1. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
A Simple Guide to FranchisingA Simple Guide to Franchising
28 Feb 2013
Joel Silverstein

2. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
1
What is Franchising?What is Franchising?
• A way of doing business – a business model.
• A business relationship whereby the owner of a business assigns to
independent people/companies the right to market and distribute the owner’s
goods and services and use the business name for a fixed period of time in a
fixed territory.
• The Franchisor (business owner) provides a licensed privilege to do
business plus offers assistance in organized training, merchandising and
management, in return for fees from the contracting agent (franchisee).

3. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
2
Franchising vs. LicensingFranchising vs. Licensing
LicensingFranchising
•Disney characters
on clothing
Examples of LicensingExamples of Franchising
•Special patent to
make detergent
•Tutor Time
•Lawn Doctor
•Jan-Pro
•Molly Maid
•Cartridge World
•McDonald’s
•Smoothie King
•KFC
Licensing is commonly thought of in a
more restricted sense such as offering
specific trademark or technical know-
how for a fee consideration.
Franchising is the licensing of a
complete business service or model.

4. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
3
Franchising is Big BusinessFranchising is Big Business
–5000+ concepts
–400,000 franchise units
–30%+ Growth per year
–Less than 5% of retail sales
–US$750 Billion
–800,000 franchise units
–8 Million people employed
–50% of retail sales
–3.5% of GDP
ChinaUnited States

5. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
4
Example: Global Consumer FoodserviceExample: Global Consumer Foodservice
• Large Regional Franchisees
– Alsea SA de CV (Latin America)
– AmRest Holdings SE (Eastern Europe/Russia)
– Americana Group (MENA)
– MH Alshaya Co (MENA/UK)
– Autogrill SpA (Italy)
• Franchising is main growth model for top 20 global chains
• Heavily concentrated in QSR (fast food) sector
• Bi-polar global market - $35,000+ per capita GDP and under $10,000 per
capita GDP. USA/Europe vs. emerging markets China/India/Latin America.

6. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
5
Why Franchise?Why Franchise?
• You want to expand your business rapidly to gain market dominance and
share before your competitors.
• You have insufficient capital to expand your business and franchising allows
for expansion with other people’s money without taking on heavy bank loans
or other investors.
• You have a simple operating model with low investment and good returns
even allowing for franchise fees and royalty payments.
• You have a unique service which meets a specific consumer or business
need and lends itself to a small business setup.

7. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
6
Conditions for a Successful Franchise ModelConditions for a Successful Franchise Model ––
Emerging MarketsEmerging Markets
• Strong unit level economics.
• Payback of investment within 3 years or less.
• Low investment cost.
• Small retail footprint.
• Concept that fills a strong lifestyle or business need.
• Simple operations/simple training systems
• Easy to control the goods or service critical to the business model.
• Affordable to the broad middle class/scalability.

8. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
7
What is special about emerging markets?What is special about emerging markets?
• Importance of social networks
• Turbulent business environment
• Government and business corruption
• Lack of rule of law
• Limited property rights
• Credit constraints

9. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
8
• Consequences for the Franchisor
– Franchisee reluctant to reveal actual sales to avoid taxes/hard to charge
royalties
– Franchisee looking to buy goods cheaper from other sources
– Need to have a business where the Franchisor supplies the goods and
services at a profit vs. standard western forms of royalty as % of sales.
– The more the Franchisor controls the supply chain with hard to
duplicate products or services the easier to control the franchisee and
grow the business.
What is special about emerging markets?What is special about emerging markets?

10. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
9
• Easier to Franchise – Bakery
– Simple operation/limited sales staff
– The franchisor can produce all the bakery items and deliver to the
franchisee stores each morning.
– Company has frozen dough technology that is difficult to copy.
ExampleExample-- Franchising in ChinaFranchising in China
– Complex operations/intense training
– Easy for the franchisee to under-report sales especially at the bar
– Easy for the franchisee to buy from multiple sources or even make a
copy cat restaurant and cancel the franchise
• Harder to Franchise – Full Service Restaurant

11. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
10
• Advantages
– Allows for rapid growth
– Less demanding capital requirements
– Easier to maintain shareholding control/limit outside investors
Advantages/Disadvantages of theAdvantages/Disadvantages of the
Franchise Growth ModelFranchise Growth Model
– Need to manage relationships with multiple business owners
– Lawsuit threats are high depending on the country
– Compliance with franchise law can be cumbersome
– If business turns weak there will be many angry franchisees to deal with
• Disadvantages

12. East West Hospitality Group Limited
Level 15 Nexxus Building, 41 Connaught Road Central, Hong Kong
Tel: (852) 2168 0675
11
Common Required DocumentationCommon Required Documentation
• All Intellectual Property necessary to support the management of the
business.
– Operations Manual
– Training Manuals
– Full set of recipes and formulas
– Marketing Materials and Brand standards
– Store layouts and designs
– Etc.
• Every franchisee will need to review and sign a franchise agreement and
possibly a Disclosure document (depending on the country).