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The Millennium University

College
Finance In the Hospitality
Industry

What is franchising?
A franchise operation is a contractual
relationship between the franchisor and
franchisee in which the franchisor offers or is
obliged to maintain a continuing interest in
the business of the franchisee in such areas
as know-how and training; wherein the
franchisee operates under a common trade
name, format and/or procedure owned or
controlled by the franchisor, and in which the
franchisee has or will make a investment in
his business from his own resources.

Franchising
Franchising
A marketing system revolving around a two-party
agreement, whereby the franchisee conducts business
according to the terms specified by the franchisor.
Franchisee
An entrepreneur whose power is limited by a contractual
agreement with a franchisor.
Franchisor
The party in the franchise contract that specifies the
methods to be followed and the terms to be met by the
other party.

TYPES OF FRANCHISE
Product distribution franchise;
Business format franchise; and
Management franchise.

PRODUCT DISTRIBUTION
FRANCHISES

A product distribution franchise model is


very much like a supplier-dealer
relationship.
Typically, the franchisee merely sells the
franchisors products. However, this type
of franchise will also include some form of
integration of the business activities.

PRODUCT DISTRIBUTION
FRANCHISES
Examples of famous product
distribution franchise:

PRODUCT DISTRIBUTION
FRANCHISES

Sells the
syrup
concentrate

FRANCHIS
EE
Restaurant
s etc

Produces the
syrup
concentrate

Retail
Stores

Produces the
final drink

Vending
Machine
Operators

BUSINESS FORMAT
FRANCHISING
In a business format franchise, the
integration of the business is more
complete.
The franchisee not only distributes the
franchisors products and services under
the franchisors trade mark, but also
implements the franchisors format and
procedure of conducting the business.

BUSINESS FORMAT
FRANCHISING

BUSINESS FORMAT
FRANCHISING

MANAGEMENT
FRANCHISE
A form of service agreement.
The franchisee provides the management
expertise, format and/or procedure for
conducting the business.

MANAGEMENT
FRANCHISE

United Parcel Service

Advantages of Franchising
Buying a name/reputation
Established markets
Technical/management assistance
Standardized procedures
Quality standards
Selection of location
Facility design
Quicker cash flow

Disadvantages of Franchising
Loss of independence
High initial fees
High royalties and advertising allowances
Contractual restrictions
Termination clauses
Not receiving promised help
Lack of competitive advantage of parent company

WHY FRANCHISE?
Franchises offer important pre-opening support:
site selection
design and construction
financing (in some cases)
training
grand-opening program

WHY FRANCHISE?
Franchises offer ongoing support
training
national and regional advertising
operating procedures and operational
assistance
supervision and management support
increased spending power, access to bulk
purchasing

FranchisorFranchisee relationship

Regulated by contract which usually


covers:
Initial fee
Royalty fee/Management fee
Capital required from franchisee
Territory/Area of operation
Duration of license and renewal
Termination

Common considerations of
franchises
Demand
Profitability of franchise, and length
of time required to recoup
investment
Track record of franchisor
Support rendered to other franchises

Common Mistakes of Prospective


Franchises
Not reading, understanding and/or asking
questions about the franchisee agreement
and other legal documents.
Not understanding the responsibilities of a
franchisee and the rights and obligations of a
franchisor.
Not analyzing the local market in advance.
Not analyzing the competition.
Not choosing the right location.

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