DEVELOPING YOUR OWN FRANCHISE - A FRAMEWORK FOR VIETNAMESE FRANCHISORS : LUN VN THS.

KINH DOANH V QUN L: 60 34 05 / NGUYN QUANG TIP ; NGHD. : TS. PHM QU LONG, THS. H NGUYN

INTRODUCTION ........................... 1 CHAPTER 1: FRANCHISING OVERVIEW .................................... 3

1.1 Franchising definition ................................................................ 3 1.2 Types of Franchising .................................................................. 3 1.2.1 Traditional franchising .......................................................... 3 1.2.2 Business-format franchising .................................................. 3 1.2.3 The differences between traditional franchising & businessformat franchising ............................................................................... 4 1.3 Reasons for being a franchisor .................................................. 4 1.4 Industries suitable for franchising ............................................. 5 1.5 Common success factors for franchising ................................... 5 1.5.1. A successful prototype location ......................................... 5

A strong management team ............................................... 5 Sufficient capitalization ..................................................... 6 A distinctive and protected trade identity .......................... 6 Proven methods of operation and management................ 6 A demonstrated market demand for the product/services . 6 Comprehensive training programs for franchisees .......... 6 Uniform site selection criteria and architectural standards 7 1.5.9. A franchisee profile and screening system ........................ 7 1.5.10. An effective system of reporting and record keeping ........ 7 1.5.11. Field support staff .............................................................. 7 1.5.12. Research and development capabilities ............................. 7 1.5.13. Effective marketing & advertising programs .................... 7 1.6 Success factors applied to Jollibee case ..................................... 8 1.6.1 Corporate profile: ................................................................... 8 1.6.2 Analyze the success of JFC by key success factors ............... 8

1.5.2. 1.5.3. 1.5.4. 1.5.5. 1.5.6. 1.5.7. 1.5.8.

CHAPTER 2: FRANCHISING IN VIETNAM ..................................... 11

2.1. An overview of Vietnam franchising market ........................... 11 2.2. Franchising environment in Vietnam ...................................... 11 2.2.1. Political environment ....................................................... 11 2.2.2. Legal environment ........................................................... 11 2.2.3. Economic environment .................................................... 12 2.2.4. Financial environment .................................................... 12 2.2.5. Social environment .......................................................... 12 2.3. Challenges to opening a new franchise system in Vietnam .... 13 2.3.1. Lack of experience ........................................................... 13 2.3.2. Insufficient franchising consultancy .............................. 13

CHAPTER 3: FRAMEWORK FOR BUILDING YOUR OWN FRANCHISE ................................. 14

3.1. Framework introduction .......................................................... 14 Figure 3.1: Framework for building a franchise system...................... 14 3.2. Concept stage ............................................................................ 14 3.2.1. Industry assessment ......................................................... 14 3.2.2. Concept assessment.......................................................... 16 3.3. Pilot stage .................................................................................. 17 3.3.1. Site selection criteria ........................................................ 17 3.3.2. Trade identity development & protection ........................ 18 3.3.3. Operations manual .......................................................... 18 3.4. Expansion stage ........................................................................ 18 3.4.1. Pricing franchise.............................................................. 18 3.4.2. Franchise agreement preparation ................................... 20 3.4.3. Franchisee recruitment ................................................... 21 3.5. Mature stage ............................................................................. 21 3.5.1. Monitoring quality ........................................................... 21 3.5.2. Monitoring franchisee financial reporting ..................... 22

