Contents

A. Simple definitions of franchising

B. Licensing the system & the Proprietary Marks

C. Franchising origins & formats

D. Types of Franchising Agreements

E. Franchise search and selection criteria

F. Franchising strategies

G. Advantages & Disadvantages of Franchising

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 Simple definitions
1. Franchising is a unique System for expanding a certain
business .

2. Franchising is a Strategy for distributing goods & services

.

3. Franchising is a Legal & Commercial Relationship

between the business owner (Franchisor) and the business
operator (Franchisee).

4. Franchising involves a License to operate a business using

a known Brand name and Proprietary Marks.

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 The “System” in Franchising

−All Tangible Business components (Decoration, Equipment, POS,

signs, Furniture, etc…)

−The Operations Manuals

−The Know – How Techniques

−The Training (classroom & on the job)

−The Support (Business Plan preparation, Store Location, Store design,

Equipment purchasing, Recruiting, Marketing, Operations,
Financial, ongoing support services …)

−Seminars & workshops

The “Proprietary Marks” in Franchising

− Trade Name (s)

− Trade Mark (s)

− Patent (s)

− Logo (s)

− Emblem (s)

− Motto (s)

− Other Proprietary Marks / copyrights

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 Franchising from a Legal Point of view

Franchising takes place when the owner of the unique &

distinctive business (FRANCHISOR)

Licenses

To the new operator (FRANCHISEE) to use its Trade name,

Proprietary marks and system according to the terms of
the Agreement (FRANCHISE AGREEMENT) and for certain
fees.

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 LICENSE

FranchisOR System Proprietary FranchisEE

Marks

The Grant of Rights from franchisor to franchisee

− Must be in a written form

− For a specific region
− For a limited time frame (term)
− Should specify whether exclusive or not
− Defined number of stores
− May vary in case of Agreement breach

In Exchange for
− Initial Franchise Fee
− Royalty Fees
− Other Fees

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 The Franchise relationship : The Exchange
RECEIVING Franchise Fee & Royalties

FRANCHISOR License FRANCHISEE

GIVING the License for System & Proprietary Marks

Other Forms of Business Expansion

• Company owned outlets

• Agency

• Distributorship

• Licensing

• Partnership / Joint venture

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 Key Terms so far

− Franchisor
− Franchisee
− Franchise Agreement
− License
− System
− Proprietary Marks
− Initial Franchise Fee
− Royalties

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 The Origins of Franchising
Middle-Ages The origins of the word are French.
“Franchise” was the synonym of granted
privilege

1858 Singer (famous sewing machines brand )

was the first to “sell rights” to distribute the
machines & train customers.

1950’s Coca-Cola’s Expansion by shifting the

burden of manufacturing & distributing to
Franchisees
Same with Famous Car Dealers and Oil
Companies (Convenience stores)

The Two Formats of Franchising

(a) Business Format Franchising

(b) Product Format Franchising

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 (a) Business Format Franchising

• Franchisor may or may not be a Manufacturer

• License covers system + Proprietary Marks

• Franchisee Follows strict & uniform way to operate &

promote Franchise

• Example : Mc-Donalds, Pizza Hut, Starbucks.

(b) Product Format Franchising

• Franchisor is Typically a Manufacturer

• License covers Proprietary Marks only

• Franchisee may or may not use same marketing efforts

as Franchisor

• Example : Ford, GM, Coca-Cola

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 Example of Franchise Sectors and Brands
Fast Food • McDonalds Pizza Hut Subway

Retail • Zara GNC Debenhams

Service• Avis 5aSec Kwik Kopy

Automotive• General Motors Ford Citroen

Restaurants• Applebee's Chillis Fuddruckers

Lodging • Sheraton Marriott Hilton

Beverage• Coca-Cola Pepsi-Cola

The Franchisor’s obligations & duties

1. To own, register & protect the Proprietary Marks
2. To be an excellent communicator
3. To constantly seek manageable expansion
4. To constantly develop the system (R&D) & solve
problems
5. To ensure consistency in service / product delivery
6. To Employ experienced staff & invest enough capital
7. To support Franchisees & provide training & manuals
8. To maintain value for Franchisees
9. To abide by the Franchise Agreement

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 The Franchisee’s obligations & Duties
− Allocate Time and effort to operate the Franchise

− Use Proprietary Marks & system appropriately

− Abide by confidentiality & non competency agreement

− Train and Motivate team members

− Pay royalties & other dues on time

− Avoid breaching the Franchise Agreement

What kind of Commitment is requested ?

