Business Format Franchise - Under a business format franchise, the franchisor provides the
franchisee with everything needed in order to set up and operate the business.
Example: fast-food restaurants (Jollibee, Chooks to Go, 7 Eleven, Siomai House)

CONTENT OF FRANCHISING AGREEMENTS

What is a Franchise?
A Franchise is a business relationship in which the owner of a trademark or brand (franchisor) grants
another individual or entity (franchisee) the right to operate a business using that brand.
Who are the parties involved?
Franchisor – The Franchisor is the entity that owns the overarching business concept. The franchisor
is the one that provides the framework, support, and brand.
Franchisee – The Franchisee is the individual or entity that operates a specific unit of that business
under the terms of the franchise agreement. This person is responsible for the local operations and
management of their individual franchise unit.

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management of their individual franchise unit.

A good basic franchise agreement will stipulate the conditions for both parties, and will contain
information on the following:
Fees and initial cost - Franchise fees are one-time fees paid by the franchisee to the franchisor for
the right to use the franchisor's brand, trademarks, and business model. The initial cost includes the
total amount of money a franchisee needs to invest to start and set up the franchise.
Product service method stipulations - Product and service method stipulations outline the products,
services, and methods that are part of the franchising agreement. Product Stipulations involve
specifications related to the products sold by the franchise. For service-based franchises, there will
be an outline of the guidelines regarding the standards of the service provided. Lastly, method
stipulations refer to specific methods, procedures, and operational protocols that franchisees need
to follow.
Restriction upon purchase of materials - These restrictions are typically included in the franchise
agreement to protect the overall brand and ensure that customers have a consistent experience
regardless of the specific franchise location they visit.
Record Keeping Requirements - Record-keeping requirements outline the obligations of both the
franchisor and the franchisee regarding the maintenance and documentation of various business
records. These requirements are designed to ensure transparency, compliance with the terms of the
agreement, and the ability to monitor and evaluate the performance of the franchise.
Life of franchise - Refers to the length of the duration of the franchise agreement.
Termination - 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.
Royalties - 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.
Location and territorial rights - The term "location" describes the actual site or location where the
franchise is run. Territorial rights refer to the sole authority to run the business and maybe grow the
franchise
Training provisions - 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.
Controls of operations and performance standard - This section details how franchisees are
expected to run their units. Controls of Operations are the policies and guidelines that the franchisor
has set out to control how the franchise is run. Performance Standards are benchmarks that a
franchisor establishes to assess how well a franchisee is running their business.

Obligations of the Franchiser and the Franchisee:

Franchisor Obligations:
1. Use of Company Name: The franchisor promises the franchisee the permission to use the
well-known brand name, trademarks, and other business-related intellectual property.
2. Management Training: Franchisors offer training to teach franchisees how to manage the
business effectively, follow operational procedures, and acquire essential skills for successful
franchise operation.
3. Financial Help: Franchisors might help franchisees with money by offering guidance on
financing, advice on managing finances, or even providing direct financial support when
needed.
4. Continuing Management Help: The franchisor promises to keep supporting and guiding
franchisees, helping them overcome challenges, and staying involved in managing the
franchise system.
5. Wholesale Prices on Purchases: Franchisors usually arrange bulk deals with suppliers so that
franchisees can buy products or services at lower wholesale prices, helping them save costs
and increase profits.

Franchisee Obligations:
1. Paying Franchise Fees: Franchisees must pay certain fees to the franchisor, which can include
an initial fee, ongoing royalties, and other charges specified in the franchise agreement.

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 an initial fee, ongoing royalties, and other charges specified in the franchise agreement.
2. Making Minimum Investment: Franchisees agree to invest a set amount of money specified
by the franchisor, covering expenses like setting up, equipment, and other costs for starting
the franchise.
3. Meeting Quality Standards: Franchisees must follow the quality standards set by the
franchisor to ensure consistency across all locations. This involves maintaining the quality of
products or services, meeting customer service standards, and fulfilling other brand
expectations.
4. Following Procedures: Franchisees must follow the operational procedures, business
protocols, and policies provided by the franchisor. This ensures a consistent and standardized
customer experience at all franchise locations.
5. Maintaining Business Relationships: Franchisees should maintain positive relationships with
customers, suppliers, and others. This involves promoting the brand, participating in
marketing, and contributing to the overall success and reputation of the franchise.

