A Primer on Franchising for the Clueless Student

IKEA, Prima Deli, and 7-Eleven: what do these household names have something in common?

Revealing answer in 3… 2… and 1

They’ve all adopted franchise systems! IKEA Singapore is managed by the Ikano Group, for example, and they hold the franchise rights for Malaysia and Thailand too. Interesting, isn’t it? Have you been interested to find out more about franchises?

What is Franchising All About?

Whenever we see XX or YY’s opening yet another outlet, we often guess that it might be a franchise business. That’s the extent of most individuals’ knowledge, however, so we embarked on a mission to better understand how franchising works.

Franchising, in the words of the British Franchise Association, entails a franchisor (the parent company or established business) granting the franchisee (the individual or prospective business owner) a license, “which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor”.

Franchising offers a win-win solution for both the franchisor and franchisee if both sides fulfil their responsibilities and maintain a good working relationship. The franchisor is able to enjoy greater market presence, cost-effective expansion, royalty payments and more, while the franchisee is able to tap into the franchisor’s brand awareness and expertise (see more below).

Examples of Well-Known Franchises in Singapore

1. Subway

Subway (currently) has over 60 outlets islandwide. According to their website, initial franchise fees range between 10,000 – 15,000 USD. Thereafter, franchisees will have to pay 12.5% of their gross sales every week (minus sales tax). 8% will go towards the franchise royalties and the remaining 4.5% towards advertising.

2. Ya Kun Kaya Toast

Ya Kun Kaya Toast operates franchise outlets both locally and overseas, in 11 other Asian countries. The beloved toast and coffee joint offers a franchise package that includes the rights to operate their concept, marketing and PR support, as well as on-going support and training.

3. Cheers

Cheers is a 24-hour convenience store chain under NTUC Fairprice, which launched Cheers’ franchise programme in 2013.  Franchisees will take over stores that Cheers operates first for a minimum of 1 year. Cheers Franchisees are required to be 25 years old and above, and should also be managing their own businesses on a full-time basis.

4. Mr Bean

Mr Bean has over 60 stores in Asia, and offers franchisees “on-going support in areas including, but not limited to Training, Store development and design, Operations, Marketing, Logistics and Financial analytics”. Mr Bean also loans franchisees their operating manuals.

Why Do Many Choose to Operate Franchise Businesses?

Young entrepreneurs and first-time business owners tend to find franchises appealing for a few reasons. Firstly, a franchise company can be set-up much quicker and at a lower cost—even after paying the franchise fee. This is because franchise businesses are adopting a business idea that has already been tried, tested, and developed. Franchisees also receive support from the parent company in the form of training, national advertising and marketing campaigns, product research and development, as well as established business relationships (especially important when it comes to suppliers and distributors). It’s a good way to venture into business even with little business experience.

That isn’t to say that there aren’t any disadvantages, however! The buying of a franchise means that franchisees enter into a formal agreement with their franchisor, which means that the former must adhere to the rules and guidelines of the latter or risk losing their license. This control can be exerted on everything from operating hours and minimum number of staff, to product pricing and outlet location. If you want to exercise creativity, a franchise really isn’t an option for you.

In exchange for all the support provided, franchisees will also need to pay franchisors an agreed upon portion of their profits monthly (royalty fees), and possibly a marketing fee. Another concern would be reputational damage; if the franchisor or another franchisee does something that has negative repercussions (e.g. stale ingredients leading to food poisoning), profits can take a dive through no fault of the franchisee’s own.

Key franchise terminology/jargon

If we’ve piqued your curiosity about franchising and you’re about to find out more about it yourself, here’s a quick list of important terms to know.

  • Master Franchisee

    • If you’re a Master Franchisee, you hold a Master Franchise contract and are a mini-Franchisor of sorts. Essentially, you have acquired the right to sell franchises on the franchisor’s behalf in another country or territory. The franchises you sell to are known as sub-franchisees.
  • Franchise Disclosure Document (FDD)

    • As there is no franchise disclosure law in Singapore this applies more to the USA and other countries, where law dictates that an FDD must be provided during the pre-sale due diligence process. There currently is no legal definition of franchising and/or a franchise under Singapore law.
  • Business Format Franchising

    • This is the kind of franchising talked about in this article. There is also Traditional Franchising, which focuses on product distribution.
  • Turnkey (Franchise/package)

    • The franchisor provides the franchisee a unit that’s ready for immediate use, where all that’s required is to ‘turn the key’.

How do I start narrowing down franchisors to work with/start the process?

Buying a franchise is a big investment, and it should only be done after a sufficient amount of due diligence and research. With so many options, how does one start narrowing things down?

The first tip from many franchisees and business gurus may come off as obvious, but it definitely makes a whole lot of sense: you’re about to invest a lot of resources (aka time and money) into this business so choose a product or service that you’re interested in, and which suits your skill set.

One good way to scout for potential franchisors is to head down to a franchise fair, such as the annual Franchising & Licensing Asia Fair. Fairs like these bring together a diverse range of franchisors across product and service categories (examples include childcare, jewellery, and legal services), along with chances to speak to franchisors directly. This is pretty important: as the founder of local vegetarian chain Greendot attests, a long lasting franchisor-franchisee relationship needs both parties to share similar lifestyles and values, and be able to grow as a team.

You’ll get to network at fairs, too, and learn more about the franchise industry through the seminars and workshops held during such events.

More Resources

With that, here are some useful articles to help you learn more about franchising!

  • iFranchise Singapore
    • The site has articles about franchising and interviews with franchisors/franchisees that are worth a read.
  • Franchising and Licensing Association Singapore (FLA Singapore)
    • FLA Singapore was one of the founding members of the World Franchise Council, and they currently have 130 member companies representing over 170 brands. Its directory provides a good launchpad for franchise scouting.
  • MoneyDigest’s article on how to finance your first franchise

We hope we’ve shed some light on the world of franchising and unravelled some of your puzzlement. If there’s any franchisor or franchisee out there reading this, we’d love to speak to you and share your experiences with our readers!

 

Do you know Digital Senior has just set up a new Facebook group ? Join UniKakis Facebook group to ask questions and engage in discussion!

LEAVE A REPLY