CHAPTER 11 Flashcards
(17 cards)
Name the forms of licensing
Chains: A chain is where identical businesses use the same products,
services, advertising and logo etc. However, it is different to a franchise
system in the sense that each individual location is owned by the parent
company. Example: Woolworths
Right to use a trade mark: The owner of the trade mark (licensor) grants
the user (licensee) the right to exploit a trade mark commercially, in return
for which certain fees are paid (royalties). Example: Samsung South Africa
• Concessions: (1) The licensor grants the licensee the right to sell the
licensor’s products or services in a given location. (2) The licensor grants the
right to sell a particular range of products or services in an existing retail or
business outlet. Example: N4 Toll Route is a build, operate and transfer (BOT)
toll road
• Dealerships: In a dealership, the manufacturer grants a second party, the
dealer, the right to sell the manufacturer’s products within a given area. The
dealer gets the exclusive rights to a specific territory and the right to operate
under the manufacturer’s trademark. Example: Leo Haese granted the right by
BMW South Africa
Licences: A licence agreement confers on the licensee the right to
manufacture, sell or use something which is the exclusive property of the
licensor. The licence agreement normally stipulates an exclusive territory in
which the licensee can exercise this right. Example: Motor vehicle
manufacturers (Nissa
Define franchising
A franchise is a grant by the franchisor to the franchisee entitling the latter to
the use of a complete business package containing all the elements necessary
to establish a previously untrained person in the franchise business, to
enable him or her to run it efficiently and profitably on an ongoing basis
according to the guidelines supplied (FASA 2022).
• In principle, franchising is suitable for any kind of business system. Today,
some of the most important franchises are connected with fast food, motor
products and services, cleaning services, building and home services,
business services and fast printing, education and training, entertainment
and recreation, health and beauty care, and property service
The following characteristics of franchising are important:
• Franchising involves an ongoing activity.
• Franchising exercises a measure of control over the business system.
• “Goodwill” may be described as the benefit and advantage of a good name,
reputation and connection of a business.
• The intellectual property of the franchisor is made available to the
franchisee.
The important concepts of franchising are
• The franchisor: This is classified as the organisation that owns the
franchising concepts.
• The franchisee: The franchisee is the entrepreneur who buys a franchise
from the franchisor and who will in most cases operate the business.
• Master franchising and franchisee: The master franchisee reaches an
agreement with the franchisor to produce and market their product, service
or trade name, as with a traditional franchise agreement. However, the
master franchisee also receives franchise fees and royalties from this area
directly.
The important concepts of franchising are:
• The franchise contract: This contract specifies all the terms on which the
relationship between the franchisor and the franchisee is based. It helps both
parties to know what the terms of the relationship are, and serves as a legal
document if any disputes should arise.
• Royalties: They are the monthly fee that the franchisee has to pay the
franchisor for the right to operate the franchise.
• The marketing fee: It is used to finance the advertising campaigns of the
franchise business.
• The franchise fee: This fee is a lump sum payment that the franchisee pays
to the franchisor when they sign the franchise contract. The franchisor uses
this money to finance the opening of the new franchisee’s business.
Some of the major advantages of developing franchises within the emerging
entrepreneurial sector can be summarised as follows:
Emerging entrepreneurs, especially in rural areas, enjoy far greater consumer loyalty
than can be found in traditional trading areas.
• Although the process of transferring the necessary skills is a much more intense and
costly affair, the system’s standards and adherence to it are seldom questioned.
• The selection of management and operational staff in the operations of emerging
franchisees is a more efficient process because of the virtual absence of cultural and
communication gaps.
• The aspirations and expectations of emerging entrepreneurs are generally modest,
thus reducing pressure on the profitability of the business during the early day
There are three types of franchises available in South Afri
Dealership: The manufacturers use franchises to distribute their product
lines. In essence, they act as the retail store for the manufacturer and may be
required to meet quotas laid down by the manufacturer. Example: Car
industry
• Business format franchising: The most common type of franchise is the one
that offers a name, image and method of doing business. Example:
McDonald’s
• Services: These franchises have established names, reputations and
methods of doing business. Example: Pam Goldin
Advantages from the franchisee’s viewpoint
A proven business model. Unlike a truly independent entrepreneur, a
franchisee need not prove the viability of the concept.
• Market-tested products and services. The franchisees benefit from this as
they do not have the change or adapt products at their own expense.
• Start-up assistance. This support includes assisting franchisees with
various factors, like site selection and pre-opening publicity and marketing.
Ongoing assistance. The franchisor will provide the franchisee with ongoing
assistance in all aspects of operations.
• Advertising and purchasing. The franchisor will operate an effective
marketing programme from which all franchisees benefit.
• Easier-to-obtain finance. Business successes are far more favourable for
franchised operations than their independent counterparts, making financial
institutions and investors more likely to invest.
• Built-in customer base. Franchisees benefit from a customer base that has
been exposed to the concept, unlike a traditional entrepreneur who has to
introduce a new business concept
Disadvantages from the franchisee’s viewpoin
Increased set-up costs. Established franchisors insist that certain minimum
standards of furnishings, fittings and equipment be maintained. This may
increase the initial cost of setting up.