FOUR PHASES OF RELATIONSHIP OF FRANCHISING

Phase 1: Recruitment
In the beginning, when the franchisor (the company offering the franchise) and the potential
franchisee (the person interested in owning a franchise) are getting to know each other, they set
expectations.
Phase 2: Growth
From the time the franchise agreement is signed until the first three years of running the franchise,
the franchisee needs a lot of support from the franchisor. This period is called the "growth stage."
Phase 3: Maturity
During this time, both parties understand each other well, and things are more predictable. If
everything has gone as planned, they have a mutual understanding and a friendly relationship.
Phase 4: The End or a New Beginning
In the final phase of the relationship between the franchisor (the company offering the franchise)
and the franchisee (the person running the franchise), there are two possible outcomes. On one
hand, the franchisee might be unhappy with the franchisor.

TYPES OF FRANCHISEE – FRANCHISOR STRUCTURE

What is the difference between a Franchisee and Franchisor?
A franchisee is a person or organization who purchases and runs a franchise, whereas a franchisor is
an established firm that offers permission to operate a business using its name and business plan.
Both sides gain from the growth of their brands through the franchise network, and the franchisee
gains from the franchisor's well-established brand and ongoing assistance. As a result, the success of
both parties is frequently linked.

Franchisees are individuals or entities that enter into a franchise agreement with a franchisor to
operate a business using the franchisor's brand, business model, and support. There are several
types of franchisees, each with its characteristics and responsibilities. Here are the main 4 types of
Franchisee:

1. Single-Unit Franchisee: - Owns and operates a single franchise unit. - Focuses on one location
and is responsible for its day-to-day operations.
2. Multi-Unit Franchisee: - Owns and operates more than one franchise unit. - Manages multiple
locations within a specified territory or across different locations.
3. Master Franchisee (Sub-franchisor): - Typically granted the right to develop and sell franchises
in a specific territory. - Acts as an intermediary between the franchisor and individual
franchisees in the designated area. - Assumes some of the responsibilities of the franchisor
within the assigned territory.
4. Area Developer: - Similar to a master franchisee but usually with a narrower focus on a
specific geographic area. - Commits to opening a certain number of units within a defined
period in a designated area.

ECONOMIC RELATIONSHIP OF FRANCHISEE – FRANCHISOR

The economic relationship between a franchisee and a franchisor is characterized by a structured

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The economic relationship between a franchisee and a franchisor is characterized by a structured
arrangement in which the franchisee, an independent business owner, gains the rights to operate
under the established brand, trademarks, and business system of the franchisor. In exchange for this
access, the franchisee typically pays an initial franchise fee and ongoing royalty fees, contributing to
the franchisor's revenue stream.

The franchisor, in turn, provides support, training, and a proven business model to help ensure the
success of the franchisee's operation. This symbiotic relationship aims to mutually benefit both
parties, with the franchisee leveraging the established brand and business model, and the franchisor
expanding its brand presence and achieving growth through a network of independently operated
franchises.

