4381338 Etr Chapter 8 English

FRANCHISING BUSINESS

CHAPTER 8

OBJECTIVES  Understanding

the definition of Franchising concept and Franchise Act 1998.  History and evolvement of Franchise in US & Malaysia  Understanding of basic concept of Franchise  Types of Franchise  Advantages and disadvantages of Franchise

Introduction The word franchise originated from French word – franco means Freedom. Franchise is used as a strategy to penetrate local & international markets. Eg. McDonald’s, KFC, Burger King & 7-Eleven after taking control of local market (USA), Americans franchaisors spread their businesses to global markets.

Franchise History • • •

•

Franchise business started in Europe 100 years. Franchise biz. expanded rapidly in the USA especially in fast-food industry in 1950s. 1955 – Ray Kroc started franchising ‘McDonald’s’ by giving his idea to McDonald brothers, Richard & Maurice McDonald in California. 1955 – Harland Saunders started KFC in Kentucky.

Franchise History  Ray

Kroc markets McDonald’s by emphasizing the aspects of Quality, Service, Cleanliness & Value (Q,S,C & V).  1961 – Kroc established Hamburger University in Illinois as a learning & training centre for food franchisee & restaurant managers. (5,000 per year intake in 2005).  1985 – there are 250,000 American franchise outlets throughout the world (foods, automotives, hotels etc.) 17% growth annually. In Japan, sales through franchise US$150 billion, 7% growth.

Franchise in Malaysia  Franchise

biz in Malaysia started in 1940s through companies like Bata, Singer, Shell & BP.  In 1970s & 1980s witnessed a rapid growth in franchising biz when A&W, KFC & McDonald’s spread to Malaysian soil.  1990s franchise system of doing business got the attention of the government & Malaysians.  1992 – Government established “Franchise Development Programme”.

Franchise in Malaysia Three parties/bodies that actively promote franchise business in Malaysia; 1) Franchise & Vendor Unit at the Ministry of Entrepreneurship & Cooperatives Development. 2) Perbadanan Nasional Berhad (PNS). (MoF) 3) Malaysia Franchise Association (MFA). Together, they conduct training, courses, seminar, exhibitions to expose & encourage entrepreneurs to enter into franchise businesses. 

Franchise in Malaysia  1998

– the government introduced Franchise Act to monitor & supervise franchise business activities in Malaysia.  Section 6 of the Franchise Act 1998 requires that every franchaisor should be registered with the Registrar of Franchise (RoF).

Franchise in Malaysia  As

at May 2006, there are 268 franchisors registered with the RoF. (103 foreign & 165 local). Industry Category, 29.1% food & beverage, 16.0% apparel & accessories, 12.7% services & maintenance.

FRANCHISE CONCEPT A

form of business that involves the distribution & marketing of products or services through a main company called Franchisor (owner who gives franchise right) and Franchisee (a person who receives franchise right).  The right given; the use of name & brand based on a pre-set system, predetermined location within a specified period.

Franchise Definition  ‘Franchise

is a form of business where a franchisor gives permission & right (brand, logo, patent, trademark, formulae, recipe, techniques, standard operation procedure -SOP) to be used by a franchisee to operate a business in return for a franchise fee & royalty’.

FRANCHISE DEFINITION SECTION 4 FRANCHISE ACT 1998  Franchisor

(franchise owner) gives the right to the franchisee (franchise holder) to conduct & manage a business;  Franchisor gives the right for the franchisee to use intellectual asset;  Franchisor has the right to perform a continuous monitoring and inspection;

Cont…  Franchisor

is responsible in assisting the

franshisee;  Franchisee must pay the franchising fee, royalties and other fees; and  Franchisor and franchisee are two separate entities and are NOT a partnership business.

Process of selling a franchise A

franchisor can expand his business faster through franchising system.  A franchisor who wants to sell his franchise has to;  Be a registered franchisor (Sec. 6, FA1998) unless he has exemption under sec. 58 of FA1998.  Foreign franchisor must at least open his ‘prototype outlet’ for a minimum of 3 years.

Process of selling a franchise A

franchisor can expand his biz through appointing ‘master franchisee’ who in turn will appoint his ‘sub-franchisees’. A master franchisee also has an option to open his own branches of outlets.  A sub-franchisee, also known as unit franchisee is not permitted to appoint another sub-franchisee, however he is encourage to open more than one outlet of his own if the demand is high.

