Franchise Handbook

Prepared ByQatar Development Bank

1 | P a g e

Table of Contents

BASICS OF FRANCHISING ......................................................................................................................................3

WHAT IS FRANCHISING? ............................................................................................................................................3 WHY FRANCHISING? .................................................................................................................................................4 BENEFITS OF FRANCHISING .........................................................................................................................................6

Franchisor .............................................................................................................................................................6 Franchisee .............................................................................................................................................................6

CHALLENGES ASSOCIATED WITH FRANCHISING .........................................................................................................7 Franchisor .............................................................................................................................................................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 Disclosure Document (FDD) .............................................................................................................22 Franchise Registrations and Fillings ..................................................................................................................22 Taxation ...............................................................................................................................................................22

FRANCHISE AGREEMENT ....................................................................................................................................23

GUIDELINES FOR FRANCHISEE .........................................................................................................................24

INVESTIGATING BUSINESS OPTIONS .........................................................................................................................24 What business should the entrepreneur start ......................................................................................................24 Determine if there is a market .............................................................................................................................24 Determine if starting the business is really affordable .......................................................................................25 Determine if enough money can be made to make the venture worthwhile ........................................................26

CRITERIA FOR SELECTING A FRANCHISE ...................................................................................................................26 The management’s abilities .................................................................................................................................26 Demand ...............................................................................................................................................................26 Competition .........................................................................................................................................................27 Costs ....................................................................................................................................................................27 Brand Name .........................................................................................................................................................27 Training & Support .............................................................................................................................................27 Franchisor’s Experience .....................................................................................................................................27 Expansion Plans ..................................................................................................................................................27

HOW TO INVESTIGATE A FRANCHISE ........................................................................................................................28 Finding out What Franchises are Available .......................................................................................................28 Evaluating the Strength of the Franchisor ..........................................................................................................29

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BUILDING BLOCKS FOR A FRANCHISEE.........................................................................................................31

FRANCHISEE CHECK-LIST ...................................................................................................................................33

Who are they (Franchisor)? ................................................................................................................................33 How have they (Franchisor) been doing? ...........................................................................................................33 How long have they (Franchisor) been doing it (Franchising)? ........................................................................33 What package is on offer from the Franchisor? .................................................................................................33 Expansion plans of the Franchisor .....................................................................................................................35 Verification by Franchisee ..................................................................................................................................35 Franchise Fee ......................................................................................................................................................35 The franchise agreement / contract .....................................................................................................................36

GUIDELINES FOR FRANCHISOR .........................................................................................................................37

1. The Business Idea ......................................................................................................................................37 2. Business in Operation ................................................................................................................................37 3. Planning Stage ...........................................................................................................................................37 4. Implementation Stage ................................................................................................................................39 5. Franchise Launch ......................................................................................................................................40

BUILDING BLOCKS FOR A FRANCHISOR ........................................................................................................41

FRANCHISE OPERATING COSTS FOR FRANCHISOR ..................................................................................44

Franchise Expansion Costs .................................................................................................................................44 Operational and Administrative Costs ................................................................................................................45

GLOSSARY ................................................................................................................................................................46

QDB SUPPORT FOR FRANCHISE BUSINESSES ............................................................................................47

FOR FRANCHISEE ......................................................................................................................................................47 FOR FRANCHISOR ......................................................................................................................................................48

ANNEXURE ................................................................................................................................................................49

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Basics of Franchising

What is franchising? Franchising is a business agreement between two legally independent undertakings wherein the franchisee secures the license to use the brand and operate a business for a financial consideration, paid to the franchisor, and as per the terms specified in the franchise agreement. In summary, a franchise business necessarily comprises of the following 5 elements:

1. A brand name (registered as a brand name and/or a trademark, etc. which serves as the umbrella sign for network, and a rallying sign for the consumer and public)

2. A license to use the brand, granted to the franchisee by the franchisor

3. A business system – a business concept formatted into a duplicable value package, founded on the franchisor’s tested know how and his continued assistance during the term of the agreement