Licenses requirements to operate in a particular place

1. General Business License: Typically, businesses need a general license to operate within a
specific jurisdiction.
2. Franchise-Specific License: Certain locations might have specific requirements or licenses for
businesses operating under a franchise model.
3. Occupancy Permit: Many places require businesses to obtain an occupancy permit for a
specific location, ensuring compliance with zoning and safety regulations.
4. Health Department Permits: Depending on the nature of the business, health department
permits may be necessary. For instance, restaurants often need health permits to comply with
food safety regulations.
5. Signage Permits: If the franchisee intends to install exterior signage, a permit may be required
to ensure adherence to local regulations regarding size, placement, and illumination of signs.
6. Alcohol License: If the franchise involves the sale of alcoholic beverages, a specific alcohol
license may be necessary. Such licenses are frequently regulated by state or local alcohol
control boards.
7. Professional Licenses: In certain industries like healthcare or personal services, employees
may need specific professional licenses or certifications.
8. Employer Identification Number (EIN): For tax purposes, especially if the franchisee has
employees, obtaining an Employer Identification Number (EIN) from the IRS is essential.
9. Sales Tax Permit: If the franchise involves the sale of tangible goods, a sales tax permit may be
required to collect and remit sales tax to the appropriate taxing authorities.
10. Special Use Permits: Depending on the nature of the business and its impact on the
community, special use permits might be necessary. For example, outdoor events or special
promotions may require additional permits.

Lesson 2
SIGNIFICANT ASPECT OF FRANCHISE RELATIONSHIP

Topic 1: THE DECISION TO EXPAND THROUGH FRANCHISING

The Decision to Expand

1. Franchise networks often lack initial plans for expansion. - The decision to franchise often
arises after years of success, not as part of the initial concept.
2. The question of expanding should precede the chosen method. - Before deciding how to
expand, businesses should first determine whether they are suitable for expansion at all.
3. Many businesses are not easily franchised. - The nature of the business may make it difficult
to replicate successfully across multiple locations.
4. Temperament plays a key role in expansion success. - Not all entrepreneurs are suited to the
challenges of managing a growing network.
5. Expansion should be a conscious decision, not a default. - Businesses should carefully
consider the risks and rewards before embarking on expansion.
6. Choosing whether or not to expand is the first step. - This fundamental decision sets the
stage for all subsequent expansion activities.

Expansion Methods

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Expansion Methods
1. Expansion methods are considered after the decision to expand.
- Once the decision to expand is made, businesses must consider various methods for
achieving it.
2. Different expansion methods exist. - There are different expansion methods:
• Company-owned outlets: financed through internal resources or external funding.
• Joint ventures: partnerships with passive investors or active operators.
• Franchising: sharing the business model with independent franchisees.
3. Method choice depends on expansion goals.
- The chosen method should align with the owner's goals for the expansion
• Small, local chain: company-owned outlets or joint ventures with passive investors.
• Regional or national network: franchising.
• Hybrid approach: combining company-owned and franchised outlets.
4. Franchising criteria and guidelines must be met.
- Choosing franchising as an expansion method requires fulfilling specific criteria and adhering
to established guidelines.
5. Brand success is crucial for franchising.
- The strength of the company's brand is a key determinant of franchising success.
6. Building a successful franchise network is complex.
- Franchising involves much more than simply selling franchises and opening outlets.
7. Method selection is the second step in the expansion process.
- Deciding on the expansion method is a crucial step after the initial decision to expand.

Sound Concept
1. Franchisability is not universal. - Despite widespread use across various industries, franchising
is not suitable for all businesses.
2. Certain criteria must be met for successful franchising. - A sound business concept,
established demand, and distinctiveness are key elements.
3. Existing businesses may already meet some criteria. - Businesses with a multi-year track
record and multiple locations might already have a foundation for franchising.
4. Established demand is crucial for success. - The product or service must have existing or
growing demand to attract franchisees and customers.
5. Uniqueness is key for attracting franchisees. - A distinctive business concept, product, service,
or delivery system sets the franchise apart from competitors.
6. Distinct features aid in brand recognition. - Trademarks, trade dress, and unique symbols can
enhance brand recall and marketing efforts.
7. Marketing plays a vital role in attracting franchisees. - Regular advertising, marketing,
sponsorships, and public relations generate interest and publicity.
8. High-potential franchisees are increasingly sought-after. - The competition for skilled
franchisees is rising, requiring a strong value proposition.
9. Various elements contribute to distinctiveness. - Operating systems, product offerings,
delivery methods, branding, and marketing all play a role.

Topic 2: WHEN IS THE COMPANY READY TO FRANCHISE?