Process of selling a franchise  Eg;

how Kenny Rogers International expand its biz in Malaysia. KRI appoints Berjaya Roaster Sdn Bhd (BRSB) as its master franchisee. BRSB opens 20 outlets of their own. BRSB also appoints 10 sub-franchisees operating in KL, Selangor, Sabah & Sarawak.

TYPES OF FRANCHISE  1)

BUSINESS FORMAT FANCHISE  Franchisee is given the right to duplicate the entire business system (operation, training, accounting, tradename, logo, promotion etc.) used by the franchisor.  This is the most popular type on franchising that is being acknowledged & supported by the government’s Franchise Development Program.  Eg. McDonald’s, KFC, PizzaHuts, Marrybrown.

TYPES OF FRANCHISE  2)

BRAND NAME or TRADE MARK FRANCHISE  Franchisor gave the right to use the name, brand, trade mark & logo that enables the franchisee to produce a product in a certain region.  Franchisee does not need a complete system & business concept as of business format franchising.  Eg; Company A uses cartoon character Doremon or Walt-Disney to produce children’s clothing.

TYPES OF FRANCHISE  3)

FRANCHISE BY CONVERSION  An existing company of a particular industry being invited to be a part of the Franchisor’s chain of network.  The appointed Franchisee will change the brand name or trade mark to that of the Franchisor’s.  Eg. Syarikat Madani Greatlink Sdn. Bhd. is a private car distributor in Banting, Selangor that was given the right to distribute Proton cars by Proton Edar to the public.

See you again next week To

Muslims; happy fasting. Selamat Berpuasa.

RESPONSIBILITIES OF FRANCHISOR & FRANCHISEE  FRANCHISE

BIZ WILL RUN SMOOTHLY IF BOTH FRANCHISOR & FRANCHISEE KNOW THEIR OWN JOBS & RESPONSIBILITIES WELL.  IF ANY PARTY IGNORE THEIR RESPONSIBILITIES, THE RELATIONSHIP WILL BE STRAINED & TURN SOUR (BAD).  IF PROBLEM IN RELATIONSHIP CONTINUES, SOONER OR LATER THE RELATIONSHIP WILL END. FRANCHISE CONTRACT WILL BE TERMINATED.

RESPONSIBILITIES OF FRANCHISOR & FRANCHISEE  BOTH

SIDES WILL SUFFER LOSSES. FRANCHISOR WILL LOSE HIS REPUTATION & FRANCHISEE WILL LOSE HIS INVESTMENT.  SO, BOTH PARTIES MUST CARRY OUT THEIR RESPONSIBILITIES TO AVOID PROBLEMS.  SECTION 30 OF FRANCHISE ACT 1998 EXPLAINS CLEARLY THE RESPONSIBILITIES OF FRANCHISOR & FRANCHISEE.

RESPONSIBILITIES OF FRANCHISOR  SINCE

FRANCHISOR SELLS HIS BIZ SYSTEM TO OTHERS, HE BEARS BIGGER RESPONSIBILITIES.  FIRSTLY, HE HAS TO PREPARE A COMPLETE WRITTEN ‘FRANCHISE PACKAGE’ SO THAT IT CAN BE APPLIED & PUT INTO OPERATION BY HIS FRANCHISEE WITHOUT PROBLEMS.

RESPONSIBILITIES OF FRANCHISOR  ‘FRANCHISE

PACKAGE’ IS DIVIDED INTO 2 PARTS;  1) PROMOTION PACKAGE  2) OPERATION PACKAGE

1) PROMOTION PACKAGE  PROMOTION

PACKAGE IS PREPARED BY A FRANCHISOR TO PROMOTE HIS BIZ SYSTEM TO POTENTIAL FRANCHISEE.  IT HELPS POTENTIAL FRANCHISEE UNDERSTAND THE SYSTEM BETTER. IT EXPLAINS THE JOBS & RESPONSIBILITIES OF BOTH PARTIES & REQUIREMENTS TO MAKE THE BIZ A SUCCESS.

1) PROMOTION PACKAGE  PROMOTION

PACKAGE CONTAINS 2 IMPORTANT DOCUMENTS;  a) DISCLOSURE DOCUMENT  b) FRANCHISE AGREEMENT

a) DISCLOSURE DOCUMENT  Section

4,FA1998 explains in details some important information franchisor should include in Disclosure Document. (Background; Management team & Staff; Court action & proceeding against franchisor; Bankruptcy; Franchise fee & other fees; Financial obligation franchisee has to fulfilled; Initial investment by franchisee; Obligation on franchisee to buy/rent materials & equipments from a particular parties; ……

a) DISCLOSURE DOCUMENT  ….

