Lesson: Franchising

OBJECTIVES:
At the end of this lesson, the student should be able to:
1. Understand franchising as a means for business expansion.
2. Understand the role of intellectual property in franchising.
3. Understand why franchising works.

LESSON

MODULE 1
Introduction

A business that is bringing in profits and that has captured the interest of a market will
naturally seek to expand. Franchising is one of the fastest growing and popular strategies for
business expansion. It is where a person (franchisor) who has developed a certain way of doing a
business gives another (franchisee) the right to use that business model in exchange for a fee.
Along with the right to use the business model the franchisor will license to the franchisee
the intellectual property rights and know-how associated with that business as well as provide
training and support to the franchisee. In essence, a successful business is being replicated and
run by entrepreneurs who are called franchisees under the supervision, control and assisted by the
owner of the business model, the franchisor.

What is a franchise?
Franchising is where a person (franchisor) who has developed a certain way of doing a
business gives another (franchisee) the right to use that business model in exchange for a fee. The
business has built a certain reputation and has brand recognition.
In essence, a successful business is being replicated and run by entrepreneurs who are
called franchisees under the supervision, control and assisted by the owner of the business model,
the franchisor.

IP issues in franchising
Along with the right to use the business model the franchisor will license to the franchisee
the intellectual property rights and know-how associated with that business as well as provide initial
and ongoing training and support.
The intellectual property rights that are licensed in a franchising arrangement almost always
include trademarks, copyright and often include trade secrets, industrial designs and patents -
depending on the nature of the business.
One could say that franchising is a special type of licensing arrangement in that it involves
the right to use a business model which necessarily includes the right to use the intellectual property
rights integral to that business along with support, training and mentoring.

The Franchise Agreement

The Franchise Agreement (FA) is the legal document that binds the franchisor and the franchisee
together. Because so many franchisors, industries and range of investments are possible, there are
different types of franchise arrangements available to a business owner.

2 Types of franchising arrangements:

1. SINGLE UNIT FRANCHISE– Single Unit Franchise (or Direct Unit Franchise) is the most
traditional and historically the most common form of franchising. Franchisor grants to an entity
 (the franchisee) the right and obligation to establish and operate one franchise. The
franchisees have to invest their own capital and apply their own management skills (generally
hands-on)

2. MULTI UNIT FRANCHISE- Franchisor grants to an entity (the multi unit franchisee) the right
and the obligation to establish and operate more than one franchised unit. The multi unit
franchisee agrees up front to open a specific number of locations during a defined period of
time. The multi-unit franchisee must have the financial and managerial capability to develop
multiple units itself.

A. AREA DEVELOPMENT FRANCHISE - This type of franchising arrangement is similar to

the multi unit franchise- the franchisor grants to an entity (the area developer) the right and
the obligation to establish and operate more than one franchised unit. The area developer
agrees up front to open a specific number of locations during a defined period of time
within a defined area.
B. MASTER FRANCHISE - Franchisor grants the right to an entity (the master franchisee) for
a specific country, region or continent, empowering the master franchisee to provide the
full range of products and services of the franchisor through sub-franchising, in just the
same way that the franchisor runs its own business. The master franchisee, in addition to
having the right and obligation to open and operate a number of locations in a designated
area, also has the right (and sometimes- obligation) to recruit other franchisees. In effect,
the master franchisee becomes sort of a franchisor to those franchisees who join the
system through its master franchise.

What is included in the Franchise Agreement?

 Terms of Agreement
The FA carries a contract explanation detailing the type of relationship a franchisee is
entering into with the franchisor. Since a franchise relationship is temporary in nature, the FA
should specify how long the agreement will last. At the end of that appointed period, the
franchise is considered null and void.
 Renewal
Renewal periods grants the franchisor the chance to review the FA thus enabling him to
decide whether to renew the agreement or not. The franchisee’s good performance is the
most common of all criteria. However, a renewal does not guarantee the retention of the
original terms and conditions of the agreement. If applicable, a renewal fee is also charged
by the franchisor.
 Termination
The FA carries in it the grounds for termination of the contract. In some cases, violations of
such conditions may still be remedied, however if repeated over time or failure to act on
them will still lead to termination of the contract.
 Fees
This part of the FA explains the due cost and date a franchisor is to be paid. Included in
these fees are franchise fees, royalties and marketing contribution. The initial franchise fee,
which may be non-refundable, is paid at the start of a franchise relationship thus giving the
franchisee the right to engage in the business using the franchisor’s name and business
system.
 Territory
The Territory determines the geographical boundaries a franchisee may operate, or within
which no other unit of the franchisor’s businesses may compete.
 Purchase of Products
 Products and supplies used in the franchise system should maintain consistency. Hence the
FA specifies that the franchisee may only buy from suppliers accredited by the franchisor. A
detailed list of approved suppliers is also provided in the Operations Manual.

Normally, this contract or the agreement obligates the businessman to some combination of the
following:
1. To make a minimum investment of money
2. To obtain and maintain a standardized inventory and/or equipment package
3. To maintain a specified quality level of performance
4. To follow specified operating procedures and the promotional efforts of the parent firm
5. To pay royalty or franchise fees
6. To engage in a continuing business relationship

While this may seem excessively binding upon the franchisee, the franchise contract usually puts a
similar responsibility on the franchisor.

The franchisor usually guarantees the franchisee some combination of these elements:
1. Use of the company name
2. Use of identifying symbols, designs, and facilities
3. Professional management and employee training
4. Wholesale prices on specific merchandise
5. Financial assistance (of various types)
6. Continuing aid and guidance

Example of a Franchise
.
Jollibee and several variants of the mark are registered trademarks in the Philippines and many other Asian
countries, and also in the United Kingdom of Great Britain and Northern Ireland, the United States of America and
Europe. Today, Jollibee Foods Corporation uses six different brands (including “Jollibee” for its core fast food business;
“Greenwich” for its pizza and pasta chain, and “Chowking” for its oriental food outlets). It owns many trademarks
including “Bee Happy”, “Yumburger”, “Chickenjoy” and “Amazing Aloha” and has registered all of its logos, some of them
in several countries.

Jollibee Foods Corporation relies on a franchising model for the operation of about half of its outlets in the
Philippines. In order to protect the company’s high quality and service standards, potential franchisees must conform
to a specific profile (self-driven entrepreneurs with good management skills, good community standing and excellent
interpersonal skills). Successful franchising applicants undergo a three-month, full-time Operations Training Program
(BOTP) at a designated training restaurant; this necessary in order for the franchisee to run a successful restaurant
operation.

Support for franchisees does not end there however: Jollibee also provides advice and assistance with
restaurant layout and design, equipment specifications, furniture and fixtures, and construction management. Jollibee
field personnel provide consulting services once the outlets are operational. Additional support to franchisees is
provided in the form of creative advertising and marketing programs, product development, and manufacturing and
logistics facilities.

The Jollibee Word, Logo and Mascot are registered trademarks of Jollibee Foods Corporation