Company Readiness for Franchising
Franchising serves as a potent strategy for business expansion, yet the decision to venture into this
realm demands a thorough assessment of several critical facets. A company's readiness to adopt
franchising hinges on pivotal considerations spanning prototypes, financial viability, strategic
planning, capital sufficiency, and adept management.

Prototype Perfection
Testing prototypes serve as the bedrock of a franchising endeavor. Meticulously refining business
concepts, services, and operational systems through prototype assessments in diverse markets is
imperative. Rigorous prototype evaluation encompasses design, product/service calibration,
customer feedback, operational logistics, training methodologies, advertising strategies, staffing
requirements, and cost analysis. These tests furnish invaluable insights necessary for franchise
model replication.

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model replication.

Example: A local bakery in the Philippines plans to franchise its brand. They conduct prototype
testing in diverse regions, considering preferences for local bread variations, pastry sizes, and flavors
based on different cultural tastes. The prototype testing involves refining store layouts to
accommodate local traffic patterns and adjusting marketing strategies to align with festive seasons
and local celebrations, ensuring a tailored approach for each region.

Financial Criteria and Profitability

The viability of a franchising model relies on its ability to yield a profitable return for franchisees
after accounting for invested labor. Demonstrating an attractive return on investment is pivotal to
entice high-caliber franchisees and compete favorably within the franchising landscape. Moreover,
the business's revenue generation should support essential franchisor services while ensuring a
satisfactory return on the franchisor's investment. Addressing major operational or financial
deficiencies is crucial for a successful franchising expansion.

Example: A Filipino-themed restaurant evaluates its franchising potential by analyzing the cost of
ingredients, labor, and overheads. They conduct market research to understand the willingness of
consumers to pay for traditional Filipino dishes. By ensuring a reasonable return on investment for
franchisees and comparing it favorably with other restaurant franchises in the country, they attract
potential partners interested in promoting Filipino cuisine.

Strategic Business Plan

A meticulously crafted business plan acts as the blueprint for business expansion through
franchising. The development of this plan, encompassing prototype testing and implementation
strategies, precedes its execution. The adaptive nature of this plan allows for adjustments based on
real-time execution, a fundamental aspect in a franchising setup governed by independent
contractors.

Example: A popular halo-halo (Filipino dessert) chain designs a comprehensive business plan
outlining the expansion strategy. This plan includes piloting franchises in key cities known for their
love of cold treats, setting up training centers for franchisees to learn the art of creating authentic
halo-halo, and integrating local fruit suppliers to maintain the authenticity of ingredients across all
franchise locations.

Capital Sufficiency
Sufficient capital stands as a cornerstone for instituting and nurturing a successful franchising
program. Both franchisors and franchisees contribute to the capital pool, with franchisors funding
the development, testing, and refinement of business concepts and operational frameworks. This
capital allocation spans multiple essential elements including operational systems, product/service
enhancement, trade identity, prototype refinement, professional fees, marketing endeavors,
regulatory compliance, and franchise sales assistance.

Example: A local spa company earmarks capital for franchising by budgeting for prototype
development, marketing campaigns tailored to local beauty preferences, legal assistance for
franchise agreements compliant with Philippine franchising laws, and investing in technology for
centralized booking systems and customer loyalty programs, crucial for maintaining consistency
across franchises.

Competent Management
The expansion via franchising necessitates a skilled management cadre proficient in orchestrating a
robust franchise network. Competencies spanning franchise sales, training, site selection, legal
compliance, operational support, communication, marketing, and technological implementation
form the core requisites. The evolving nature of a franchisor's management team mandates a shift
from generalist roles at the network's inception to specialized functions as the franchise network
proliferates.

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Example: A Filipino-style barbecue restaurant recruits a management team comprising individuals
skilled in Filipino culinary traditions, experts in Filipino customer service culture, and professionals
experienced in franchise operations within the Philippine market. As the franchise network expands,
the team evolves, incorporating specialists in marketing Filipino cuisine to international audiences
and enhancing operational efficiency.

