Franchise Handbook. Prepared By Qatar Development Bank

Transcription

1 Franchise Handbk Prepared By Qatar Develpment Bank

2 Table f Cntents BASICS OF FRANCHISING...3 WHAT IS FRANCHISING?...3 WHY FRANCHISING?...4 BENEFITS OF FRANCHISING...6 Franchisr...6 Franchisee...6 CHALLENGES ASSOCIATED WITH FRANCHISING...7 Franchisr...7 Franchisee...7 TYPES OF FRANCHISING...8 COMPARISON BETWEEN THE DIFFERENT FRANCHISE FORMATS...9 TYPES OF FRANCHISE ARRANGEMENTS...10 BENEFITS AND CHALLENGES OF FRANCHISE ARRANGEMENTS...11 FRANCHISING VALUE CHAIN...12 Key Entities in the Franchising Value Chain...12 FRANCHISE DISCLOSURE DOCUMENT...15 Critical Items in the FDD...18 LEGAL ASPECTS OF FRANCHISING...20 Franchise Law...20 Franchise Agreement...20 Franchise Disclsure Dcument (FDD)...22 Franchise Registratins and Fillings...22 Taxatin...22 FRANCHISE AGREEMENT...23 GUIDELINES FOR FRANCHISEE...24 INVESTIGATING BUSINESS OPTIONS...24 What business shuld the entrepreneur start...24 Determine if there is a market...24 Determine if starting the business is really affrdable...25 Determine if enugh mney can be made t make the venture wrthwhile...26 CRITERIA FOR SELECTING A FRANCHISE...26 The management s abilities...26 Demand...26 Cmpetitin...27 Csts...27 Brand Name...27 Training & Supprt...27 Franchisr s Experience...27 Expansin Plans...27 HOW TO INVESTIGATE A FRANCHISE...28 Finding ut What Franchises are Available...28 Evaluating the Strength f the Franchisr P age

3 BUILDING BLOCKS FOR A FRANCHISEE...31 FRANCHISEE CHECK-LIST...33 Wh are they (Franchisr)?...33 Hw have they (Franchisr) been ding?...33 Hw lng have they (Franchisr) been ding it (Franchising)?...33 What package is n ffer frm the Franchisr?...33 Expansin plans f the Franchisr...35 Verificatin by Franchisee...35 Franchise Fee...35 The franchise agreement / cntract...36 GUIDELINES FOR FRANCHISOR The Business Idea Business in Operatin Planning Stage Implementatin Stage Franchise Launch...40 BUILDING BLOCKS FOR A FRANCHISOR...41 FRANCHISE OPERATING COSTS FOR FRANCHISOR...44 Franchise Expansin Csts...44 Operatinal and Administrative Csts...45 GLOSSARY...46 QDB SUPPORT FOR FRANCHISE BUSINESSES...47 FOR FRANCHISEE...47 FOR FRANCHISOR...48 ANNEXURE...49 Page 2 f 49

4 Basics f Franchising What is franchising? Franchising is a business agreement between tw legally independent undertakings wherein the franchisee secures the license t use the brand and perate a business fr a financial cnsideratin, paid t the franchisr, and as per the terms specified in the franchise agreement. In summary, a franchise business necessarily cmprises f the fllwing 5 elements: 1. A brand name (registered as a brand name and/r a trademark, etc. which serves as the umbrella sign fr netwrk, and a rallying sign fr the cnsumer and public) 2. A license t use the brand, granted t the franchisee by the franchisr 3. A business system a business cncept frmatted int a duplicable value package, funded n the franchisr s tested knw hw and his cntinued assistance during the term f the agreement 4. Payment by the franchisee f a financial cnsideratin, either in a direct frm, such as an entrance/ upfrnt fee and/r cntinuing fee ( ryalty ), and/r an indirect frm such as a mark-up n supplied gds 5. The investment in, and wnership f, the assets f the franchised business by the franchisee It is imprtant t nte that a franchise business is ne, which is replicable in a cntrlled envirnment and hence nt all businesses are franchisable. The fllwing businesses are nt cnsidered replicable and d nt lend themselves t the franchise mdel: Creative business: Businesses, which require particular skills either f a creative r artistic nature that cannt be easily taught r duplicated Technical business: Businesses, which require significant level f knwledge transfer and cnstant flw f knw-hw frm the franchisr t the franchisee, are unlikely t be franchised Page 3 f 49

5 WHY Franchising? Cmparisn between a Franchise and Traditinal Business Mdel Advantages & Disadvantages Particulars Franchise Traditinal Business Business Cncept Prven and ready-made business cncept t start with Business Idea / cncept needs t be tested and validated Operating Mdel (including preperating activities) Marketing Materials and Media Planning Tested streamlined system, Standard Operating Prcesses (SOPs) and in built supprt fr lcatin identificatin, raw material prcurement, equipment purchase, management & staff hiring plans and training prgrams Definite view n start-up csts and ther elements f running the business leading t clarity and ease f capital and financial planning decisins Available tested marketing materials / designs / cllaterals, alng with media planning and executin Centralized marketing and brand develpment activities undertaken by the franchisr leads t reductin f investment f time and cst fr the franchisee fr marketing and brand building related activities Systems, prcesses and plicies need t be develped, designed and executed Lwer degree f clarity n capital investments and ther cst estimates as cmpared t a franchise business Marketing material is t be develped afresh; the entire prcess f branding, media planning and campaign executin is t be undertaken by the business as a self panned and driven initiative Risk Mitigated risk, as the business cncept has been tried and tested earlier in different gegraphies Franchisee has an ptin t d an initial due-diligence by cnnecting with the existing pl f franchisees Severity f risk assciated with business is nt knwn until it is self tested (business intrinsically assumes the risk f failure) Business Guidance Start-up Time Finance Availability Standardized / need based guidance t the business available frm a franchisr n all the aspects f effective management and peratins All the abve listed pints, help in reducing the business start-up time Lending institutins find it relatively easier t finance a franchise business, cnsidering that it is a prven and tested business mdel N such guidance available t the business, unless availed frm external surces (cnsultants, mentrs); generally n a paid basis Typically lnger start-up time when cmpared with a franchise (n a relative basis) Lending institutins are relatively apprehensive in financing an untested / unprven business mdel Custmer Base A franchise has access t a ready-made custmer-base f a successful brand (r) Takes relatively less time t build the custmer-base with the help f a prven system in place It typically takes relatively lng time t build the brand reputatin and crrespndingly the custmer-base Prduct / Service Innvatin Investing in Research & Develpment (R&D) r testing a new prduct / service, is taken care f by the franchisr Time, effrt and mney required fr R&D and launching a new prduct / service has t be brne by the business Page 4 f 49