CONCLUSION .............................. 23

DEVELOPING YOUR OWN FRANCHISE A FRAMEWORK FOR VIETNAMESE FRANCHISORS Nguyen Quang Tiep School of Business Vietnam National University, Hanoi Supervisor: Dr. Pham Quy Long, MBA Ha Nguyen October 2010 INTRODUCTION The emergency and objectives of the research The reform of Vietnam has been taking place totally and deeply in many fields. The event that Vietnam became the official member of the WTO put an important mark in the integrating process into the world economy. Vietnams economy has grown fast, in the last twenty years GDP increased by over 7% on average. The franchising sector first came to Vietnam in early 1990s, and after 15 years, the total revenue in this sector grew 24 times, from 1.5M USD in 96 to 36M USD in 10. However, the major portion of this market is dominated by foreign brands. Vietnamese companies havent succeeded in leveraging the local market understanding to make a successful franchise system in order to directly compete with international franchise systems in domestic market. With the objective to find a suitable method for developing franchise systems in Vietnam, I have chosen the topic Developing your own franchise a framework for Vietnamese franchisors. The objectives of the research are to: - Present an overview of franchising and provide the key franchising success factors - Provide an analysis of the franchising market in Vietnam - Recommend a master framework for Vietnamese franchisors to build their own franchise systems. Subject and scope The subject concentrates on the framework for franchise system development. In which, it will specially suggests the activities needed to develop a business-format franchise in Vietnam. Research methodology:
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In the thesis, the author adopts mainly secondary research methods to domestic and foreign material sources to find out basic theories about franchising, analyze the opportunities and challenges to Vietnam franchisors, and develop the appropriate framework to build franchise systems in Vietnam. The systematical, statistical, analytical methods are also applied to analyze all collected data. The structure of the thesis Chapter 1: Franchising overview The first chapter gives a general overview about franchising, types and history of franchising, industries most suitable for franchising and why people want to franchise their businesses. More importantly, the key success factors for franchisors are listed and illustrated by the case of Jollibee Food Corporation, Philippines. Chapter 2: Franchising in Vietnam Chapter 2 concentrates on studying the franchising market in Vietnam, the macro environment for franchising and the challenges with which Vietnamese franchisors are facing. From this chapter, we understand that Vietnam franchising market is just at the very initial stage and has great potential for development. Despite a favorable environment, Vietnamese franchisors have not been successful in dominating the domestic market with their own systems. Chapter 3: Framework for building your own franchise In this chapter, the author suggests a master framework for building franchise systems in Vietnam, in which the most critical and typical items related to franchise building are discussed and categorized into 4 main strategic steps: concept, pilot, expansion and mature.

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CHAPTER 1: FRANCHISING OVERVIEW Franchising definition

A franchise is the agreement or license between two legally independent parties which gives: a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor) the franchisee the right to market a product or service using the operating methods of the franchisor the franchisee the obligation to pay the franchisor fees for these rights the franchisor the obligation to provide rights and support to franchisees 1.2 Types of Franchising 1.2.1 Traditional franchising Traditional franchising is an arrangement in which one party, a franchisor, develops a trade name and licenses it to another party, a franchisee. The product franchisee contracts for the use of the name to deliver products or services to end customers for a certain time period at a certain location. 1.2.2 Business-format franchising Business-format franchising is a type of franchising in which the franchisor primarily sells a way of doing business to its franchisees. A business-format franchise thus includes not only the product, service, and trademark, but the entire business format itself a marketing strategy and plan, operating manuals and standards, quality control, and continuing two-way communication

1.2.3 The differences between business-format franchising Category Franchisee can use Franchisors trade name, logo Franchisor offers an operating system to franchisee Uniformity in the operations of franchise outlets Franchisee contribute to systems MKT & advertising Compensation to franchisor

traditional

franchising Businessformat

&

Traditional

Product sale to Royalty fee franchisee

1.3 Reasons for being a franchisor Obtain operating efficiencies and economies of scale Increase market share and build brand equity Use the power of franchising as a system to get and keep more and more customers-building customer loyalty. Reach the targeted consumer more effectively through cooperative advertising and promotion. Sell products and services to a dedicated distributor network. Replace the need for internal personnel with motivated owner/operators. Shift the primary responsibility for site selection, employee training and personnel management, local advertising, and other administrative concerns to the franchisee Achieve more rapid market penetration at a lower capital cost

1.4

Industries suitable for franchising

Today franchising occurs in more than 80 different industries. However, franchising does not occur in literally hundreds of industries. Moreover, franchising is highly concentrated in just a few industries: 20 percent of all franchise systems are found in fast food and 11 percent are found in general retail. Other evidence shows that franchisors perform much better in certain industries than in others. Franchisors now account for the majority of sales in tax preparation, printing and copying, and specialty food retailing, and close to half of all sales in fast food, restaurants and lodging. Fast food, Retail, and Service businesses are the industries that not only have biggest number of franchise systems but also contain majority of large scale systems. 1.5 Common success factors for franchising 1.5.1. A successful prototype location This is the most critical success factor which all franchise systems must consider before franchising. The pilot store(s) will serve as a basis for the franchising program. The store(s) must have been tested, refined, and operated successfully and consistently profitable. The success of the prototype should not be too dependent on the physical presence or specific expertise of the founders of the system. 1.5.2. A strong management team The team is made up of internal officers and directors (as well as qualified consultants) who understand both the particular industry in which the company operates and the legal and business aspects of franchising as a method of expansion. Management team and its expertise can help the franchisor in 2 ways: to join from building to refining the prototype, or to use franchising tools to expand the system from successful existing store(s).