Obligation on franchisee to buy/rent materials & equipments according to standard & specifications; Financial facilities; responsibilities of franchisor before & during operation of biz; Exclusive territorial right; Trademark & Intellectual Properties; Patent & Design; Requirement to concentrate on biz; Forbiddance on selling other products; Renewal, termination, buyback, modification of agreement; ……..

a) DISCLOSURE DOCUMENT  ….

Other information about franchisor’s biz; franchisor’s financial statements; any awards & recognitions won by franchisor; certification by franchisor to offer his franchise system to franchisee)

b) FRANCHISE AGREEMENT  ANOTHER

FRANCHISOR’S IMPORTANT RESPONSIBILITY IS TO PREPARE A FRANCHISE AGREEMENT (FRANCHISOR BEARS THIS COST).  SECTION 18 (5). COST OF PREPARATION OF THE AGREEMENT CAN BE TAKEN PARTLY FROM A FRANCHISEE IF A FRANCHISEE TERMINATE THE CONTRACT DURING THE “COOLING OFF PERIOD”

b) FRANCHISE AGREEMENT  SO

IMPORTANT IS THE “FRANCHISE AGREEMENT”, FA 1998 PROVIDES ELEVEN SECTIONS UNDER PART III TO EXPLAIN SOME OF THE MAIN POINTS IN THE AGREEMENT.  SEC 18–REQUIREMENTS OF FRANCHISE AGREEMENT; S.19–PAYMENT OF FRANCHISE FEE; S.20 – PROHIBITION AGAINST DISCRIMINATION; S.21–PAYMENT OF ROYALTY; S.22 –PROMOTION FUND; S.23 – PROMOTION FEE …….

b) FRANCHISE AGREEMENT  ….SEC

24- REGISTRATION OF TRADEMARK & SERVICE MARK; S.25 – DURATION OF FRANCHISE; S. 26 – CONFIDENTIALITY OF INFORMATION; S.27 – PROHIBITION ON SIMILAR BUSINESS; S.28 – WAIVERS VOID (ANY STIPULATION IN FRANCHISE AGREEMENT PURPORTING TO BIND A FRANCHISEE TO WAIVE COMPLIANCE WITH ANY PROVISION OF FA1998 IS VOID).

b) FRANCHISE AGREEMENT  INFORMATION

& PARTICULARS CONTAINED IN “FRANCHISE AGREEMENT” WILL OVERRIDE THOSE IN “DISCLOSURE DOCUMENT” SHOULD THERE BE ANY CONFLICT OR DISCREPENCY BETWEEN THE TWO (DISCLOSURE DOCUMENT & FRANCHISE AGREEMENT).

2) OPERATION PACKAGE  SECOND

PART OF FRANCHISE PACKAGE IS OPERATION PACKAGE (1ST IS PROMOTION PACKAGE). IT COMES IN THE FORM OF MANUALS (BOOKLETS OF WRITTEN INSTRUCTIONS).  INSTRUCTIONS IN MANUALS ARE WRITTEN IN DETAIL, CLEAR & PRECISE MANNER SO THAT EVEN INEXPERIENCED FRANCHISEE CAN REFER, ADAPT & OPERATE THE SYSTEM WITHOUT PROBLEMS OR MISTAKES.

10 MANUALS  “OPERATION,

TRAINING, MARKETING, ADVERTISING, FIELD SUPPORT, QUALITY CONTROL, PRE-OPENING, LOCATION CHECK, REPORTING, AND CRITERIA TO SELECT A LOCATION”.

RESPONSIBILITIES OF FRANCHISEE  FULL

COMITMENT TO THE OPERATION & MANAGEMENT OF THE BUSINESS  COMPLIANCE OF BUSINESS METHOD/SYSTEM  RECRUITMENT & TRAINING OF STAFF  PAYMENT OF FEES, ROYALTIES & SALARIES  PROTECT THE BUSINESS GOOD NAME  GOOD CONDUCT

RESPONSIBILITIES OF FRANCHISEE  ALSO

VERY IMPORTANT FOR A FRANCHISEE TO MAINTAIN A GOOD WORKING RELATIONSHIP WITH HIS/HER FRANCHISOR.  GOOD & CLOSE RELATIONSHIP REDUCES POTENTIAL CONFLICTS BETWEEN FRANCHISEE & FRANCHISOR.  IN MALAYSIA, MOST CONFLICTS OR DISAGREEMENTS BETWEEN THE TWO ARE SOLVED THROUGH ARBITRATION.

