• FRANCHISING AND
LEASING
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ByAdvitya
Abhishek Arora
Ankit Saini
CONTENTS
Describe the significance of franchising
Identify the major advantages and
limitations of franchising
Discuss the features of franchising
Describe the franchisor/franchisee
relationship.
Franchising Terms
• Franchising
 A marketing system revolving around a two-party legal
agreement, whereby the franchisee conducts business
according to the terms specified by the franchisor
• Franchise contract
 The legal agreement between franchisor and
franchisee
• Franchise
 The privileges conveyed in the franchise contract
Contd…
• Franchisee
 An entrepreneur whose power is limited by a
contractual agreement with a franchisor
• Franchisor
 The party in the franchise contract that specifies the
methods to be followed and the terms to be met by the
other party
Types of Franchises
• Product and Trade Name Franchise
Grants the right to use a widely recognized
product or name
• Business Format Franchise
Provides an entire marketing system and
ongoing guidance from the franchisor
• Manufacturing Franchising
Grants manufacturer the rights to produce and
sell goods using name and trademark
Features of Franchising
• A license
• A shared development and improvement
obligation
• Franchisor’s right to define rules regarding
operations
Two parties and agreement
Specified period
Support system
The Advantages of Franchising
(Franchisor)
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Financial assistance
Operating assistance
Strategic
Administrative
Research and development
Cost saving
Risk reduction
Financial Assistance
• Start-up business costs are normally high
and thus by teaming up with a franchise
organization, the individual can increase
her/his chance of receiving financial help.
• The franchisor might chose to use liberal
payment schemes to the franchisee in
order to get over the initial financial hurdle.
Operating Assistance
• The franchisor provides a range of
operating services including site selection,
bulk purchasing of equipment, and
inventory.
• Other areas of assistance include the use
of an established, nation-wide brand
Disadvantages
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Capital investment share
Risk (Goodwill)
Undue influence
IPR Risk (intellectual property rights)
Shared profit
Reduction in control
Pros and Cons of Franchising
(Franchisee)
 Advantages
– Probability of success
 Proven line of business
 Pre-qualification of
franchisor
– Training
 Franchisor-provided
– Financial assistance
 Franchisor assistance
 Lesser risk
– Operating benefits
 Franchisor-aided
 Limitations
– Franchise costs
 Initial franchise fee
 Investment costs
 Royalty payments
 Advertising costs
– Restrictions on Business
Operations
– Restricted profits
– Transfer of goodwill
– Loss of independence
LEASING
-A contractual arrangement
DEFINITION
It is a contractual arrangement calling for
the lessee (user) to pay the lessor (owner) for use
of an asset.
Lessor and Lessee - Meaning
• The Lessor is the legal owner of the asset.
• The Lessee obtains the right to use the asset in
return for rental payments
Elements of a Lease Agreement
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Names of the parties
Object Being Leased
Specific consideration
Other Conditions
Termination Clause
• Date and duration of
the agreement.
• Conditions for
renewal or nonrenewal
• Security deposit and
its return
Sample Lease Agreement
Types of Lease
1. Operating Lease
2. Finance Lease
Operating Lease vs. Finance Lease
Operating lease
Finance lease
Lessor is the legal and the
economic owner
Lessor is the legal owner
Lessee is the economic owner
Risks and rewards associated
with the asset not substantially
transferred
Risks and rewards associated
with the asset are substantially
transferred
Risks include losses due to idle capacity, technological obsolescence & changing
economic conditions. Rewards include expectation of profitable operation over economic
life of asset and gain from appreciation in value or realization of residual value.
Source: Accounting Standard 19 issued by the Institute of Chartered Accountants of India
Advantages of Leasing
• No Large Outlay – The cost is spread over a number of
years
• Security – The asset is owned by the lessor therefore, no
further security needed
• Tax Advantages – Lease rental costs are often tax
deductible
• Budgeting -
Lease agreement is almost always a fixed contract,
it is relatively easy to budget and forecast with.
Disadvantages of Leasing
• No Ownership
• Long Term Expense – Cheaper in short term, more
expensive in long term
• Maintenance – Even though you don’t own it, maintenance is
still your responsibility
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FRANCHISING
VS.
LEASING
DIFFERENCES
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FRANCHISING
Right to use the brand name. •
Good working relationship
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between both parties.
Proper training from
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franchisor.
Money paid as royalties.
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Includes securities laws and •
legal formalities.
LEASING
No right to use the brandname
Good relationship is not
necessary.
No training from parent
company.
Money paid as leasing cost.
Simple contract or agreement.
CASE STDY-1
MCDONALDS
MCDONALDS
• Founded by Dick and Mac in 1940 in California.
• Ray Kroc a Chicago based salesman realised
the potential.
• The best way was- FRANCHISING!!!
• Today 70% stores are franchised.
….contd
• First outlet opened in Basant Lok, New Delhi in
1996.
• Potential franchisers must have atleast liquid
assets of $750000 (4,80,00,000 INR).
• In addition franchise fees $45000 (2880000 INR)
• 4% monthly service fees on gross sales
• And a certain percentage as rent.
Figures speaks…
CASE STUDY-2
AMUL
AMUL
• AMUL(Anand milk federation union limited) was
found in 1946 at Anand in Gujarat.
• It is owned by Gujarat co-operative milk
marketing federation ltd(GCMMF).
• It has a annual turnover of $3.4 billion
dollars(21,67,07,330 INR).
• More than 6400 outlets of Amul.
Contd…
• Franchisee requires 300sq feet of area at
a premium location.
• Approx investment of 5-10 lacs.
• Training, renovation,designing done by
franchisor.
• No royalties.
FIGURES SPEAKS….
THATS ALL FOLKS!!
THANK YOU!!