1.5.3. Sufficient capitalization Franchisors need sufficient fund to launch and sustain the franchising program to ensure that capital is available for him to provide both initial & ongoing support and assistance to franchisees. 1.5.4. A distinctive and protected trade identity Trade identity includes registered trademarks, as well as a uniform trade appearance, signage, slogans, trade dress, and overall image. The franchisor must have a vision of how wide the system would grow, which markets (especially overseas markets) the system would enter so that the trademarks could be registered accordingly. 1.5.5. Proven methods of operation and management The comprehensive operations manual is the result of years of operations in the prototype location. The manual must not be too easily duplicated by competitors, maintain their value to the franchisees over an extended period of time, and be enforced through clearly drafted and objective quality control standards. 1.5.6. A demonstrated market demand for the product/services The franchisors products and services should meet certain minimum quality standards, not be subject to rapid shifts in consumer preferences, and be proprietary in nature. Market research and analysis should be sensitive to trends in the economy and specific industry, the plans of direct and indirect competitors, and shifts in consumer preferences. It is also important to understand what business you are really in. For example, many of the major oil company franchisors thought that they were in the gasoline business until they realized that they were in the convenience business and quickly jumped into mini-marts or fast-food and quick service restaurants either directly or via co-branding. 1.5.7. Comprehensive training programs for franchisees The training should integrate all of the latest education and training technologies and that take place both at the companys headquarters and on-site at the franchisees proposed location at the outset of the relationship and on an ongoing basis.
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1.5.8. Uniform site selection criteria and architectural standards To the success of a franchising system, location plays a very important part. With a good site, the franchisee not only gets much higher sales but also contributes to building brand awareness and brand preference for the system. The site selection criteria should

aim to find optimal location, as rental fee is one of the biggest operation cost for franchisee.
1.5.9. A franchisee profile and screening system The purpose of this system is to identify the minimum financial qualifications, business acumen, and understanding of the industry that will be required by a successful franchisee. 1.5.10. An effective system of reporting and record keeping It can help to maintain the performance of the franchisees and ensure that royalties are reported accurately and paid promptly. Good practice or initatives of some outlets can be multiplied and practised across the network, and lift the performance of the whole franchising system. 1.5.11. Field support staff Are skilled trainers & communicators & must be available to visit & periodically assist franchisees & monitor quality control standards. 1.5.12. Research and development capabilities The franchise company must have the capabilities for the introduction of new products and services on an ongoing basis to consumers through the franchised network. 1.5.13. Effective marketing & advertising programs A strong brand brings customers to franchisees, and brings new franchisees to the franchisor. From a debt-financing perspective, a successful franchise brand carries a preexisting recognition that lifts up the confidence in creditors. Therefore, both franchisor and franchisees may have quicker and easier approach to bank loans