The decision to embark on franchising demands a comprehensive evaluation of a company's

capabilities across prototypes, financial viability, strategic planning, capital sufficiency, and adept
management. A meticulous approach in addressing these considerations sets the stage for a
successful transition into the dynamic realm of franchising, ensuring scalability, profitability, and
sustained growth for the company and its prospective franchisees.

Topic 3: GROWING THE FRANCHISE NETWORK

A franchise network is a type of business structure wherein a company (the franchisor) offers people
or entities (the franchisees) an opportunity to use the franchisor's well-known brand, solid business
plan, and infrastructure to run their own business. Although each franchise runs on its own, they all
work together to further the brand's expansion and success as a whole. This is why franchisors must
be able to take note of the strategies they will use and come up with a reliable network that will help
the brand maintain its good reputation and ensure consistent quality and customer experience
across all franchise locations.

The Critical Role of Franchisee Selection

The primary challenge in effectively expanding a franchise network lies in securing and recruiting
suitable franchisees. The success of the network is significantly influenced by the capabilities,
resources, and attitudes of its franchisees. Even with a stellar concept, operational system, strategic
site selections, and robust marketing, achieving success in a franchise business is unattainable if the
franchises are handed over to individuals or entities that are not suited for the role.

Franchisees who are exceptionally productive and successful, contribute significantly more value to
the franchisor and the entire network compared to average performing franchisees. The enhanced
value comes in various forms, including higher revenue generation, faster growth in the number of
outlets, fewer operational issues, reduced operating costs, and an overall positive impact on the
brand's reputation and image. Essentially, top-performing franchisees bring greater overall benefits
and contribute more to the success and development of the franchisor's business model.

Pros and Cons of Multi-Unit Franchise Ownership

Some franchisees have the ability and work ethic to grow into multi-unit owners, which is why many
franchise networks have expanded. In the food service sector, for example, a large number of
outlets are managed by multiple franchisees under one or two franchise networks. With its ability to
promote quicker expansion, increase capital inside the network, and possibly reduce franchise
turnover rates and expansion risks, the multi-unit ownership model is an effective boost for network
growth.

However, it also brings attention to possible issues. Growing franchisees with multiple units under
their management could result in poor operations that are more difficult for the franchisor to keep
an eye on and manage. In addition, the network is more dependent on a limited number of
franchisees, which leaves it more susceptible to the operational or financial problems of these major
players. These concerns may have a greater effect on the network than they would on franchisees
running one or two locations.

Organizational Core Values

• An essential core value in successful franchise management involves cultivating a positive
attitude toward employees. This encompasses viewing employees not merely as costs but as
valuable assets, treating them with respect, and investing in their training and mentorship.
This strategy is essential to creating a successful company that can run the franchise
successfully. Instead of using authoritarian techniques, franchisees are urged to implement a
collaborative management style to foster a positive work environment. This strategy

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 collaborative management style to foster a positive work environment. This strategy
eventually leads to a decreased rate of employee turnover and happier, more productive
employees.

Insights from Leadership: The words of Leonard Roberts, former CEO of Radio Shack,
underscore the importance of creating a great workplace before achieving excellence in
serving customers. Franchisees play a pivotal role in shaping the organizational culture,
influencing both employee satisfaction and customer experiences

• Other key values include maintaining a positive and responsive attitude towards customers,
even in challenging scenarios; franchisees are expected to possess a motivational drive for
success, fostering positive beliefs in their capabilities for success in both life and business; a
strong work ethic is deemed essential, acknowledging the demanding nature of managing a
franchise, often requiring dedicated effort and extended hours; you must have an innovative
mindset about how you can independently work for the improvement of your business; there
should be a willingness to work in harmony with the people involved in the business; lastly,
active community involvement is encouraged, recognizing its role in fostering a positive brand
image. Together, these core values lay the groundwork for a thriving franchise business
• The success of franchisees is closely tied to the quality of the relationships they build and
maintain with customers, employees, suppliers, fellow franchisees, and the franchisor.