6 Thugh there are many advantages f establishing a business as a franchise; there are certain disadvantages which als need t be accunted fr Limited Cntrl A franchisee needs t cnduct the business in accrdance with the terms and cnditins agreed in the franchise agreement. Hence the level f cntrl that the franchisee can exert as a business wner is diluted as cmpared t a traditinal business Limited Flexibility The franchisee des nt have flexibility t mdify r change the business mdel r intrduce new prduct fferings unless authrized by the franchisr. Mrever franchisees established with master franchise r area develpment rights have a pre determined cmmitment t scale business t a certain level within a defined perid, failing which the business culd be liable t pay penalties. Starting a purely self wned business ffers greater flexibility t a business wner as cmpared t a franchise Relatively higher investment Starting a business as a franchise invlves an upfrnt franchise fee and n-ging ryalty fees which are nt assciated with a traditinal business. This increases the initial upfrnt investment fr the business. which in the case f a traditinal business wuld pssibly happen in a phased manner Page 5 f 49

7 Benefits f Franchising Franchisr An efficient and effective methd fr business expansin Ability t expand the business with minimal capital investment Assures franchisr f nging incme, even if a few f its units d nt perfrm well Ability t leverage n the lcal expertise available t enter a new market Franchise netwrks can be expanded faster than cmpany run netwrks Greater internatinal ptential, assciated with the deplyment f the system f Master Franchising, by which the franchisr can quickly and simply replicate the whle f its franchise mdel in anther cuntry, leaving the Master Franchisee t adapt the mdel t the lcal market its language, business custms and legal requirement Franchisee An pprtunity fr an individual / cmpany t quickly kick start a new business Availability f a prduct r service with an established brand name, thereby enabling easy access t custmers / cnsumers Increased chances f business success thrugh assciatin with a prven business mdel Active pre-pening supprt in terms f site-selectin, design and cnstructin planning, training, market launch etc. Active n-ging supprt in the frm f training, marketing and advertising, supervisin and managerial supprt, prduct develpment supprt Access t a pl f vendrs / suppliers fr bulk purchasing Page 6 f 49

8 Challenges Assciated with Franchising Franchisr Inability f the franchisr in identifying a prper target market r business partner (franchisee) in ne regin, culd lead t unwarranted impact n the franchisr s brand image and business in the ther regins f peratin as well Franchisrs while dealing with large business grups (as franchisees) will generally tend t have weak bargaining pwer Safeguarding business secrets is key in franchise businesses and any lss f internal intelligence and knw hw, severely impacts the franchisr eventually Franchisee Upfrnt fee assciated with franchising business are usually quite high, limiting SMEs uptake f franchising pprtunities Franchisee s freedm f peratin (in terms f methd and regin/s f peratin, prduct/s / service/s t be ffered and pricing strategy amng thers) is limited and is primarily guided by the franchisr Any deviatins n parameters agreed upn in the franchise agreement, culd lead t penalties fr the franchisee Usually franchisees d nt have much say in relatin t the terms & cnditins included in the franchise agreement In additin t the initial franchise fee, franchisees must pay nging ryalties and advertising fees, which needs t be prvisined fr adequately, alng with perating csts fr running the business Inability n the part f franchisrs and franchisees in meeting the prmised deliverables may have a cascading effect n the brand value and the verall business mdel. Mrever, a damaged, system-wide image can result if ther franchisees are perfrming prly r the franchisr runs int an unfreseen prblem. Page 7 f 49

9 Types f Franchising There are 3 types f franchising mdels with business frmat franchising being the mst cmmn. Type f Franchising Trade Name Prduct Distributin Business Frmat It invlves a brand name, where-in the franchisee purchases the right t becme identified with the franchiser s trade name withut distributing particular prducts exclusively under the trade name. Example: Hardware dealers (True Value Hardware and Western Aut) It invlves licensing the franchisee t sell specific prducts under the brand name thrugh a selective r limited distributin netwrk. Example: Autmtive dealers (Chevrlet and Chrysler), gasline prducts (Exxn and Sunc) and sft drinks (Pepsi Cla and Cca- Cla) It invlves prviding franchisee with a cmplete business frmat, including license fr trade name, prducts / services t be sld, perating methds, strategic marketing plan, quality cntrl prcess, and necessary business services. Example: Fast-fd restaurant (McDnald, KFC) Business Frmat Franchise is cnsidered as the purest frm f Franchising. The grwth f business frmat franchising has far utpaced the grwth in the ther tw frmats. Page 8 f 49

10 Cmparisn between the different franchise frmats Particulars Nature f Franchise Trade Name Prduct Distributin Business Frmat Depth and Detail f Franchise Agreement Lw Medium High Inclusin f Franchisrs Brand Name in the Unit name Brand Name may be used in the Unit Name Brand Name may be used in the Unit Name Unit name has t be the Brand Name Sales f Prducts / Services Nt limited t a particular brand Franchisr s brand Franchisr s brand Onging fees payable by the franchisee Ryalty Payment Ryalty Payment Ryalty Payment + Management fee (fr training and marketing supprt) Degree f Training supprt prvided by Franchisr Level f Operatinal Cntrl Exercised by the Franchisr Lw Mderate High Lw Mderate High Page 9 f 49