4. Payment by the franchisee of a financial consideration, either in a direct form, such as an entrance/ upfront fee and/or continuing fee (“royalty”), and/or an indirect form such as a mark-up on supplied goods

5. The investment in, and ownership of, the assets of the franchised business by the franchisee

It is important to note that a franchise business is one, which is replicable in a controlled environment and hence not all businesses are ‘franchisable’. The following businesses are not considered replicable and do not lend themselves to the franchise model: Creative business: Businesses, which require particular skills either of a creative or artistic nature that cannot be easily taught or duplicated Technical business: Businesses, which require significant level of knowledge transfer

and constant flow of know-how from the franchisor to the franchisee, are unlikely to be franchised

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WHY Franchising? Comparison between a Franchise and Traditional Business Model – Advantages & Disadvantages

Particulars Franchise Traditional Business

Business Concept • Proven and ready-made business concept to start with • Business Idea / concept needs to be tested

and validated

Operating Model (including pre-operating activities)

• Tested streamlined system, Standard Operating Processes (SOPs) and in built support for location identification, raw material procurement, equipment purchase, management & staff hiring plans and training programs

• Definite view on start-up costs and other elements of running the business leading to clarity and ease of capital and financial planning decisions

• Systems, processes and policies need to be developed, designed and executed

• Lower degree of clarity on capital investments and other cost estimates as compared to a franchise business

Marketing Materials and Media Planning

• Available tested marketing materials / designs / collaterals, along with media planning and execution

• Centralized marketing and brand development activities undertaken by the franchisor leads to reduction of investment of time and cost for the franchisee for marketing and brand building related activities

• Marketing material is to be developed afresh; the entire process of branding, media planning and campaign execution is to be undertaken by the business as a self panned and driven initiative

Risk

• Mitigated risk, as the business concept has been tried and tested earlier in different geographies

• Franchisee has an option to do an initial due-diligence by connecting with the existing pool of franchisees

• Severity of risk associated with business is not known until it is self tested (business intrinsically assumes the risk of failure)

Business Guidance • Standardized / need based guidance to the business

available from a franchisor on all the aspects of effective management and operations

• No such guidance available to the business, unless availed from external sources (consultants, mentors); generally on a paid basis

Start-up Time • All the above listed points, help in reducing the business

start-up time

• Typically longer start-up time when compared with a franchise (on a relative basis)

Finance Availability • Lending institutions find it relatively easier to finance a

franchise business, considering that it is a proven and tested business model

• Lending institutions are relatively apprehensive in financing an untested / unproven business model

Customer Base

• A franchise has access to a ready-made customer-base of a successful brand (or)

• Takes relatively less time to build the customer-base with the help of a proven system in place

• It typically takes relatively long time to build the brand reputation and correspondingly the customer-base

Product / Service Innovation

• Investing in Research & Development (R&D) or testing a new product / service, is taken care of by the franchisor

• Time, effort and money required for R&D and launching a new product / service has to be borne by the business

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Though there are many advantages of establishing a business as a franchise; there are certain disadvantages which also need to be accounted for

• Limited Control – A franchisee needs to conduct the business in accordance with the terms and conditions agreed in the franchise agreement. Hence the level of control that the franchisee can exert as a business owner is diluted as compared to a traditional business

• Limited Flexibility – The franchisee does not have flexibility to modify or change the business model or introduce new product offerings unless authorized by the franchisor. Moreover franchisees established with master franchise or area development rights have a pre determined commitment to scale business to a certain level within a defined period, failing which the business could be liable to pay penalties. Starting a purely self owned business offers greater flexibility to a business owner as compared to a franchise

• Relatively higher investment – Starting a business as a franchise involves an upfront franchise fee and on-going royalty fees which are not associated with a traditional business. This increases the initial upfront investment for the business. which in the case of a traditional business would possibly happen in a phased manner

