Franchising Overview

What is Franchising?

A business relationship where an entrepreneur can reduce risk and benefit from the business experience of all members of the franchise system.

Key Parties

Franchisor

The party that specifies the methods to be followed and the terms to be met.

Franchisee

An entrepreneur whose power is limited by a contractual relationship with the franchisor.

Key Terminology

  • Franchise Contract: The legal agreement between franchisor and franchisee.
  • Business Format Franchising: The franchisee obtains an entire marketing and management system.
  • Product and Trade Name Franchising: Granting the right to use a widely recognized product or name.

Pros & Cons of Franchising

Advantages (Pros)

  • Reduced risk of failure
  • Use of a valuable trade name and trademark
  • Access to a proven business system
  • Management training provided by the franchisor
  • Immediate economies of scale
  • A way for an existing business to diversify

Disadvantages (Cons)

  • Misleading or exaggerated earnings claims
  • Restrictions on liquidating holdings
  • Conflicts of interest with suppliers
  • Churning (terminating successful franchises to resell)
  • Encroachment (new outlets too close)
  • One-sided contracts and non-compete clauses
  • Franchisor intimidation

Evaluating a Franchise Opportunity

Key Questions to Ask

Is the franchisor dedicated to the franchise system as its primary distribution method?

Does the franchisor produce and market quality goods/services with established demand?

Does the franchisor have a favorable reputation in the industry?

Will the franchisor offer a well-designed business plan and complete training?

Does the franchisor have good relations with its franchisees?

Does the franchisor have a history of attractive earnings for its franchisees?

Buying an Existing Business

Reasons to Buy

  • Reduce uncertainties vs. starting from scratch
  • Acquire ongoing operations and customer base
  • Potentially lower cost than starting new
  • Get into business more quickly

Due Diligence

The exercise of reasonable care in evaluating a business opportunity. Key areas to investigate:

  • Financial statements & Tax returns
  • Contracts and lease agreements
  • Customer lists and sales records
  • Employee rosters and payroll
  • Supplier/purchaser lists

Comparison: Start Up vs. Purchase vs. Franchise

Factor Start Up Purchase Franchise
Risk of Failure
High
Moderate
Low
Managerial Flexibility
High
Moderate
Low
Future Growth Potential
Unlimited
Unlimited
Restricted
Initial Financial Outlay
Discretionary
Substantial
Substantial
Ongoing Financial Commitments
Nil
Nil
Yes
Ability to Raise External Funds
Poor
Moderate
Moderate

Malaysian Franchise Association (MFA)

Vision & Objectives

Vision: To be the main promoter and mover representing the Franchise fraternity towards making Malaysia the Regional Hub for Franchise Development.

Objective: To unify Franchisors, Franchisees, and support institutions to establish a good image in the business of Franchise.

Main Functions

  • Set and enforce standards of ethical business.
  • Act as a registry for franchise information.
  • Coordinate and offer educational programs.
  • Undertake promotional activities.
  • Liaise with government departments.
  • Serve as a forum for exchange of expertise.
  • Sponsor trade and investment missions.