11 Types f Franchise Arrangements A franchising arrangement between the franchisr and the franchisee wuld either be structured as a single unit franchise r a multi-unit franchise. Franchisee gets the rights t pen and perate single franchise unit Franchisr Rights t pen multiple units within a particular territry Rights t sub-franchise Takes n sme f the respnsibility f the franchisr; Offers initial supprt and training t the sub-franchisee Receives a percentage f the upfrnt franchisee fee and ryalty fee Franchisee gets the rights t pen and perate multiple franchise units Exclusive rights t develp a particular territry by pening mre than ne units N right t sub-franchise Page 10 f 49

12 Benefits and Challenges f Franchise Arrangements Key benefits and challenges assciated with the Single and Multi-unit Franchise Benefits Challenges Individual / Single Unit Franchise Franchisee gets direct invlvement / attentin f the franchisr; franchisr can exercise better cntrl ver individual units; and thereby enables early identificatin / eliminatin f ptential challenges, if any Ideal fr a business mdel, where quality cntrl is critical (fr example in F&B) Faster way f multiplying the units in the regin as the franchisr is nt limited by the resurces and capabilities f the master franchisee Is cnsidered apt fr individual entrepreneurs / SMEs Franchisr needs mre time and resurces t mnitr all the single unit franchises Usually single unit franchisees are SMEs and lack business sphisticatin, thereby increasing the business risk fr the franchisr Multi-Unit Franchise Ptential fr the franchise unit t break-even faster, due t business expertise and ecnmies f scale enjyed by the master franchisees (primarily established business grups) Franchisr saves n time and resurces as invlvement with individual units is reduced with the help f master franchisee There is n cmpetitin frm the same franchise brand as is the case in a Single Unit franchise, wherein there culd be multiple wners f a particular franchise brand within a designated territry Difficult t get a master franchisee, unless franchisr is a renwned brand The franchisr s bargaining pwer with the master franchisee wuld be lwer as cmpared t a Single Unit franchisee Nt ideal in case the franchisr wants t expand fast within a particular regin Page 11 f 49

13 Franchising Value Chain A typical value chain in franchising Regulatry Framewrk Franchise Agreement Franchisr Business Mdel Prduct / Service, Technical knw-hw Brand Name Training, Prcesses and Resurces Franchisee Prduct / Service Revenues End User / Cnsumer Franchise Fees / Ryalty Financial Institutins, Law Firms, Assciatins, Cnsultants Key Entities in the Franchising Value Chain Brad scpe f wrk undertaken by the key entities in the franchising value chain: FRANCHISOR Identifies prspective market fr the business Identifies ptential franchisees Evaluates franchisee s financial and peratinal capabilities, with respect t the target market regin Utilizes supprt frm Franchise Assciatins / Cnsultants / Financers / Marketing Agencies / Law firms (as per requirement) fr expanding its business and venturing int new markets Prvides nn-financing supprt t franchisee in terms f business planning, training, resurces management, branding / prmtinal activities, infrastructure design and setup Charges an upfrnt franchisee fees and nging ryalties t the franchisee fr rendering the abve listed services Page 12 f 49

14 FRANCHISEE Identifies a brand name / cncept as a ptential business pprtunity Evaluates the lcal market ptential fr the identified brand Cnnects with franchise assciatin / cnsultants / fr nn-financial services required t evaluate and assess the ptential franchising pprtunity Avails supprt frm law firms n the regulatry and legal aspects f the franchise business Invests / Surces capital t pay the upfrnt franchise fee and establish the business unit. Utilizes technical, peratinal, branding and prmtinal supprt frm franchisr Cnducts business using franchisr s trade / brand name and the business mdel defined by the franchisr FINANCING INSTITUTIONS Financial Institutins such as banks and nn-banking financial cmpanies (NBFCs) prvide financing t franchisees fr ne r mre f the fllwing: Fr initial business establishment Business expansin thrugh establishment f new units r acquisitin f existing franchise units Equipment upgrades and stre remdels Wrking capital needs Receivable finance FRANCHISE ASSOCIATIONS Lbbies with Gvernment bdies fr the benefit f the franchise industry Endrses and creates a platfrm fr prtectin and prmtin f scial, ecnmic and ther rights f the Assciatin s members Creates a channel fr distributin f infrmatin abut franchising business pprtunities thrugh structured research Prvides required supprt t franchisees / franchisrs in terms f: Cnducting educatin prgrams, wrkshps, seminars and franchise meets Publishing / release f business / market ptential reprts n a regular basis Prviding match-making services fr franchisees / franchisrs Supprting franchisrs and franchisees in dispute reslutin prcesses Referring franchisees / franchisrs t empanelled cnsultants / firms such as: Financial institutins fr financial supprt Law firms fr legal supprt Cnsultants fr nn-financial supprt (example: market feasibility study) Marketing agencies fr PR and advertising activities Page 13 f 49

15 LAW FIRMS Prvide services t bth franchisrs and franchisees Services prvided by law firms include: Fr the Franchisr Preparatin f Draft Franchise Agreement Legal Guidance n cmpliance with the legal prvisins applicable in a particular cuntry Legal guidance n the prcess f IP registratin in the cuntry f the franchisee Handling legal disputes, if any Fr the Franchisee Review f the Draft Franchise Agreement Advise n critical legal risks Assistance in the prcess f cmpany frmatin and registratin Handling legal disputes, if any FRANCHISE CONSULTANTS Acts as a ne-stp-shp fr franchisrs / franchisees in establishing a franchise business. Prvide the fllwing services n a standalne r cmbined basis: Fr the Franchisr Strategy Planning and Business Plan Develpment Develping Operatinal Plicy and Prcess manuals Web System Develpment, Guidance and Cnsulting Develping Training Mdules Implementatin and executin supprt Cnnect with law firms fr legal supprt Match-making (franchisrs and franchisees) Franchise Sales Training Fr the Franchisee Feasibility Analysis and Business Plan Develpment Cnnect with law firms fr legal supprt Advise n the ptimum financing structure Match-making (franchisrs and franchisees) Implementatin and executin supprt (if required) Page 14 f 49