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Benefits of Franchising

Franchisor

• An efficient and effective method for business expansion

• Ability to expand the business with minimal capital investment

• Assures franchisor of ongoing income, even if a few of its units do not perform well

• Ability to leverage on the local expertise available to enter a new market

• Franchise networks can be expanded faster than company run networks

• Greater international potential, associated with the deployment of the system of Master Franchising, by which the franchisor can quickly and simply replicate the whole of its franchise model in another country, leaving the Master Franchisee to adapt the model to the local market – its language, business customs and legal requirement

Franchisee

• An opportunity for an individual / company to quickly kick start a new business

• Availability of a product or service with an established brand name, thereby enabling easy access to customers / consumers

• Increased chances of business success through association with a proven business model

• Active pre-opening support in terms of site-selection, design and construction planning, training, market launch etc.

• Active on-going support in the form of training, marketing and advertising, supervision and managerial support, product development support

• Access to a pool of vendors / suppliers for bulk purchasing

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Challenges Associated with Franchising

Franchisor

• Inability of the franchisor in identifying a proper target market or business partner (franchisee) in one region, could lead to unwarranted impact on the franchisor’s brand image and business in the other regions of operation as well

• Franchisors while dealing with large business groups (as franchisees) will generally tend to have weak bargaining power

• Safeguarding business secrets is key in franchise businesses and any loss of internal intelligence and know how, severely impacts the franchisor eventually

Franchisee

• Upfront fee associated with franchising business are usually quite high, limiting SMEs’ uptake of franchising opportunities

• Franchisee’s freedom of operation (in terms of method and region/s of operation, product/s / service/s to be offered and pricing strategy among others) is limited and is primarily guided by the franchisor

• Any deviations on parameters agreed upon in the franchise agreement, could lead to penalties for the franchisee

• Usually franchisees do not have much say in relation to the terms & conditions included in the franchise agreement

• In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees, which needs to be provisioned for adequately, along with operating costs for running the business

Inability on the part of franchisors and franchisees in meeting the promised deliverables may have a cascading effect on the brand value and the overall business model. Moreover, a damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into an unforeseen problem.

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Types of Franchising There are 3 types of franchising models with ‘business format’ franchising being the most common.

Business Format Franchise is considered as the purest form of ‘Franchising’. The growth of ‘business format’ franchising has far outpaced the growth in the other two formats.

Type of Franchising

Trade Name Product Distribution Business Format

• It involves a brand name,where-in the franchiseepurchases the right tobecome identified with thefranchiser’s trade namewithout distributingparticular productsexclusively under the tradename.

• Example: Hardwaredealers (True ValueHardware and WesternAuto)

• It involves licensing thefranchisee to sell specificproducts under the brandname through a selectiveor limited distributionnetwork.

• Example: Automotivedealers (Chevrolet andChrysler), gasolineproducts (Exxon andSunoco) and soft drinks(Pepsi Cola and Coca-Cola)

• It involves providingfranchisee with a completebusiness format, includinglicense for trade name,products / services to besold, operating methods,strategic marketing plan,quality control process,and necessary businessservices.

• Example: Fast-foodrestaurant (McDonald,KFC)

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Comparison between the different franchise formats

Trade Name Product Distribution

BusinessFormat

Depth and Detail of Franchise Agreement Low Medium High

Inclusion of ‘Franchisors Brand Name’ in theUnit name

Brand Name may be used in the Unit Name

Brand Name may be used in the

Unit Name

Unit name has to be the Brand

Name

Sales of Products / Services Not limited to a particular brand

Franchisor’s brand

Franchisor’s brand

Ongoing fees payable by the franchisee Royalty Payment Royalty Payment

Royalty Payment + Management fee (for training and marketing

support)

Degree of Training support provided byFranchisor Low Moderate High

Level of Operational Control Exercised by theFranchisor Low Moderate High

Particulars

Nature of Franchise

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Types of Franchise Arrangements A franchising arrangement between the franchisor and the franchisee would either be structured as a single unit franchise or a multi-unit franchise.