Lesson 3
FRANCHISING AS A SUPERIOR EXPANSION METHOD

FRANCHISING AS A SUPERIOR EXPANSION METHOD

Some of the common expansion methods are:
• Franchising
• Mergers and Acquisitions
• Licensing
• Joint Ventures
Why Franchising is a superior expansion method?
Advantages:
• Comprehensive Operational Control
• Rapid Regional Expansion
• Risk Distribution
• Optimized Operations and Consistency
• Local Expertise for Market Adaptation
Benefits:
Two general categories
1. Benefits relating to the capital investment furnished by franchisees.
2. Benefits relating to the motivated management by franchisees.

Topic 1: BENEFITS RELATED TO CAPITAL FURNISHED BY FRANCHISEES

Rapid expansion of the franchise network

The rapid expansion of a franchise network is made possible by franchisees through the capital and
effort they contribute, resulting in the acquisition of sites and the development of outlets.
Franchising uniquely taps into the substantial capital offered by franchisees, enabling faster growth
rates and allowing companies to secure better locations and gain market share. The motivation for
franchisees lies in the opportunity to own a business within a recognized network, which not only
secures better locations but also enhances consumer recognition and understanding of the franchise
network's products or services, contributing to overall success.

Franchisees share risk of expansion of the franchise network

Franchisees play an important role in sharing the risks of expanding the franchise network through
substantial capital contributions for various expenses. They cover costs for real estate,
improvements, equipment, and the working capital, supported by franchisee fees designed to offset

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improvements, equipment, and the working capital, supported by franchisee fees designed to offset
the franchisor's expenses. The franchisor's direct expansion costs are limited, mainly involving
overhead expenses, while ongoing fees from franchisees sustain services, marketing efforts, and
network growth. This reduces the franchising company's vulnerability to economic fluctuations and
outlet failures, providing financial stability and resilience compared to other methods.

A franchising company can realize a higher return on its capital

In franchising, the franchisor realizes a higher return on capital as franchisees bear the primary
investment for outlet development. With few fixed assets beyond owned outlets, the franchisor's
revenue, although lower than traditional methods, yields a higher profit percentage because the
franchisor's lower capital investment is focused on supporting and managing the franchise network.
This results in a more significant percentage of revenue translating into profit.

Franchise networks can realize economies achieved by company- owned outlets through joint
procurement
In franchising, franchisors often establish supply programs encompassing various necessities like
equipment, fixtures, supplies, insurance, and marketing services needed by franchisees. These
programs offer the franchise network the benefits of collective purchasing power, mirroring the
efficiencies gained by a network of company-owned outlets. By centralizing procurement efforts,
franchisors can negotiate better deals and pass on cost advantages to their franchisees, resulting in
the overall competitiveness and efficiency of the entire franchise network.

Reacquisition of franchised businesses

This involves a successful franchisor having the capability to repurchase businesses that were initially
owned by franchisees. In many extensive franchise networks, there is a mix of outlets operated by
both the franchisor and individual franchisees. The franchisor, being financially capable and well-
established, can strategically buy back franchisee-owned businesses.

Topic 2: BENEFITS RELATED TO THE MOTIVATED MANAGEMENT OF FRANCHISED OUTLETS

a. Franchisees are motivated owner-managers

- Unlike traditional employed managers, franchisees have a direct and ongoing financial stake in
their businesses, fostering a strong commitment.
- The appeal of franchise ownership lies in providing individuals, especially those seeking an
alternative to slow corporate advancement or facing job instability, the chance to become business
owners within a proven network.
- Franchisees benefit from operating under a common trade identity, established operating and
marketing systems, ongoing support, and shared resources.
b. Franchisees are idea/information resources to a franchisor
- Business owners, like franchisees, are more motivated to innovate compared to non-owner
managers.
- They contribute to the development of new products, services, operating methods, and marketing
concepts.
- The effectiveness of this contribution is maximized when the franchise network systematically
gathers, assesses, and shares the operational experiences and innovative ideas of franchisees.
c. A Franchising company has a simpler and more efficient management structure
- The franchisor serves as an administrator and service provider, offering information and services to
franchisees.
- Fewer levels of management are needed, and fewer field supervisors are required compared to
company-owned outlets.
- The franchisor's revenue is usually based on the gross sales of its franchisees, making it easier to
monitor than retail outlet profits.
- Challenges associated with hiring, training, compensating, insuring, supervising, and motivating
employees, along with related paperwork, are shifted to franchisees.
d. Franchising offers opportunities for employee to acquire franchises
- Franchisors can offer franchises to experienced employees, addressing the "dead end job"
syndrome and motivating those who have reached their highest likely management level.