16 Franchise Disclsure Dcument 1 The purpse f the Franchise Disclsure Dcument (FDD) is t prvide prspective franchisees with infrmatin abut the franchisr, the franchise system and the agreements (which a franchisee needs t sign) s that they can make an infrmed decisin. Many cuntries have disclsure laws which require infrmatin t be prvided t prspective franchisees befre they cmmit t the franchise. The fllwing illustratin classifies imprtant sectinal infrmatin (in a typical FDD) abut a franchise business under 23 different item heads : Item 1 The franchisr and any parents, predecessrs and affiliates: This sectin prvides a descriptin f the cmpany and its histry. Item 2 Business experience: This sectin prvides bigraphical and prfessinal infrmatin abut the franchisrs and its fficers, directrs and executives. Item 3 Litigatin: This sectin prvides relevant current and past criminal and civil litigatin fr the franchisr and its management. Item 4 Bankruptcy: This sectin prvides infrmatin abut the franchisr and any members f management wh have gne thrugh a bankruptcy. Item 5 Initial fees: This sectin prvides infrmatin abut the initial fees and the range and factrs that determine the amunt f the fees. Item 6 Other fees: This item prvides a descriptin f all ther recurring fees r payments that must be made. Cntinued 1 Surce: Internatinal Franchise Assciatin (IFA) Page 15 f 49

17 Item 7 Initial investment: This item is presented in tabular frmat and includes all the expenditures required by the franchisee t make, t establish the franchise. Item 8 Restrictin n surces f prducts and services: This sectin includes the restrictins that the franchisr has established regarding the 'allwed' surce f prducts r services. Item 9 Franchisee Franchisee s bligatins: This item prvides a reference table that indicates where in the franchise agreement franchisees can find the bligatins they have agreed t. Item 10 Financing: This item describes the terms and cnditins f any financing arrangements ffered by the franchisr. Item 11 Franchisr Franchisr s Assistance, Advertising, Cmputer Systems and Training: This sectin describes the services that the franchisr will prvide t the franchisee. Item 12 Territry: This sectin prvides the descriptin f any exclusive territry and whether territries will be mdified. Item 13 Trademarks: This sectin prvides infrmatin abut the franchisr s trademarks, service marks and trade names. Item 14 Patents, cpyrights and prprietary infrmatin: This sectin gives infrmatin abut hw the patents and cpyrights can be used by the franchisee. Item 15 Obligatin t participate in the actual peratin f the franchise business: This sectin describes the bligatin f the franchisee t participate in the actual peratin f the business. Cntinued Page 16 f 49

18 Item 16 Restrictins n what the franchisee may sell: This sectins deals with any restrictins n the gds and services that the franchisee may ffer its custmers. Item 17 Renewal, terminatin, transfer and dispute reslutin: This sectin tells yu when and whether yur franchise can be renewed r terminated and what yur rights and restrictins are when yu have disagreements with yur franchisr. Item 18 Public Figures: If the franchisr uses public figures (celebrities r public persns), the amunt the persn is paid is revealed in this sectin. Item 19 Financial Perfrmance Representatins: Here the franchisr is allwed, but nt required, t prvide infrmatin n unit financial perfrmance. Item 20 Outlets and Franchisee Infrmatin: This sectin prvides lcatins and cntact infrmatin f existing franchises. Item 21 Financial statements: Audited financial statements fr the past three years are included in this sectin. Item 22 Cntracts: This item prvides f all the agreements that the franchisee will be required t sign. Item 23 Receipts: Prspective franchisees are required t sign a receipt that they received the FDD. Page 17 f 49

19 Critical Items in the FDD Item 7: Initial investment: Sme f these csts are averages r estimates and may vary in the area f peratins; it is imprtant fr the franchisee t: Talk t ther franchisees wh have been in the system fr a year r mre t see: Hw much mney they needed in the beginning until they became prfitable Hw much they were able t draw frm the business t supprt themselves Item 11: Franchisr s Obligatins: The franchisee needs t pay particular attentin t thse services the franchisr is bligated t prvide and the services they may prvide. Item 17: Renewal, terminatin, transfer and dispute reslutin: The business shuld take its time t understand what rights they will have and what rights they are giving up. In particular, the business needs t pay attentin t any nn-cmpete prvisins and their r bligatins when the franchise relatinship ends. Item 19: Financial perfrmance representatins: Only 30 t 40 % f all franchisrs prvide prspective franchisees with infrmatin abut financial perfrmance. Item 20: Outlets and franchisee infrmatin: The franchisee must examine hw many units the franchisr has taken back and resld. If this number is high, this culd indicate churning (when the franchisr takes back failed lcatins and remarkets them ver and ver). The business must pay attentin t the cntact infrmatin f the franchisees that have left the system. These are peple a franchisee definitely needs t talk t. Item 21: Financial statements: Financial statements (Balance Sheet, Incme Statement and Cash Flw Statement) are the track recrd f the franchisr. The franchisee shuld be given cpies f the franchisr s last three years financial statements. The business shuld ideally take them t an accuntant wh specializes in franchising t evaluate. The franchisee must remember that the financial cnditin f the franchisr affects its ability t run a financially successful peratin in the future. Item 22: Cntracts: The franchisee must make sure that all the agreements listed are attached t the FDD and that the business has read every ne f them. Page 18 f 49