Franchisor

Franchisee gets the rightsto open and operate singlefranchise unit

Franchisee gets the rightsto open and operatemultiple franchise units

• Rights to open multiple unitswithin a particular territory

• Rights to sub-franchise• Takes on some of theresponsibility of the franchisor;Offers initial support and trainingto the sub-franchisee

• Receives a percentage of theupfront franchisee fee and royaltyfee

• Exclusive rights to develop aparticular territory by openingmore than one units

• No right to sub-franchise

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Benefits and Challenges of Franchise Arrangements Key benefits and challenges associated with the Single and Multi-unit Franchise

Benefits Challenges

Individual / Single Unit Franchise

• Franchisee gets direct involvement / attention of the franchisor;franchisor can exercise better control over individual units; andthereby enables early identification / elimination of potentialchallenges, if any

• Ideal for a business model, where quality control is critical (forexample in F&B)

• Faster way of multiplying the units in the region as the franchisor isnot limited by the resources and capabilities of the master franchisee

• Is considered apt for individual entrepreneurs / SMEs

• Franchisor needs more time andresources to monitor all the single unitfranchises

• Usually single unit franchisees areSMEs and lack businesssophistication, thereby increasing thebusiness risk for the franchisor

Multi-Unit Franchise

• Potential for the franchise unit to break-even faster, due to businessexpertise and economies of scale enjoyed by the master franchisees(primarily established business groups)

• Franchisor saves on time and resources as involvement withindividual units is reduced with the help of master franchisee

• There is no competition from the same franchise brand as is thecase in a Single Unit franchise, wherein there could be multipleowners of a particular franchise brand within a designated territory

• Difficult to get a master franchisee,unless franchisor is a renowned brand

• The franchisor’s bargaining power withthe master franchisee would be loweras compared to a Single Unitfranchisee

• Not ideal in case the franchisor wantsto expand fast within a particularregion

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Franchising Value Chain A typical value chain in franchising

Key Entities in the Franchising Value Chain Broad scope of work undertaken by the key entities in the franchising value chain:

FRANCHISOR

• Identifies prospective market for the business

• Identifies potential franchisees

• Evaluates franchisee’s financial and operational capabilities, with respect to the target market region

• Utilizes support from Franchise Associations / Consultants / Financers / Marketing Agencies / Law firms (as per requirement) for expanding its business and venturing into new markets

• Provides non-financing support to franchisee in terms of business planning, training, resources management, branding / promotional activities, infrastructure design and set-up

• Charges an upfront franchisee fees and ongoing royalties to the franchisee for rendering the above listed services

FranchisorBusiness

Model

Product / Service, Technical know-how

Brand Name

Training, Processes and Resources

Franchisee

En

d U

se

r / C

on

su

me

r

Product / Service

Financial Institutions, Law Firms, Associations, Consultants

Regulatory Framework

Franchise Fees / Royalty

Revenues

Franchise Agreement

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FRANCHISEE

• Identifies a brand name / concept as a potential business opportunity

• Evaluates the local market potential for the identified brand

• Connects with franchise association / consultants / for non-financial services required to evaluate and assess the potential franchising opportunity

• Avails support from law firms on the regulatory and legal aspects of the franchise business

• Invests / Sources capital to pay the upfront franchise fee and establish the business unit.

• Utilizes technical, operational, branding and promotional support from franchisor • Conducts business using franchisor’s trade / brand name and the business model defined

by the franchisor

FINANCING INSTITUTIONS

• Financial Institutions such as banks and non-banking financial companies (NBFCs)

provide financing to franchisees for one or more of the following: o For initial business establishment o Business expansion through establishment of new units or acquisition of existing

franchise units o Equipment upgrades and store remodels o Working capital needs o Receivable finance

FRANCHISE ASSOCIATIONS

• Lobbies with Government bodies for the benefit of the franchise industry • Endorses and creates a platform for protection and promotion of social, economic and

other rights of the Association’s members

• Creates a channel for distribution of information about franchising business opportunities through structured research