1.6 Success factors applied to Jollibee case 1.6.1 Corporate profile: Foundation: 1975 in Quezon City, Philippines Incorporated: 1978 (100% Filipino Corporation) Headquarters: Metro Manila, Philippines Founder, President & CEO: Tony Tan Caktiong Industry: QSR (Quick Service Restaurant) Retail Sales: 51,550 million Pesos (2007) (1,186 million USD) Net Income: 2,388 million Pesos (2007) (55 million USD) Number of stores: 1,639 (Philippines 1,460 and abroad 179 - 2007) Number of employee: 32,918 (2007) 1.6.2 Analyze the success of JFC by key success factors 1.6.2.1. Successful prototype: Good It took them 5 years for pilotting compared to the average 7.1 years of fast food industry in table 1.3 1.6.2.2. Management team: Excellent One of the major reasons for JFCs success is the role of Tony Tan Caktiong. In 2004, Tony Tan Caktiong was awarded World Entrepreneur of the Year by Earnst & Young for his outstanding leadership and achievement. 1.6.2.3. Capitalization: Good From the good operations of the 6 stores that JFC had before franchising, the income from these played a very important part in financing for the system in early days. 1.6.2.4. Trade identity: Good From the fact that English is the official language in the Philippines, Jollibee is a good brand name which is easy to call and meaningful. All the trade identities were registered before the 1st franchise owned store opened in 1980. 1.6.2.5. Methods of operation and management: Good
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Jollibee introduced Food Utilization Management System highly developed computerized system for ordering, preparation, food management, and accounting process in 1984. 1.6.2.6. Market demand: Excellent Understand the local market demand is the key weapon that helped Jollibee won the battle with McDonalds in the Philippines. The food from Jollibee is often preferred by Filipinos compared to Western fast food chain. 1.6.2.7. Training: Good Classroom training: Basic Operations Training Program, store layout & design, equipment specifications, furniture & fixtures On-site training: Store operations management, advertising and marketing program, manufacturing & logistics 1.6.2.8. Site selection criteria: Good From the locations that Jollibee have in HCMC, we can find the criteria of Jollibee are similar to other fast food chains in HCMC such as KFC, Lotteria, Pizza Hut 1.6.2.9. Franchisee screening system: Good Jollibee screen the franchisees in 6 main categories: Personal information; educational background; business experience; personal financial and social background; business plan 1.6.2.10. Reporting and record keeping system: good Jollibee introduced Food Utilization Management system in 1984, which is a highly developed computerized system for ordering, preparation, food management, and accounting process. 1.6.2.11. Field support staff: Good Like any other large franchise system, Jollibee maitains a big team of field support staff (also called Quality Management team) to ensure the food safety, quality and cleanliness in the stores 1.6.2.12. R&D: Good JFC has a sophisticated and more careful process to offer a new product, which is made of 7 steps from getting customer input to introduce new product to the public.
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1.6.2.13. Marketing & Advertising: Good In 1983, JFC launched the Langhap-Sarap (means you can smell how delicious it tastes) campaign. The campaign was considered a major success which creates a bonding between companys promise and Filipnos habit of sniffing the aroma of food before eating.

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CHAPTER 2: FRANCHISING IN VIETNAM 2.1. An overview of Vietnam franchising market Franchise industry is considered to be started in Vietnam in early 1990s with the phenomenal expansion of Trung Nguyen coffee with over 500 shops. Since then, franchising has been growing steadily from a 1.5M USD revenue in 1996 to 36M USD in 2010. Despite the impressive growth, our market is much too small compared to other countries in ASEAN region. In 2008, we were just equal to 2.1% of Malaysia market, 1.3% of The Philippines market, 1.0% of Thailand and 0.3% of Indonesia. Vietnam franchising market has high potential with a forecasted growth of 50% per year, in the next few years to come. Regarding the sector structure, retail forms a quarter of the franchise sector, followed by beverages (20 per cent), restaurants (16 per cent), fashion (9 per cent), education (5 per cent) In terms of geographic markets, Ho Chi Minh City is the biggest market in the country, accounts for 31.5% of the total market. 2.2. Franchising environment in Vietnam 2.2.1. Political environment In general, Vietnam is considered to have a stable political environment compared to other countries in South East Asia. This stability has made a major contribution to the economic development with steady growth in GDP and promising macroeconomic factors. Vietnam have also been strongly encouraging the private economic sector to develop. The growth in production of private sector even surpassed the FDI sector since 2000. Among top 500 biggest companies in Vietnam in 2009, the private sector accounts for 30%. 2.2.2. Legal environment Since 1/1/06, franchising has been officially & legally accepted in Vietnam. Commerical Law 2005 spent the whole session 8 in chapter VI to define franchising activities. This is the legal base for franchising to develop in Vietnam. However, in all of the above mentioned legal documents, the relationship between franchisor and franchisees is not monitored.