20 It is imprtant t nte that a franchisr is nt mandated t share a Franchise Disclsure Dcument with a prspective franchisee unless stipulated by law. Under the franchise laws in certain cuntries (fr e.g. USA and Malaysia) franchisrs need t share an updated cpy f the FDD with the prspective franchisee; hwever the same des nt apply in Qatar, nr in any cuntry within the GCC, primarily attributed t the absence f a franchise law in these cuntries It is recmmended that prspective franchisees in Qatar seeking t take up a franchise f a US brand r a brand frm any cuntry where franchising is gverned by a dedicated franchise law shuld seek the FDD frm the franchisr t have a detailed perspective n the franchisr and the business pprtunity itself. Ntably, sme franchisrs ffer a Franchise Prspectus t prspective franchisees t prvide an verview f the franchise business and ther key / related business infrmatin. Irrespective f the type f dcument / infrmatin prvided, a franchisee needs t seek critical infrmatin n the lines mentined abve, prir t establishing a cntractual relatinship with the franchisr. Page 19 f 49

21 Legal Aspects f Franchising There are certain legalities invlved in a franchise business, which a franchisr and a franchisee shuld cnsider as requisites fr establishing and cntinuing a mutually rewarding business relatinship that safeguards the business interests f bth parties (franchisr s and franchisee s). Sme f the critical legal aspects f franchising are discussed in brief in this sectin: Franchise Law Franchise businesses are gverned by the franchise law f the land / cuntry, where the franchise perates. Cuntries such as Malaysia and the United States f America (US) have a franchise specific law, which prvides a rbust legal framewrk fr the franchisrs and franchisees t cmply with. In Qatar (similar t many ther cuntries acrss the wrld (including the GCC), there is n specific law gverning franchises. The implied laws applicable fr franchising in Qatar are based n the existing regulatins within the regulatry jurisdictin f Qatar applicable t cmpany / business peratins. These encmpass the Cmmercial Cmpanies law, Civil law, Agency law, Intellectual Prperty laws etc. Accrdingly, in Qatar against the backdrp f the absence f a franchise law in place; the franchise agreement alng with ther imprtant factrs cvered in this sectin ften becme the key cvenants in gverning the rights and respnsibilities f the parties (i.e., franchisr and franchisee) t the agreement. Franchise Agreement Every franchise must have a franchise agreement that thrughly describes the ffering made t the franchisee. In the absence f a franchise law, the franchise agreement frms the sle cntract (r a legal dcument) between franchisr and franchisee. Hence the franchise agreement shuld cver the fllwing factrs amng thers t prmte and prtect the rights f bth parties and the verall franchise peratin: INTELLECTUAL PROPERTY (IP) RIGHTS REGISTRATION Franchise businesses perate n the premise f cncept uniqueness and hence require the IP rights (such as trademarks, cpyrights, knw-hw, trade secrets and ther intellectual prperty) t be prtected against unauthrized usage. Therefre it is imprtant fr a franchisr t get the IP pertaining t his / her franchise registered with respective Gvernment authrities f the cuntry, where the franchise is (currently) / planning t perate (in the near future). The franchise agreement shuld clearly identify / define the intellectual prperty, alng with the clauses gverning IP usage precisely in terms f the territry, time perid (cmmencement & terminatin date) and renewal. Page 20 f 49

22 In Qatar: The Law n Trademarks, Cmmercial Indicatins, Trade Names, Gegraphical Indicatins and Industrial Designs N. 9 f 2002 grants t wners the exclusive right t use their intellectual prperty. The franchisr can register the trademark under the abvementined law t prtect the franchise brand. The law n Prtectin f Cpyright and Neighbring Rights N. 7 f 2002 cnfers prtectin upn authrs f riginal literary and artistic wrks, irrespective f the value, quality, purpse r mde f expressin f such wrks. Prtected wrks include bks, lectures, musical wrks, phtgraphic wrks and cmputer sftware. Menus fr restaurants f F&B utlets cannt be cpyrighted under the abve mentined law. ANTI-COMPETITION AND PREVENTION OF MONOPOLY Businesses perating in the franchise industry are als gverned by anti-cmpetitin / preventin f mnply acts / laws f respective cuntries, where the franchise perates. In Qatar: Act N (19) 2006 has been enacted fr the Prtectin f Cmpetitin and the Preventin f Mnplistic Practices. The franchisr r franchisee must ensure that their practices d nt classify as mnplistic r restrictive, r else the Cmmittee fr the Prtectin f Cmpetitin and Preventin f Mnplistic Practice may be frced t investigate. ARBITRATION AND MEDIATION As in any business, arbitratin and mediatin plays an imprtant rle between tw parties invlved in a franchise business. Typically a franchise agreement des cntain clauses related t arbitratin and mediatin, clearly defining the prcesses, in the event f a cnflict between the cncerned parties. Sme f the franchise assciatins (in the cuntries where they exist) ffer vluntary arbitratin and mediatin services t its members (franchisr and franchisee). In Qatar, as there is n franchise assciatin r a dedicated entity lking int such matters, hence the franchise agreement shuld include clauses prviding abslute clarity n the mdus perandi t be fllwed fr arbitratin and mediatin related t issues if they arise; in rder t address any pssible elements f cnflict arising between the franchisr and the franchisee Furthermre, the factrs discussed herewith (alng with ther clauses pertaining t varius fees assciated with franchise business, franchise exclusivity, franchise renewal / terminatin, penalty / charges fr nn-cmpliance etc.,) fcus n and accmmdate the specific needs and requirements f the franchise peratin and gvern the relatinship between the parties in a psitive and cnstructive manner. The imprtant pints related t the structure f a franchise agreement are prvided under the Franchise Agreement sectin f this dcument. Page 21 f 49