• Provides required support to franchisees / franchisors in terms of: o Conducting education programs, workshops, seminars and franchise meets o Publishing / release of business / market potential reports on a regular basis o Providing match-making services for franchisees / franchisors o Supporting franchisors and franchisees in dispute resolution processes o Referring franchisees / franchisors to empanelled consultants / firms such as:

− Financial institutions for financial support − Law firms for legal support − Consultants for non-financial support (example: market feasibility study) − Marketing agencies for PR and advertising activities

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LAW FIRMS

• Provide services to both franchisors and franchisees

• Services provided by law firms include:

o For the Franchisor

− Preparation of Draft Franchise Agreement − Legal Guidance on compliance with the legal provisions applicable in a particular

country − Legal guidance on the process of IP registration in the country of the franchisee − Handling legal disputes, if any

o For the Franchisee

− Review of the Draft Franchise Agreement − Advise on critical legal risks − Assistance in the process of company formation and registration − Handling legal disputes, if any

FRANCHISE CONSULTANTS

• Acts as a one-stop-shop for franchisors / franchisees in establishing a franchise business.

• Provide the following services on a standalone or combined basis:

o For the Franchisor

− Strategy Planning and Business Plan Development − Developing Operational Policy and Process manuals − Web System Development, Guidance and Consulting − Developing Training Modules − Implementation and execution support − Connect with law firms for legal support − Match-making (franchisors and franchisees) − Franchise Sales Training

o For the Franchisee

− Feasibility Analysis and Business Plan Development − Connect with law firms for legal support − Advise on the optimum financing structure − Match-making (franchisors and franchisees) − Implementation and execution support (if required)

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Franchise Disclosure Document1 The purpose of the Franchise Disclosure Document (FDD) is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements (which a franchisee needs to sign) so that they can make an informed decision. Many countries have disclosure laws which require information to be provided to prospective franchisees before they commit to the franchise. The following illustration classifies important sectional information (in a typical FDD) about a franchise business under 23 different ‘item heads’:

Continued…

1 Source: International Franchise Association (IFA)

Item 1

•The franchisor and any parents, predecessors and affiliates: This section provides a description of the company and its history.

Item 2

•Business experience: This section provides biographical and professional information about the franchisors and its officers, directors and executives.

Item 3

•Litigation: This section provides relevant current and past criminal and civil litigation for the franchisor and its management.

Item 4

•Bankruptcy: This section provides information about the franchisor and any members of management who have gone through a bankruptcy.

Item 5

•Initial fees: This section provides information about the initial fees and the range and factors that determine the amount of the fees.

Item 6

•Other fees: This item provides a description of all other recurring fees or payments that must be made.

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Continued…

Item 7

•Initial investment: This item is presented in tabular format and includes all the expenditures required by the franchisee to make, to establish the franchise.

Item 8

•Restriction on sources of products and services: This section includes the restrictions that the franchisor has established regarding the 'allowed' source of products or services.

Item 9

•Franchisee’Franchisee’s obligations: This item provides a reference table that indicates where in the franchise agreement franchisees can find the obligations they have agreed to.

Item 10

•Financing: This item describes the terms and conditions of any financing•arrangements offered by the franchisor.

Item 11

•Franchisor’Franchisor’s Assistance, Advertising, Computer Systems and Training: This section describes the services that the franchisor will provide to the franchisee.

Item 12

•Territory: This section provides the description of any exclusive territory and whether territories will be modified.

Item 13

•Trademarks: This section provides information about the franchisor’s trademarks, service marks and trade names.

Item 14

•Patents, copyrights and proprietary information: This section gives information about how the patents and copyrights can be used by the franchisee.

Item 15

•Obligation to participate in the actual operation of the franchise business: This section describes the obligation of the franchisee to participate in the actual operation of the business.

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Item 16

•Restrictions on what the franchisee may sell: This sections deals with any restrictions on the goods and services that the franchisee may offer its customers.