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The franchisor is not obligated to disclose some important items to franchisees before selling the franchise to them. 2.2.3. Economic environment The average GDP growth rate in 20 years since 1990 till 2009 was higher than 7%. GDP per capita has grown 10 times after 20 years. Vietnam has a potential market of 86 million people, 28% of which are living in urban areas. This provides a very promising business opportunity for franchising. Vietnam government has been putting on big effort to improve the infrastructure. Although our infrastructure has not reached the standard of other ASEAN countries such as Thailand, Philippines, we have seen great improvement in this field recently. Vietnam has a young population with a median age of 27.4 years, and 55.5% of the population, is in the labor force, 49.6% of which are working in urban areas. There are over 0.2 million students graduate every year. The young and dynamic labor force will help the new franchise systems grow faster. 2.2.4. Financial environment By May 2008, there are 4 state owned banks, 36 joint stock banks, 44 foreign & joint venture banks in Vietnam. The competition between banks, especially commercial banks, in urban area is becoming fierce. Huge amount of money has been invested into building the infrastructure for financial environment. There is adequate capital and infrastructure available within the country to adequately support franchise development and expansion. Vietnam has managed to lower the inflation rate from the doubledigit inflation in 2007 & 2008 down to 7% in 2009. However, since 2005, VND keeps on shrinking in value. In the last 5 years, Vietnam dong has lost over 20% value compared to USD 2.2.5. Social environment Together with the fast economic development, the consumer behavior has gradually changed accordingly. People are spending more, requiring branded products, and are willing to pay more for better service. This trend has expanded the customer base for franchising business.
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Besides, the social conception about entrepreneurship has been improved. Entrepreneurs are now deservedly respected. They are considered to contribute to economic development. Hence, this positive social conception has boosted entrepreneurship. This is a good sign for franchising business as there will be larger pool of franchisees for franchise systems to grow. Regarding cuisine culture, Vietnam foods are considered gentle, healthy and fresh. We have plenty of foods that can be franchised such as Pho, spring rolls, Hue food, noodle soups 2.3. Challenges to opening a new franchise system in Vietnam Among 90 systems with 800 outlets, Vietnamese brands only get a humble share. There are only some well-known Vietnamese brands in franchising sector, such as Pho 24, Kinh Do bakery From what we observe in the market, the main reasons can be: 2.3.1. Lack of experience This is the biggest challenge to all Vietnamese would-be franchisors. Many entrepreneurs who have a good business concept for franchising, or even have succeeded in running the prototype units, do not know how build a franchise system from that concept or prototype. The lack of franchising experience has made many new business concepts expand slowly. However, this slow speed may result in the difficulties in finding good locations, as foreign brands tend to get prime location for long term contracts. 2.3.2. Insufficient franchising consultancy Almost all of the franchise consulting companies are law firms, who in fact do not have actual experience in building a franchise system except for legal advisory. Vietnam Franchising Association was established a few years ago but their role and contribution is very fuzzy. Normally, in other countries, Franchising Association often act as a connection between franchisors & franchisees, support franchisors & franchisees in expertise and consultancy, as well as organizing annual franchising exhibitions. VFA has not fulfilled these tasks.

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CHAPTER 3: FRAMEWORK FOR BUILDING YOUR OWN FRANCHISE 3.1. Framework introduction Figure 3.1: Framework for building a franchise system

3.2. Concept stage 3.2.1. Industry assessment An industry that is suitable for franchising contains 7 characteristics: 3.2.1.1. Production/distribution occur in limited geographic markets. Franchising makes more sense in industries providing customers with product or service requires small-scale production and distribution in a wide variety of different geographic locations. 3.2.1.2. Physical locations are helpful to serving customers. Franchising is more effective in industries such as computer stores, in which the product or service is provided to the end customer at a set location, than in industries such as carpet cleaning services, in which the product or service is provided at the customers premises. 3.2.1.3. Local market knowledge is important to performance. Franchising tends to be more effective in industries in which local market knowledge is more important to business success than in other industries. Because the franchisee comes from the local market,
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he or she can provide information about needed adaptations to the market more cheaply than a centralized company can search for it. 3.2.1.4. Brand name reputation is a valuable competitive advantage. Franchising is most effective in industries in which brand name development is important. This is the case in fragmented industries, such as restaurants. Franchising is valuable in industries in which brand names are important because it increases the scale of operations of a business very quicklymuch more quickly, in fact, than through company ownership of outlets. By providing a common brand umbrella for businesses operating in unfamiliar areas, you can ensure that your customers will know what they will experience before they pay for that experience. 3.2.1.5. High standardization & codification level Franchising works best in industries with standardized products and services. Standardization makes it easier to determine the right policies and procedures for monitoring the actions of franchisees who are serving customers under the systems brand name and using its operating procedures. Codifying a business operation means writing down the routines and procedures underlying the operation, from the ordering of supplies to the serving of customers, to the repairing of machinery. Franchising is more effective in industries in which the routines and procedures can be codified because the mode of business depends on the ability to write contracts to govern the actions and obligations of franchisors and franchisees. To control your franchisees behavior and ensure that your standards are being upheld, you need to write down those standards in the contract you sign with them. 3.2.1.6. The operation is labor intensive. Franchising is a very useful method of business in labor-intensive industries and is less valuable in capital-intensive ones. Because people shirk but machines do not, the incentives provided by franchising are more important in labor-intensive industries than in capital-intensive ones.