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syndrome and motivating those who have reached their highest likely management level.
- This opportunity may prevent the loss of experienced managers to competitors.
- Some franchisors provide special incentives to employees, including credits toward franchise
purchase earned during employment, reduced initial franchise fees, and financing support for an
employee's investment in developing their franchised business.

Topic 3: FRANCHISING FROM PERSPECTIVE OF A FRANCHISEE

Value Proposition of a Franchise

Franchisee must find a franchisor who offer value that exceed its cost. The decision to invest in a
franchise involves a careful consideration of the benefits provided by the franchisor against the costs
and obligations incurred by the franchisee. The long-term success and continued growth of the
franchise, mostly depends on the value of the franchisor provide to the franchisee. If the franchisor's
services provide extensive support and expert guidance, the franchisee may find that the costs
associated with the franchise will, in the long run, exceed the value of its benefits.

Benefits of a Franchise that a Franchisee must consider:

1. Strong trade identity and consumer good will
2. Know-How and Experience
3. Effective site selection
4. Finance assistance
5. Outlet development assistance
6. Training and start-up support
7. Procurement programs
8. Advertising and Marketing services
9. Research and Development
10.Continuing guidance and support

Cost Benefit Analysis

– is a technique that helps decision-makers choose the best investment opportunities in different
scenarios. In franchising, cost benefit analysis helps franchisee to choose a franchise by evaluating
whether it is worth to invest. This analysis involves predicting and projecting future events,
particularly considering the past operating history of the franchisor. It also requires evaluating
potential events that could impact the franchisor's operations.

A comprehensive evaluation of the franchisor's history and potential risks is paramount for
prospective franchisees to make informed decisions in navigating this intricate business landscape

There are many potential events which may change the performance of the franchisor, causing the
costs of the franchise to exceed its value. These events may change the way the franchisor relates to
its franchisees.
• Illness, death, or retirement of the franchisor
• Acquisition of the franchisor
• Changes in management personnel

Challenges to Expect as a Franchisee

The prospective franchisee should anticipate possibility of the following;
- Franchisor becoming less competitive
- Changes in cost benefit analysis
- Restriction on expansion within franchise network
- Brand damage beyond your control
- Limited autonomy

Independence of a Franchisee
The degree of independence for a franchisee can vary based on the terms of the franchise
agreement. Franchisees often agree to certain specifications, standards, and operating procedures
set by the franchisor.

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set by the franchisor.
Franchise agreements typically include guidelines and standards that franchisees must adhere to.
These may cover aspects such as branding, product or service quality, and customer experience.
Franchisees are expected to follow specific operating procedures outlined by the franchisor. This
helps maintain consistency across different franchise locations and ensures that the brand image is
upheld.

Aspect of a Successful Franchisee

- Uniformity and Consistency Maintaining consistency in specifications, standards, and operating
procedures is crucial for a franchise's success. This ensures that customers experience a uniform
quality and image across all locations within the franchise network. Consistency helps in building
brand identity and customer trust.
- Flexibility
Successful franchising recognizes the importance of allowing franchisees some flexibility in their
operations. Franchisees often have the freedom to make certain decisions related to local
marketing, staffing, and community engagement. This flexibility allows them to adapt to local
market conditions and customer preferences.
- Less Independency
The foundation of the franchise model is that all franchisees follow the same system, offering the
same products and services in their respective territories. You will be obliged to follow the
instructions given by the franchisor – usually comprised in the franchise manual which is a
comprehensive document telling you how to run the business.
- Driven
As a franchisee you are running your own business – you are not buying a job. Whilst your franchisor
will give you some support, it will be your responsibility to make the business succeed. You will need
to manage your staff, market your business and ensure that excellent service is delivered. You
should be ambitious about growing your business – in addition to improving turnover and profit, if
you are successful the franchisor may allow you to purchase additional territories.