Item 17

•Renewal, termination, transfer and dispute resolution: This section tells you when and whether your franchise can be renewed or terminated and what your rights and restrictions are when you have disagreements with your franchisor.

Item 18

•Public Figures: If the franchisor uses public figures (celebrities or public persons), the amount the person is paid is revealed in this section.

Item 19

•Financial Performance Representations: Here the franchisor is allowed, but not required, to provide information on unit financial performance.

Item 20

•Outlets and Franchisee Information: This section provides locations and contact information of existing franchises.

Item 21

•Financial statements: Audited financial statements for the past three years are included in this section.

Item 22

•Contracts: This item provides of all the agreements that the franchisee will be required to sign.

Item 23

•Receipts: Prospective franchisees are required to sign a receipt that they received the FDD.

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Critical Items in the FDD

• Item 7: Initial investment: Some of these costs are averages or estimates and may vary in the area of operations; it is important for the franchisee to:

o Talk to other franchisees who have been in the system for a year or more to see:

− How much money they needed in the beginning until they became

profitable

− How much they were able to draw from the business to support themselves

• Item 11: Franchisor’s Obligations: The franchisee needs to pay particular attention to those services the franchisor is obligated to provide and the services they may provide.

• Item 17: Renewal, termination, transfer and dispute resolution: The business should take its time to understand what rights they will have and what rights they are giving up. In particular, the business needs to pay attention to any non-compete provisions and their r obligations when the franchise relationship ends.

• Item 19: Financial performance representations: Only 30 to 40 % of all franchisors provide prospective franchisees with information about financial performance.

• Item 20: Outlets and franchisee information: The franchisee must examine how many units the franchisor has taken back and resold. If this number is high, this could indicate churning (when the franchisor takes back failed locations and remarkets them over and over). The business must pay attention to the contact information of the franchisees that have left the system. These are people a franchisee definitely needs to talk to.

• Item 21: Financial statements:

o Financial statements (Balance Sheet, Income Statement and Cash Flow Statement) are the track record of the franchisor. The franchisee should be given copies of the franchisor’s last three years financial statements. The business should ideally take them to an accountant who specializes in franchising to evaluate.

o The franchisee must remember that the financial condition of the franchisor affects its ability to run a financially successful operation in the future.

• Item 22: Contracts: The franchisee must make sure that all the agreements listed are attached to the FDD and that the business has read every one of them.

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It is important to note that a franchisor is not mandated to share a Franchise Disclosure Document with a prospective franchisee unless stipulated by law. Under the franchise laws in certain countries (for e.g. USA and Malaysia) franchisors need to share an updated copy of the FDD with the prospective franchisee; however the same does not apply in Qatar, nor in any country within the GCC, primarily attributed to the absence of a franchise law in these countries It is recommended that prospective franchisees in Qatar seeking to take up a franchise of a US brand or a brand from any country where franchising is governed by a dedicated ‘franchise law’ should seek the FDD from the franchisor to have a detailed perspective on the franchisor and the business opportunity itself. Notably, some franchisors offer a ‘Franchise Prospectus’ to prospective franchisees to provide an overview of the franchise business and other key / related business information. Irrespective of the type of document / information provided, a franchisee needs to seek critical information on the lines mentioned above, prior to establishing a contractual relationship with the franchisor.

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Legal Aspects of Franchising There are certain legalities involved in a franchise business, which a franchisor and a franchisee should consider as requisites for establishing and continuing a mutually rewarding business relationship that safeguards the business interests of both parties (franchisor’s and franchisee’s). Some of the critical legal aspects of franchising are discussed in brief in this section:

Franchise Law Franchise businesses are governed by the franchise law of the land / country, where the franchise operates. Countries such as Malaysia and the United States of America (US) have a franchise specific law, which provides a robust legal framework for the franchisors and franchisees to comply with. In Qatar (similar to many other countries across the world (including the GCC), there is no specific law governing franchises. The implied laws applicable for franchising in Qatar are based on the existing regulations within the regulatory jurisdiction of Qatar applicable to company / business operations. These encompass the Commercial Companies law, Civil law, Agency law, Intellectual Property laws etc. Accordingly, in Qatar against the backdrop of the absence of a franchise law in place; the franchise agreement along with other important factors covered in this section often become the key covenants in governing the rights and responsibilities of the parties (i.e., franchisor and franchisee) to the agreement.