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3.2.1.7. Outlets are not terribly costly to establish. Franchising works best in industries in which outlets are not very expensive for people to operate. For instance, in industries in which the cost of establishing a single outlet is in the hundreds of billions of VND (such as luxury hotels), franchising is relatively uncommon. 3.2.2. Concept assessment 3.2.2.1. Valuable system to sell A valuable system includes an operation for delivering product or service to customers that is better than what potential franchisees would be able to develop if they started their own businesses 3.2.2.2. Transferable concept a. Replicable concept To franchise a business, you need a concept that is replicable. It has to be possible for someone to produce the same products or services and provide the same customer experience in more than one location. Otherwise, you wont be able to assure customers that your brand name represents a standard experience. b. Concept that can be codified If you are thinking of franchising a business, you should try to write an operating manual for your business. If you cant do it, that is a signal to you that you might not want to try franchising. There is no way for you to franchise your business if it cant be reduced to a set of rules put down in an operating manual. c. Teachable concept Often this means that your business concept needs to be simple and something that can be implemented without great difficulty. The concepts cannot be hard to teach and cannot require a great deal of background knowledge to learn. 3.2.2.3. Large pool of potential franchisees You get a large pool of potential franchisees if you come up with a concept that requires relatively little education, relatively little investment, and relatively little knowledge of an industry.