23 Franchise Disclsure Dcument (FDD) The purpse f the FDD is t prvide prspective franchisees with infrmatin abut the franchisr, the franchise system and the agreements (which a franchisee needs t sign) s that they can make an infrmed decisin. In the US, it is mandatry fr a franchisr t prvide each f its ptential franchisees with a cpy f the FDD, cntaining all f the relevant infrmatin / details abut the franchisr. Details f imprtant infrmatin available in a FDD are discussed in detail under the Franchise Disclsure Dcument sectin f this dcument. Franchise Registratins and Fillings Cuntries (such as Malaysia and sme f the States in America) necessitate the franchisr t register their franchise (in the respective cuntry r State), where the franchisr perates his / her wn utlet r a franchised utlet. Hence it is imprtant fr a franchisee t verify, whether the franchise under cnsideratin is registered with the respective Gvernment authrities, as per the mandatry regulatry envirnment applicable in the hme cuntry f the franchisr. Taxatin Thugh there des nt seem t be any special taxatin plicies fr franchise businesses acrss the wrld, it is imprtant fr franchisr and franchisee t understand the taxatin plicies f the respective cuntries / regin where the franchise perates / will perate. In Qatar: Article 11 f the New Qatari Tax law impses a withhlding tax f 5% f the grss amunt f ryalties and technical fees. The bjective here is that any persn wh pays fees fr services t an entity withut a permanent presence in Qatar will be required t withhld the requisite amunt f funds frm the supplier. Article 12 further prvides infrmatin n hw this tax will be administered. A tax card system will be in place, which all taxpayers in Qatar will have t btain. The bligatin lies n the franchisee t withhld (subject t the prvisins f tax agreements between Qatar and varius ther cuntries acrss the wrld) and remit the amunt t the Ministry by the 16 th day f the calendar mnth fllwing the date f making the withhlding. Page 22 f 49

24 Franchise Agreement In Qatar, there are n specific franchise laws r disclsure requirements fr franchisr t franchisee. As a cnsequence, the franchise agreement frms the sle cntract between the tw parties (franchisr and franchisee) and acts as the sle and unified basis fr any kind f negtiatin r dispute reslutin. The fllwing aspects need t be clearly addressed within the remit, purview and structure f any franchise agreement Clear definitin f franchise business, lcatin and territry? Duratin f the franchise agreement? Clear descriptin f training prvided: type, duratin and cst? Right f renewal r extensin and any cnditins applicable fr this? Clear list f franchisr s bligatins and duties? Clear list f franchisee s bligatins and duties? Terminatin clause fr bth parties? Is there a right t sell r transfer the franchise? Des this require the franchisr s permissin? Is there a fee r cmmissin payable t the franchisr n sale? Cntingency fr lng illness r death? Franchisee s heirs rights n death? Details n number f franchise utlets t be pened ver a definite perid f time with respect t the type f franchise agreement (example Single-Unit Franchise, Multi-Unit Franchise, Area Develpment Franchise r Master Franchise) Can the franchisee carry n any ther / similar business cncurrently? Details n anti-cmpetitin cvenants applicable t the franchise business in the cuntry / regin Details n Arbitratin / Mediatin / Alternative Dispute Reslutin (in built as clauses within the franchising agreement) alng with the applicability and surce f gverning laws? Details f the trademarks, designs, cpyrights, trade secrets, knw-hw and patents relevant t the franchise, alng with legal aspects pertaining t usage f Intellectual Prperty (IP) rights Details f payments t franchisr such as franchise fee, depsit, ryalties, advertising cntributins and any ther payments required? Supplies frm franchisr r independent third party? Details, csts assciated and attributin related t re-branding activities, if any in future (fr example change / renvatin f the franchise utlet, additinal / new prducts & services, perating prcedures, IT system and Marketing & Advertising, etc.). Whether premises are held under lease by the franchisr and if s what is the lease term? Can the franchisee change premises during the term f the cntract? What peratinal cntrls can the franchisee expect frm the franchisr? What are the prcedures fr managing underperfrming franchisees? Details n penalty clauses and liquidated damages assciated with nn-cnfrming parties (bth franchisr and franchisee)? Details f liquidatin damages Frce Majeure cnditins and implicatins n the applicable terms f the agreement Page 23 f 49

25 Guidelines fr Franchisee Investigating Business Optins 2 Regardless f whether the entrepreneur chses t remain an independent business wner r becme a franchisee; research is the single mst imprtant activity in the decisin making prcess. The key aspects t be answered are depicted in the fllwing illustratin. what Business? Is there a market? Can yu affrt it? Can yu make enugh mney t make it wrthwhile? What business shuld the entrepreneur start Smetimes peple start a business because they think they ll make a lt f mney, nly t find ut that they d nt enjy the business. An entrepreneur shuld start a business in an industry that he / she will enjy and plan t be in fr at least next 10 t 15 years. The entrepreneur needs t ask him / herself: What they like t d? (interest and hbbies) D they knw hw t d? (experience) What d they d well? (special skills and talents) Which industry(s) invlve their interests and use their skills and talents? What prducts r services culd they sell in this industry(s)? Wuld they rather sell a prduct r service? What prducts r services wuld they like t sell the mst? Determine if there is a market 2 Surce: Internatinal Franchise Assciatin (IFA) Page 24 f 49

26 All successful businesses must: Satisfy a need r Slve a prblem r Respnd t a trend Befre starting any business, it is critical fr the entrepreneur t determine if there is a market fr the prduct r service. Accrdingly, it is imprtant t undertake cmprehensive market research cvering: Hw many ptential custmers are in the area? Will the prduct r service sell? What need des it satisfy? What prblem des it slve? What trend r fad des it address? What shuld the apprpriate pricing be? Wh are the key cmpetitrs? Hw many cmpetitrs are there? What d they ffer? Hw will the prduct r service be unique? What marketing niche can the business capture? Determine if starting the business is really affrdable In rder t start a business, the entrepreneur has t have mney and in rder t stay in business, he / she needs t make mney. The single mst cmmn reasn new businesses fail is that they did nt have enugh mney t begin with. Csts t cnsider: Estimating start-up csts related t: Lcatin design and cnstructin Prfessinal fees Equipment and fixtures & furniture Opening inventry and supplies Insurance Pre-pening cst (labr, advertising & prmtin etc.,) Estimate wrking capital needs (the mney required until the business becmes prfitable, which includes the entrepreneur s living expenses, if necessary): Salaries Insurance Utilities Advertising Rent Page 25 f 49