Franchise Agreement Every franchise must have a franchise agreement that thoroughly describes the offering made to the franchisee. In the absence of a franchise law, the franchise agreement forms the sole contract (or a legal document) between franchisor and franchisee. Hence the franchise agreement should cover the following factors among others to promote and protect the rights of both parties and the overall franchise operation:

INTELLECTUAL PROPERTY (IP) RIGHTS REGISTRATION Franchise businesses operate on the premise of concept uniqueness and hence require the IP rights (such as trademarks, copyrights, know-how, trade secrets and other intellectual property) to be protected against unauthorized usage. Therefore it is important for a franchisor to get the IP pertaining to his / her franchise registered with respective Government authorities of the country, where the franchise is (currently) / planning to operate (in the near future). The franchise agreement should clearly identify / define the intellectual property, along with the clauses governing IP usage precisely in terms of the territory, time period (commencement & termination date) and renewal.

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In Qatar: The Law on Trademarks, Commercial Indications, Trade Names, Geographical Indications and Industrial Designs No. 9 of 2002 grants to owners the exclusive right to use their intellectual property. The franchisor can register the trademark under the abovementioned law to protect the franchise brand. The law on Protection of Copyright and Neighboring Rights No. 7 of 2002 confers protection upon authors of original literary and artistic works, irrespective of the value, quality, purpose or mode of expression of such works. Protected works include books, lectures, musical works, photographic works and computer software. ‘Menus’ for restaurants of F&B outlets cannot be copyrighted under the above mentioned law.

ANTI-COMPETITION AND PREVENTION OF MONOPOLY

Businesses operating in the franchise industry are also governed by anti-competition / prevention of monopoly acts / laws of respective countries, where the franchise operates. In Qatar: Act No (19) 2006 has been enacted for the Protection of Competition and the Prevention of Monopolistic Practices. The franchisor or franchisee must ensure that their practices do not classify as monopolistic or restrictive, or else the Committee for the Protection of Competition and Prevention of Monopolistic Practice may be forced to investigate.

ARBITRATION AND MEDIATION

As in any business, arbitration and mediation plays an important role between two parties involved in a franchise business. Typically a franchise agreement does contain clauses related to arbitration and mediation, clearly defining the processes, in the event of a conflict between the concerned parties. Some of the franchise associations (in the countries where they exist) offer voluntary arbitration and mediation services to its members (franchisor and franchisee). In Qatar, as there is no franchise association or a dedicated entity looking into such matters, hence the franchise agreement should include clauses providing absolute clarity on the modus operandi to be followed for arbitration and mediation related to issues if they arise; in order to address any possible elements of conflict arising between the franchisor and the franchisee

Furthermore, the factors discussed herewith (along with other clauses pertaining to various fees associated with franchise business, franchise exclusivity, franchise renewal / termination, penalty / charges for non-compliance etc.,)’ focus on and accommodate the specific needs and requirements of the franchise operation and govern the relationship between the parties in a positive and constructive manner. The important points related to the structure of a franchise agreement are provided under the Franchise Agreement section of this document.

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Franchise Disclosure Document (FDD) The purpose of the FDD is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements (which a franchisee needs to sign) so that they can make an informed decision. In the US, it is mandatory for a franchisor to provide each of its potential franchisees with a copy of the FDD, containing all of the relevant information / details about the franchisor. Details of important information available in a FDD are discussed in detail under the Franchise Disclosure Document section of this document.

Franchise Registrations and Fillings Countries (such as Malaysia and some of the States in America) necessitate the franchisor to register their franchise (in the respective country or State), where the franchisor operates his / her own outlet or a franchised outlet. Hence it is important for a franchisee to verify, whether the franchise under consideration is registered with the respective Government authorities, as per the mandatory regulatory environment applicable in the home country of the franchisor.