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3.3. Pilot stage 3.3.1. Site selection criteria 3.3.1.1. Density of the primary target audience Population demographics and psychographics provide a solid base to project revenue and profit. By deviding the total population in the area by age and income, you can project the potential revenue and profit of the outlet. 3.3.1.2. Traffic volume This is often measured in terms of pedestrians and vehicles traveling past the site on a 12-hours and 24-hour basic. Also, the date should be segmented between weekday and weekend volume levels. 3.3.1.3. Traffic patterns A third important element in assessing the viability of a particular site is traffic patterns: inbound and outbound sides of the street. Also, a site on the homebound side of the street could be a positive or negative aspect, depending on the nature of the franchise. For example, a fast food franchise is far more successful when located on the work bound site of the street. Moreover, if there are periods of traffic congestion near the site, this is a generally negative aspect, because it dramatically reduces retail volume. 3.3.1.4. Site visibility Visibility of key aspect of the store location (e.g., sign, entrance, and building) measured in both meters and seconds before the potential customer is aware of the site is important. 3.3.1.5. Traffic flow to the site The overall flow of traffic, which can be largely determined by placement of entrances and exits on the site, lets us know the potential revenue of the site. Properly managed site flow can maximize revenue for the outlet. 3.3.1.6. Complementary versus contracdictory neighbors Franchises that are complementary neighbors tend to create minitrade areas among themselves, which draw more customers to the area than each franchise could otherwise so individually. This generally occurs within franchises that fill a specific need through a variety of different products options.
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3.3.2. Trade identity development & protection Once you start to set up your pilot prototype, you have to start developing the trade identity of the franchise system. Trade identity is not only a logo or brand name. Much more than that, trade identity is a combination between brand name, logo, signage, color, design, equipment, layout, customer flow or even the atmosphere created by the decoration effects. Trade identity distinguishes one franchise from another. An insightful trade identity requires big effort from franchisor and his team and may be the results of many changes and revisions during the pilot stage. 3.3.3. Operations manual Guidelines for preparation of the manual The operations manual will develop and change as your franchise system develops and changes. Be sure to reserve this level of flexibility in your franchise agreement. As it is inevitable that your franchise system will evolve, prepare the manual in a format that is user-friendly and easy to update. Assume nothing about the skills and experience of your typical franchise. No detail should remain unaddressed in the manual. The manual must be comprehensive (yet generic) enough to be followed by all franchisees. The manual should anticipate and answer some of the questions most commonly asked by your franchisees. The manual, which is confidential and proprietary, should be treated as a trade secret under the law of intellectual property. 3.4. Expansion stage 3.4.1. Pricing franchise 3.4.1.1. Franchise fee The franchise fee is a one-time payment made by the franchisee to the franchisor when the franchise agreement is executed. The fee can be charged to franchisees based on the following factors: a. Value of good will: You can charge a higher franchise fee if your franchise system is larger and has operated for a longer period of
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time because franchise fees incorporate the value of goodwill, which is higher if you have more experience and more outlets. b. Value of geographical territory provided to franchisee: When franchisees receive larger territories for a given type of product or service, they expect to pay larger fees. c. Cost, extent and type of services provided to franchisee: The greater the expenses that you incur in selecting your franchisees and the more up-front assistance and training that you provide to them, the higher the franchise fee are. d. Terms of franchise contract: Essentially, the longer the term of the contract is, the higher the fee is that you can charge. e. Others: The value of the system brand, the production process, franchisee profiles, outlet profit margins, and industry norms are among the factors that influence the size of the franchise fee. On average, the up-front franchise fee is 8% of the value of all payments from franchisees over the life of the franchise agreement 3.4.1.2. Royalty rate As a franchisor, the royalty is your major source of compensation, often accounting for more than 90% of the money that you receive from your franchisees over the life of your franchise agreement. The most common percentage royalty, charged by roughly 1/3 of franchisors, is 4-5% of sales. The criteria to charge roalty fee are: a. Industry norms: The nature of profit margins, type of products, the abilities of franchisees, their need for assistance, and the cost of monitoring them all affect royalty rates. b. Contribution of franchisor/franchisee to the system: If your franchisees contribution to the system is very high, as is the case when they have a great deal of valuable local market knowledge that you are using to develop the system, the royalty rate that you charge should be relatively low, and vice versa. c. Level of ongoing support to franchisee: If you provide more services (such as field training or centralized purchasing) to your franchisees, you can expect a higher royalty rate. d. Brand name: Your royalty rate should also reflect the value of your systems brand name: stronger brand means higher rate.
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e. Longer operation experience of the franchisor: The more years that you have operated your business before franchising, the higher your royalty rates can be. f. Franchisees level of sale: You can charge higher royalty rates when the level of sales at your franchisees outlets is higher 3.4.2. Franchise agreement preparation 3.4.2.1. Rights granted The franchisor grants the franchisee the right to use the intellectual property developed by the franchisor. The scope of the rights to be granted is often quite broad and typically includes a set of trademarks, trade dress, the know-how, ongoing technical assistance and access to resources, and the right to manufacture or distribute the franchisors proprietary products and/or branded merchandise. 3.4.2.2. Territory The size of the geographic area granted to the franchisee by the franchisor must be discussed in conjunction with what exclusive rights will be granted to the franchisee with respect to this territory. 3.4.2.3. Services to be provided by the franchisor The franchise agreement should delineate which products/dservices will be provided to the franchisee by the franchisor or its affiliates. 3.4.2.4. Supplying the products In most product-driven franchises, there are proprietary products, which are manufactured or controlled by the franchisor. The franchisee is under an affirmative duty to purchase these products. 3.4.2.5. Franchise, royalty and other fees and reporting The franchise agreement should clearly set forth the nature and amount of fees that will be payable to the franchisor by the franchisee, both initially and on a continuing basis: initial franchise fee, continuing fee, and advertising and promotion fund. The obligations of the franchisee to provide periodic weekly, monthly, quarterly, and annual financial and sales reports to the franchisor should also be addressed in the franchise agreement.