ADVANTAGES OF FRANCHISE BUSINESS TO THE FRANCHISOR  1)

Growth cost is lower – Franchisor can grow & expand his business at a lower cost. Franchisor does not need to spend money on renting premises, searching for good locations, paying staff salaries, buying fixed assets etc. (cost are borne by franchisee). So growing & expanding business through other people.

ADVANTAGES OF FRANCHISE BUSINESS TO THE FRANCHISOR  2)

Lower Number of Workforce/Staff. – A franchisor does not have to hire large number of staff. Every franchisee will hire their own staff. Franchisees are responsible to manage, control & pay their own staff.  3) Purchasing in bulk – franchisor can get cheaper supplies by buying in greater quantity or amount.(he then distributes to his franchisees).  4) Centralized advertising & promotion will reduce operation cost.(both share the costs).

ADVANTAGES OF FRANCHISE BUSINESS TO THE FRANCHISEE  1)

System of Business that is proven Successful – franchisee gets a chance to use an established brand name & a systematic business model. Product is easily acceptable to customers because it is already well-known locally & internationally. Franchisee only needs to follow the system & maintains its good reputations.

ADVANTAGES OF FRANCHISE BUSINESS TO THE FRANCHISEE  2)

Does not require experience – to be a franchisee, experience is not the main criteria. What is more important is full commitment, confidence, ability to raise capital & ability to follow instructions. New & inexperience franchisee will get training & support until he can run the business successfully by himself. Eg, McDonald’s franchisee will have to undergo a 6 months training before being allowed to be a franchisee.

ADVANTAGES OF FRANCHISE BUSINESS TO THE FRANCHISEE  3)

Standardized Quality Control – Franchisee has a chance to market high quality products. Franchisor emphasizes on product quality. Franchisor ensures products’ quality by providing continuous training, constant monitoring through scheduled visits & inspections, and making sure that franchisee follows strictly to the instruction in the manuals. Eg. Fast-food industry is famous with QSC (Quality, Service & Cleanliness).

DISADVANTAGES OF FRANCHISE BUSINESS TO FRANCHISOR  Self

Owned vs. Franchise Units – Owning & operating the business yourself is better in term of commitment to fulfill your mission & vision. If you franchise your business, franchisee’s commitment is based on contract period (usually 5 years), franchisee might not want to continue his commitment after that. If the business is selfowned, commitment towards set strategic objectives will continue.

DISADVANTAGES OF FRANCHISE BUSINESS TO FRANCHISOR  Difficulty

in selecting a good franchisee – Not easy to get a good franchisee, most of them are inexperience, lack of capital & unmotivated. Very difficult to know who has the correct attitude to be a good franchisee.  Communication – if communication between franchisor & franchisee is not good, the probability of the relationship to turn sour is high. Eg. If franchisee does not report honestly the monthly sales, franchisor might become suspicious.

DISADVANTAGES TO FRANCHISEE  Capital

too high – becoming a franchisee is more expensive than starting up your own business. Many fees: Franchise Fee, royalty, Advertising & Promotion fees, training fees, administration & management fees etc.  Eg. Marrybrown; start-up capital RM450,000 & franchise fee RM60,000 apart from advertising & administration fees every month.

DISADVANTAGES TO FRANCHISEE  Fail

to become a profitable business. Despite all the efforts, good system, famous brand name etc., franchisee sometimes cannot make profit, his sales cannot cover the expenditures. Business will also fail if franchisor does not deliver his duties & responsibilities.

DISADVANTAGES TO FRANCHISEE  Termination

of Contract/Agreement. Franchisee is exposed to contract termination even though his duration is not yet over. Under Section 31 FA 1998, a franchisor can terminate the contract if a franchisee fails to comply with any terms of the agreement or if a franchisee fails to remedy the breach committed by him or his employees. So if the relationship between franchisee & his franchisor is not good, a franchisor can find a lot of reasons to end the contract.

CONCLUSION  Franchising

is the easiest way to become an entrepreneur (provided you have the capital).  The government of Malaysia encourages franchise as the “engine of growth” to the development of the country’s economy, this provides a lot of opportunities to the locals.