Topic 4: SIGNIFICANT ELEMENTS OF A BUSINESS FORMAT FRANCHISE

Trademarks and Trade Dress

- A trademark is a distinctive sign, symbol, logo, word, or phrase that is used to identify and
distinguish the goods or services of one party from those of others. Trade dress, on the other hand,
refers to the overall appearance and image of a product or service, including its packaging, design,
décor, or any other characteristic that contributes to its visual identity. Without federal registration,
a trademark owner gains "common law" rights in their business area through use. However, if
someone unknowingly uses a similar mark outside this area before registration, they may gain
superior rights. Unregistered trademarks are less valuable than registered ones, as they can face
challenges from other users in broader geographic markets.
Business Format and Operating System
- Franchisors not only license trademarks but also provide franchisees with a business format and
operating system. The success and value of a franchise increase with the established nature of this
system. The operating system often contains valuable trade secrets, and franchisors take measures
to safeguard them. Failure to protect trade secrets can lead to loss of their confidential status and
exposure to the public domain.
Site Selection and Business Facility Development
- Franchisors help franchisees pick a good location and set up their business space. The help can
range from just giving advice on where to set up (basic services) to doing everything, including
building the whole place and selling it to the franchisee (full services).
Advertising And Marketing
- Most franchisors of business formats understand how important marketing and advertising are to
their franchisees' success. To assist these initiatives, franchisors frequently set up central funds for
marketing and promotion, which are managed by the franchisor and financed by franchisee
contributions. An efficient advertising and marketing fund handled by the franchisor becomes a
symbol of success in highly competitive industries where franchising is a common business model.
Training

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Training
- Franchisors usually provide training to every franchisee and often to the managers of the
franchisee's business. This training is a mix of classroom lessons and practical experience in a real
working business. How thorough and helpful this training is initially is really important for the
franchisee's business to start and run successfully.
Continuing Assistance and Guidance
- Franchisors provide some degree of continuing assistance and guidance to their franchisees. This is
provided in several forms such as a comprehensive operations manual that is periodically updated.
This manual describes in detail the elements of the operation of the franchised business. This usually
consists of several hundred pages. Next is periodic written and electronic communications that
address developments in the franchised networks' industry, information on competitors, as well as
operational and marketing information.
System Standards
- These include the appearance and maintenance of the franchisee's business facility; authorized
products and services; restrictions on sources of supply for equipment and supplies; employee
qualifications, training and dress; operating hours; insurance requirements; use of trademarks;
production, presentation, etc.
Term, Renewal, and Transfer
- Franchise agreements typically include provisions governing the term for which the franchise is
granted. It usually relates to whether or under what conditions the franchise would be renewed or
extended when the initial term expires. This also includes conditions regarding the transfer of the
franchise. Furthermore, a long term, renewal rights and reasonable transfer rights make the
franchise more valuable, from the perspective of the franchisee.
Other Significant Terms and Conditions
- One significant terms and conditions is territorial protection to be granted to the franchise. As
there are terms and conditions, these can affect the value of a franchise. Although, it is less than the
impact of the value of the franchisor's trademark and trade dress, business format and operating
system, system standards, site selection and facility development services, advertising and
marketing programs, training and continuing assistance and guidance, etc.
Fees
- All business format franchise relationships involve payment of fees by the franchisee to the
franchisor. This includes the initial fee which is intended to reimburse the franchisor for services
furnished to the franchisee in connection with the establishment and opening of the franchised
business. There is also the continuing fee or also called royalty and service fee which are the
significant consideration paid by the franchisee for the rights and service granted by the franchisor.

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