Commitment to franchise partnership

Commitment to learn
Commitment to succeed
Commitment to cooperate
Commitment to communicate
Commitment to serve customers
Commitment to develop business & staff
Commitment to be unique

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 Types of Franchising Agreements

(A) Single Unit Franchise Agreements (SUA)

(B) Multi Unit Franchise Agreements

i – Master Franchise Agreement (MFA)
ii- Area Development Agreement (ADA)
iii- Multiple single units Agreement (MSU)

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 Types of Franchising Agreement (cont’d)
SUA MFA ADA MSU
X1 X3 X1 X3
X X X X X
X2 X4 X2 X4

OR OR

X1 X2
X X

A B X1 X2

OR

A B
X
C D

Additional Key Terms

‰ Master Franchise Agreement

‰ Master Franchisee
‰ Area Development Franchise Agreement
‰ Area Development Franchisee
‰ Multi Unit Franchise Agreement
‰ Multi Unit Franchisee
‰ Single Unit Franchise Agreement
‰ Single Unit Franchisee
‰ Trademarks (Marks, Brand Name, Logo,…)

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 Where to look for a Franchise ?

• Internet
• Magazines
• Exhibitions
• Franchise Associations
• Newspapers
• Franchise Directories
• Referrals
• Existing Franchises

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 Which Franchise to choose : Main selection criteria

1. The Franchise costs and expected returns

2. The Brand’s Equity

3. The nature of the franchise : Demand and competition

4. The Franchisor’s Background and commitment

5. The Franchisor’s support

6. The Degree of personal Involvement

The Main Franchise Documents to review

• The Franchise Information Package (The franchise kit)

• The Uniform Franchise Offering Circular (UFOC)

• The Franchise Agreement

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 What is the franchisor looking for ?

• Passion about the franchise business

• Good financial capabilities

• Business Acumen

• Desire to succeed

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 Types of Franchising Strategies
(a) Expanding by selling Franchise Rights to prospect
Franchisees
i- Offering Rights only
*)Master Rights
**) Area Development Rights
***) Single Rights
ii- Offering Turn-key solutions
iii- Offering (i) or (ii) with Full or partial financing

(b) Expanding by establishing and operating new stores

(c) Expanding by a combination of (a) & (b)
(d) Expanding thru conversion strategy
(e) Expanding thru Retro-Franchising

Why would we consider “Franchising” a successful strategy ?

• Its ultimate Goal is increasing profitability, distribution and

Brand equity
• It offers a cost effective mean of business expansion as it
requires minimal capital commitment from Franchisor
• It is an optimum method to reach International Markets where
Franchisor has no knowledge or experience .
• It offers sometimes a “Complete business solution” for non
experienced operators
• It offers several expansion alternatives
• It offers an opportunity to stimulate entrepreneurship at a
rapid pace

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 Advantages of Franchising
1. Proven & tested concept
2. Reduces the risk of failures associated with new
businesses
3. Operating under a recognized brand name
4. Faster learning curve
5. Start-Up Assistance
6. Easier for obtaining Financing
7. Collective purchasing power
8. Synergy created by associating with Franchisees

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 The Statistics supports Franchising

Main reasons for failures of small projects

1. Lack of Business Experience

2. Shortage of capital
3. Bad location for business
4. Bad Management of Inventory
5. Over Investment in Fixed Assets
6. Absence of Financing options
7. Use of capital for personal purchases
8. Competition

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 Disadvantages of Franchising

− Franchisee is committed to pay Franchise Fee & Royalties

− Franchisee has to report constantly to Franchisor

− Some Lack of independence & Freedom

− Limited Geographical Area & defined Franchise term

− Control over permitted products & services

− Major Franchisor problems may someday affect your business

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