27 Interest n a lan, if applicable Assess, evaluate and identify the surces f funding: Yurself Family & Friends Savings and investments A partner Selling persnal assets Lans Determine if enugh mney can be made t make the venture wrthwhile Estimate the prfit ptential fr the business: Incme Expenses Prfit The entrepreneur / ptential franchisee must think abut the amunt f time and energy it will take t make the business successful. He / she must make a decisin as t whether enugh mney can actually be made t make the entire venture wrth the time and energy invested. Criteria fr Selecting a Franchise 3 A franchisee shuld cnsider the fllwing critical success factrs, befre cmmitting t a franchise business: The management s abilities D the entrepreneur and / r his key team have the technical skills r experience t manage the franchise? D the entrepreneur and / r his key team have the business skills t manage the franchise? Demand Is there enugh demand in the area fr the business s prducts r services? Is the demand year-lng r seasnal? 3 Surce: Internatinal Franchise Assciatin (IFA) Page 26 f 49

28 Will the demand grw in the future? Des the prduct r service generate repeat business? Cmpetitin Hw much cmpetitin des the business, including ther franchisees? Are the cmpeting cmpanies/ franchises well established? D they ffer the same prducts and services at the same r lwer prices? Is there a specialty r niche that the business can capture? Csts Hw much mney will this franchise cst befre it becmes prfitable? Can the entrepreneur affrd t buy this franchise? Can the entrepreneur make enugh mney t make the investment wrth the time and energy invested? Brand Name Hw well knwn is the franchise name? Des the franchisr have a reputatin fr quality? Is there any litigatin against the brand in any cuntry that culd be detrimental t the lcal peratins? Training & Supprt What kind and hw much training and supprt des the franchisr prvide? D existing franchisees find this level f training and supprt adequate? Franchisr s Experience Has the franchisr been in business lng enugh t have established the type f business strength that the entrepreneur is seeking? Expansin Plans Is the franchisr planning t grw at a rate that is sustainable? Page 27 f 49

29 Hw t Investigate a Franchise 4 Like starting any business, buying a franchise invlves risk. Studies shw that successful franchisees: Cnduct their wn marketing research Use their wn financial and legal advisrs Develp thrugh marketing and business plans Have prir wrk experience in the industry Prspective franchisees must devte a vast amunt f time researching the franchises available and evaluating the strength f the franchisrs thrugh: Finding ut What Franchises are Available Reading Articles and Ads in Business Publicatins Inc. : Entrepreneur : Franchise Times : Franchising Wrld : Franchise Update : Attending Trade Shws and Expsitins Reginal and internatinal trade shws, franchise exps, etc., Researching the Internet startup.wsj.cm 4 Surce: Internatinal Franchise Assciatin (IFA) Page 28 f 49

30 Evaluating the Strength f the Franchisr INVESTIGATE THE FRANCHISOR S BUSINESS STRENGTH Hw lng has the franchisr been in business? Hw many current franchisees are there? What is the failure rate f the franchisees? Are there any pending r past lawsuits and what have they been fr? Des the franchisr have a reputatin fr quality prducts r services? What is the franchisr s financial health? Credit rating, if available Prfitability Reputatin What are the financial perfrmance representatins? On what are they based? Are the prjectins based n the franchisr r franchisee-run centers? Hw lng have the centers used fr prjectins been in business? What is the backgrund f the principals / management? What is their business experience? Have they persnally had any bankruptcies? Have they persnally had any recent litigatin? OBTAIN PROFESSIONAL ADVICE CONCERNING THE FDD AND FRANCHISE AGREEMENT The ptential franchisee must seek the advice f a legal firm / advisr / cunselr, wh specializes in franchise advisry, at this stage and pay special attentin t: Csts Agreement tenure and renewal prvisins and cnditins Terminatin clauses Franchise territry (if any) Prcedures and restrictins Training and assistance Financial perfrmance ptential - grss sales, net prfit Expansin plans f the franchisr: Hw fast d they plan t grw? Where d they plan t grw? D they have a business plan fr the ptential franchisee s area r lcatin? What is their analysis f the cmpetitin in the ptential franchisee s area? Hw many units are being planned fr the ptential franchisee s area? Hw much is ging t be spent in reginal advertising in the ptential franchisee s area? Page 29 f 49

31 TALK WITH EXISTING FRANCHISEES The ptential franchisee must try and schedule a meeting with existing franchisees and emphasize n understanding the fllwing: Level f training Quality f prducts r service Level and prmptness f supprt Operatins and quality f the peratins manuals Financial perfrmance histry / claims Any prblems r difficulties with the franchisr Anther key cmpnent f the due diligence prcess by the ptential franchisee is t visit / talk with franchisees wh have left the system and find ut why they left VISIT THE FRANCHISOR S HEADQUARTERS The entrepreneur as part f the due diligence prcess must als try and rganize a visit t the franchisr s headquarters, where the bjective shuld be t: Meet the supprt team Review the peratins manuals WORK IN AN EXISTING FRANCHISE It is advisable that the entrepreneurs try and wrk in an existing franchise t get t knw the system, manuals, training prgram, supprt, earning ptential, etc. Page 30 f 49

32 Building Blcks fr a Franchisee In rder t ensure success fr any franchising venture, it is imprtant t build a strng fundatin by emplying a rbust and step wise framewrk fr franchise identificatin and peratin. There is a step wise prcess that needs t be emplyed (sequentially) in rder t identify and set up a franchise business. The essential building blcks fr a franchisee are as fllws: 1. Educatin & Training It is the first and mst imprtant step fr an entrepreneur befre they plan t be cme a franchisee Ptential and existing franchisees shuld develp a sund understanding f the basic and specific cncepts f franchising thrugh self educatin r attending franchise specific trainings and wrkshps 2. Franchise Opprtunity Identificatin Ptential franchisees shuld fllw a scientific / ratinal methd t identify a suitable franchise pprtunity thrugh a rbust prcess f franchisr due diligence (as detailed in the previus sectins) 3. Evaluating Market Ptential & Feasibility Ptential franchisee shuld evaluate the lcal market ptential and business feasibility (befre signing the franchise agreement and paying any kind f franchise fee t franchisr) fr the franchise under cnsideratin In rder t understand the market ptential, it is advisable that franchisees cnduct a thrugh market, technical and financial feasibility fr the planned venture either internally r thrugh prfessinals cnsultants 4. Legal Advice If the utput f the feasibility study is psitive, the franchisee shuld seek advice frm a legal cunsellr / firm specialising in franchise advisry t understand and ratify the legal cvenants f the franchise agreement Cntinued Page 31 f 49