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3.4.2.6. Quality control A well-drafted franchise agreement always includes a variety of provisions designed to ensure quality control and consistency throughout the franchise system. 3.4.2.7. Protection of intellectual property The franchise agreement should always contain a separate section on the obligations of the franchisee and its employees to protect against misuse or disclosure the trademarks and trade secrets being licensed. 3.4.2.8. Termination of the franchise agreement Is the section discussing how a franchisee may lose its rights to operate the franchised business. The obligations of the franchisee must also be clearly spelled out, such as the duty to return all copies of the operations manuals, pay all past-due royalty fees, and immediately cease using the franchisors trademarks. 3.4.3. Franchisee recruitment 3.4.3.1. Industry experience New franchisors probably want to look for franchisees with industry experience which is very beneficial when the franchise is new. 3.4.3.2. Net worth requirements The franchisees initial investment is the amount of money that he or she needs to invest to create the franchised outlet, including the cost of leases, equipment, and inventory to operate a business 3.4.3.3. Psychological attributes Psychological profiling is useful as a selection criterion for franchisors for several reasons. Franchisees need to have the right motivations to be successful. In addition, characteristics such as maturity help them to manage employees and serve customers. 3.5. Mature stage 3.5.1. Monitoring quality 3.5.1.1. Field support Field support personnel are used to act as a liaison between the franchisor and franchisee. The main responsibilities communicating the needs of the franchisees to the company and ensure that company policies are upheld by franchisees.

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3.5.1.2. External service audits To address the rising expense of monitoring, franchisors can also use external audit services or peer review methods, contracting with an outside agency to evaluate franchisee operations. 3.5.1.3. Peer review A peer review is conducted by and between franchisees in the same franchise system. Franchisees visit locations, work in the operation. This method eliminates the problem of limited access afforded to the mystery shopper, who is not able to evaluate back-end operations. 3.5.1.4. Analytical tools Franchisors can develop a set of performance expectations based on the performance of their own stores and compare actual franchisee results to these expectations and develop exception reports. 3.5.1.5. Customer feedback The best way to monitor a franchisees performance is to ask customers whether they are being well served. Customer surveys are also an important marketing and advertising tool. 3.5.2. Monitoring franchisee financial reporting 3.5.2.1. Point of sale (POS) systems The most basic function of the POS system is to capture sales data. The functions may include collecting inventory data or numerous other inputs (e.g. employee information and marketing data). 3.5.2.2. Financial reporting Using analytical tool to monitor franchisees financial reporting is a cost-effective way. Budgets and forecasts make a good benchmark against which you can compare actual financial results. 3.5.2.3. Financial audits Hiring external auditors to audit the financial statements of each franchisee is expensive, but is an effective means of investigating a franchisee that may be inaccurately reporting financial results.

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CONCLUSION In developed countries, franchising has always been considered the fastest growing sector, generating great value and creating millions of jobs. In the United States, retail sales from franchised outlets constitute nearly 50 percent of all retail sales, estimated at over 1,000 billion USD and employing over 10 million people in 2002. The economy of Vietnam is taking big developing step to integrate into the world economy. In that situation, franchising is expected to be one important growth engine to achieve economic development target. Building a franchise system is a challenging task that requires deep experience, systematic approach, and entrepreneurship. However, due to lack of experience and a proper guiding framework, majority of Vietnam franchisors failed to make a successful and large-scale franchise system. Therefore, the thesis Developing your own franchise a framework for Vietnamese franchisors goes into detail solutions for building a franchise system in Vietnam. Using the collection of research methods, basing on objectives and missions of the topic, this thesis goes deeply to make clear the following points: First, the thesis presents the basic theory of franchising as well as providing the key success factors with pratical examples. Second, the thesis analyzed the franchising market in Vietnam in terms of size, potential, and macro environment to show a potential and favorable future for franchising in this market. Third, basing on the evaluation of Vietnam franchisors capability in building franchise systems, the thesis provides a pratical and appropriate framework for would-be franchisors to apply in developing their own systems. Through the researched issues in the thesis, we can see that the success factors for franchising can be combined and categorized into 4 main steps: analyzing concept, operating pilot units, expanding the system and maintain a mature franchise. A framework of these 4

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steps is what Vietnamese entrepreneurs need to build their own franchise system. However, since the knowledge of the writer is limited, so this thesis can not avoid some errors, and the master framework still need adjustment and revision before it can be completely useful to franchisors in real life. I really hope to receive comments, judgments from teachers, friends, and readers so that I can improve my research topic.

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