• Ongoing royalties and advertising fees. Franchisees must understand that
the royalties and marketing fees are part of the monthly fixed costs.
• Rigid operating procedures. For individuals who thrive on experimentation
and innovation, this may be a bitter pill to swallow.
• Bad decisions by the franchisor. The franchisee will also be affected by a
damaged brand name if the franchisor makes a mistake or if many
franchisees within the same franchise system are closing their doors.
Advantages from the franchisor’s viewpoint
• Rapid expansion. Rapid growth is more likely with franchisees providing
the start-up capital and assuming responsibility for day-to-day operations.
• Dedicated owner-operators. Since franchisees invest their own money,
they are usually far more committed to the long-term success of the business
than could be expected from a salaried branch manager
Disadvantages from the franchisor’s viewpoint
• High operating costs. It is costly to set up and operate an effective head
office structure – a vital component in the long-term success of any franchise.
• Reduced income per unit. The franchisor’s income is usually limited to a
percentage of the franchisees’ sales.
• Restrictions on freedom to act. Unlike entrepreneurs who go it alone,
franchisors accept money from others and promise them a blueprint for
success in return
The role of the franchisor
To select the best qualified franchisees who understand the franchise’s concept,
products and/or services and are committed to operating the system according
to the established standards.
• To protect the franchisor’s brand and reputation by enforcing system
standards in all company-owned and franchised locations and to ensure that
the brand is not damaged in any way.
• To make changes to the system’s product and/or services mix when
necessary to meet consumer demand and provide the adequate training to
the franchisees • To enhance and improve the operating system when necessary and to
provide training in this regard.
• To provide franchisees with training for use with their teams to ensure that
all unit staff understand their role in the franchised operation and have the
skills to be effective in performing their job responsibilities and duties.
• To develop and enforce advertising, promotion and merchandising standards,
as appropriate, that reinforce the franchise’s brand image and increase
customer traffic
The role of the franchisee
• The franchisee should conduct the franchised business strictly in accordance with
the established standards that were laid out in the operating manual.
• The franchisee and/or his or her employees are obliged to undergo training by the
franchisor in the business system.
• The franchised business is usually conducted from premises that have been
approved by the franchisor. The premises must be maintained in a good and clean
condition.
• The franchisee is not allowed to advertise or conduct promotional marketing
activities without the prior written approval of the franchisor. The franchisee is
obliged to use and display the franchisor’s point-of-sale advertising or promotional
material.
• The franchisee is also obliged to allow the franchisor at all reasonable times to carry
out such inspections or investigations that may be considered necessary for the
purposes of ascertaining whether the provisions of the agreement are being
complied with
The protection of the franchisor’s intellectual
property
The franchisee not only obtains the right to use the franchisor’s trademarks
but is obliged to do so.
• The franchisee may not divulge, or allow to be divulged, to any person any
aspect of the business system, the know-how or the trade secrets other than
for the purposes of the franchise agreement.
• The franchisee undertakes to protect and promote the goodwill associated
with the franchised business. All goodwill generated by the conduct of the
franchised business will be to the benefit of the franchisor
11.12.4 Restraints of trade on the franchisee and the
franchisor
The franchisor may also place restraints on the franchisee with regard to products
and sales. The KFC franchisee may, for example, be obliged to buy the chicken from
the franchisor or another supplier designated by the franchisor. The franchisee may
be obliged to carry on business only in certain products and services.
• Other restraints may relate to the franchisee’s right to advertise, or to competition
(e.g. the franchisee is not allowed to have an interest in a business that competes
with the franchised business) during the term of the franchise agreement or for a
certain period of time after its termination.
• Restraints of trade are also placed on the franchisor. The purpose of these restraints
is usually to offer the franchisee protection against competition by the franchisor or
third parties. If the franchisee is granted an exclusive territory, the franchisor may be
obliged not to operate, or grant any other person the right to operate, the same
franchise within that territory
Payment obligatio
In addition to the financial obligations incurred when the franchise is
established (such as the buying of equipment and products and obtaining
premises), the payment obligations of the franchisee usually include an
initial lump sum to the franchisor at the conclusion of the contract and
royalties payable periodically during the term of the agreement.
• The lump sum payment is usually an initial payment for the rights agreed to
in terms of the agreement and for the equipment, advice, assistance and
training provided by the franchisor to enable the franchisee to establish the
business.
• In addition to the royalties, the franchise agreement may also provide for
additional levies related to specific services provided by the franchisor.
Termination of the agreement
Franchise agreements may provide for the termination of the contract after a
time period (for example, five years) or on the death, insolvency or incapacity of
the franchisee.
• The contract may also provide that on the death of the franchisee, the franchisor
may approve the transfer of the franchised business to any of the beneficiaries of
the deceased franchisee. They will be required to assume the management of the
franchised business as soon as they have bound themselves to observe the terms
and conditions of the franchise agreement.
• Franchise contracts often oblige franchisees on termination of the contract to not
participate directly or indirectly in the management or control of a concern that
conducts business in the nature of, or similar to, the franchised business for a
certain period of time. The former franchisee is also obliged not to disclose
confidential information or other trade secrets of the franchis