33 5. Means f Finance Like any ther cnventinal business, a franchisee requires finance fr business set up A franchisee culd finance its franchise utlet/s thrugh a cmbinatin f wned capital, funds brrwed frm friends & family and / r cnventinal bank financing 6. Establishing Franchisee Unit Fr pening a new franchise unit, a franchisee needs t identify & secure unit lcatin, plant & machinery, raw material suppliers and manpwer, amngst ther imprtant activities Even thugh it is in the best interest f a franchisr t assist his / her franchisee in the abve listed, it is imprtant that a franchisee must knw befre hand (prir t signing the franchise agreement) the level f supprt available frm the franchisr in this regard It is a fundamental aspect f a 'business frmat' franchising, that a franchisee learns and imbibes a tested business mdel 7. Training Prgram A franchisee requires training fr managing the business (management training) and fr its emplyees / perating staff; this entails requisite trainign n peratinal, technical and management aspects) A franchisee shuld ask fr and seek all the essential training (initial / nging) frm the franchisr 8. Onging Supprt / Mentring 9. Dispute Reslutin The advantage f being in a franchise business is access t / availability f nging supprt and mentring frm the franchisr It is in the best interest f bth a franchisr and a franchisee and hence a franchisee shuld always take the advantange f the franchisr's prven business expertise and experience in the field and specific t the franchise business In the event f any kind f differences / dispute arising between a franchisr and a franchisee, an amicable reslutin methdlgy shuld be adpted Thugh the franchise agreement includes clauses gverning dispute reslutin, the issues culd be settled utside a frmal curt f law such as Arbitratin & Dispute Reslutin Cell (fr example the Dispute Reslutin Department under Qatar Chamber f Cmmerce) Page 32 f 49

34 Franchisee Check-List 5 The fllwing checklist presents a summary f the key aspects that a franchisee needs t validate prir t cmmitting t a franchise arrangement (details f these aspects have been cvered in previus sectins f this dcument) Wh are they (Franchisr)? Franchisr s sharehlders histry? Franchisr s fficers and directrs? Hw have they (Franchisr) been ding? Franchisr s financial health histry? Franchisrs mst recent audited accunts? Hw lng have they (Franchisr) been ding it (Franchising)? Hw lng has the franchisr been perating? Hw lng has the franchisr been ffering franchises? Des the franchisr have a reputatin fr quality prducts r services? Number and identity f current franchisees? Can the entrepreneur chse which franchisees t talk t? Have any franchisees been terminated and if s, why? Are there any pending r past lawsuits and what have they been fr? What package is n ffer frm the Franchisr? What are the initial fees, ryalties and management fees payable? What is the typified Return n Investment and des it justify time & effrt investment and pprtunity cst fregne? Are there realistic predictive financial mdel available, based n the franchisr s experience / research? What is the ttal cst breakdwn f starting a franchise under the franchisr s business mdel? What is the ttal wrking capital required? What is the liquid capital required by the franchisee, net f brrwings? Is the franchise agreement term lng enugh t enable financial returns? Is there any infrmatin n any grants / financial supprt (fr example emplyment grants) available? Is there ready access t infrmatin n lending packages frm banks available t franchisees? 5 Surce: Irish Franchise Assciatin Page 33 f 49

35 Has the franchisr dcumented a cmprehensive step-by-step guide t delivering the business mdel, within the remit f the peratins manual? Has the franchisr clearly utlined the specificatins f all equipment, ingredients etc., needed in the delivery f the ffer? Are there the requisite details n required quality standards, available? Are there details n setting up f the supply chain fr the franchisee including apprved suppliers / vendrs? Has the franchisr clearly defined its franchisee selectin criteria? Hw des the franchisee recruitment prcess wrk? What type f initial supprt will their franchise supprt ffice prvide? What type f nging supprt will their franchise supprt ffice prvide? What type f initial training will the franchisr prvide? What is the duratin and cst assciated? Is supprt / training nging r nly at the initial stage? Is nging training cmpulsry? Is additinal training prvided and at what additinal cst? What types f training facilities are available? Hw des the training wrk? Des the franchisr train the franchisee and the Franchisee s staff r des the franchisr train the franchisee t enable him / her t train their wn staff? Is the business a sustainable pprtunity r is it shrt-term / seasnal in nature? Is the business mdel legal in Qatar? Are there any aspects f the business (prducts / services) illegal / nt allwed / banned in Qatar? Des the franchisr prvide pre-pening supprt / assistance? Des the franchisr prvide a turn-key pprtunity whereby they prject manage the fitut f the unit befre the franchisee cmmences peratins? Des the franchisr prvide n-site pening assistance? Des the franchisr wn / rent the premises? Will the franchisr specify the layut and design f the premises? Will the franchisr prvide initial advertising / marketing assistance? What are the details f the assistance t be prvided Will the franchisr prvide nging advertising / marketing assistance? What are the details f the assistance t be prvided What is the franchisr s rganizatinal structure and what resurces are dedicated t the franchise rllut prgram? What are the franchise perating hurs? What is the typical pricing ratinal / methdlgy? Are there any territrial and perating restrictins in place? Is there enugh understanding n aspects related t Intellectual Prperty prtectin and licensing (fr example Trademarks registratin and usage restrictin in the cuntry / regin etc.,) Des the franchisr hld franchisee frums? If s, hw ften and where? Page 34 f 49