Taxation Though there does not seem to be any special taxation policies for franchise businesses across the world, it is important for franchisor and franchisee to understand the taxation policies of the respective countries / region where the franchise operates / will operate. In Qatar: Article 11 of the New Qatari Tax law imposes a withholding tax of 5% of the gross amount of royalties and technical fees. The objective here is that any person who pays fees for services to an entity without a permanent presence in Qatar will be required to withhold the requisite amount of funds from the supplier. Article 12 further provides information on how this tax will be administered. A tax card system will be in place, which all taxpayers in Qatar will have to obtain. The obligation lies on the franchisee to withhold (subject to the provisions of tax agreements between Qatar and various other countries across the world) and remit the amount to the Ministry by the 16th day of the calendar month following the date of making the withholding.

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Franchise Agreement In Qatar, there are no specific franchise laws or disclosure requirements for franchisor to franchisee. As a consequence, the franchise agreement forms the sole contract between the two parties (franchisor and franchisee) and acts as the sole and unified basis for any kind of negotiation or dispute resolution. The following aspects need to be clearly addressed within the remit, purview and structure of any franchise agreement

• Clear definition of franchise business, location and territory?

• Duration of the franchise agreement?

• Clear description of training provided: type, duration and cost? • Right of renewal or extension and any conditions applicable for this?

• Clear list of franchisor’s obligations and duties?

• Clear list of franchisee’s obligations and duties?

• Termination clause for both parties?

• Is there a right to sell or transfer the franchise? Does this require the franchisor’s permission? Is there a fee or commission payable to the franchisor on sale?

• Contingency for long illness or death?

• Franchisee’s heirs’ rights on death?

• Details on number of franchise outlets to be opened over a definite period of time with respect to the type of franchise agreement (example Single-Unit Franchise, Multi-Unit Franchise, Area Development Franchise or Master Franchise)

• Can the franchisee carry on any other / similar business concurrently?

• Details on anti-competition covenants applicable to the franchise business in the country / region

• Details on Arbitration / Mediation / Alternative Dispute Resolution (in built as clauses within the franchising agreement) along with the applicability and source of governing laws?

• Details of the trademarks, designs, copyrights, trade secrets, know-how and patents relevant to the franchise, along with legal aspects pertaining to usage of Intellectual Property (IP) rights

• Details of payments to franchisor such as franchise fee, deposit, royalties, advertising contributions and any other payments required?

• Supplies from franchisor or independent third party?

• Details, costs associated and attribution related to re-branding activities, if any in future (for example change / renovation of the franchise outlet, additional / new products & services, operating procedures, IT system and Marketing & Advertising, etc.).

• Whether premises are held under lease by the franchisor and if so what is the lease term?

• Can the franchisee change premises during the term of the contract?

• What operational controls can the franchisee expect from the franchisor?

• What are the procedures for managing underperforming franchisees?

• Details on penalty clauses and liquidated damages associated with non-conforming parties (both franchisor and franchisee)?

• Details of liquidation damages

• Force Majeure conditions and implications on the applicable terms of the agreement

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Guidelines for Franchisee

Investigating Business Options2 Regardless of whether the entrepreneur chooses to remain an independent business owner or become a franchisee; research is the single most important activity in the decision making process. The key aspects to be answered are depicted in the following illustration.

What business should the entrepreneur start Sometimes people start a business because they think they’ll make a lot of money, only to find out that they do not enjoy the business. An entrepreneur should start a business in an industry that he / she will enjoy and plan to be in for at least next 10 to 15 years. The entrepreneur needs to ask him / herself:

• What they like to do? (interest and hobbies)

• Do they know how to do? (experience)

• What do they do well? (special skills and talents) • Which industry(s) involve their interests and use their skills and talents?

• What products or services could they sell in this industry(s)?

• Would they rather sell a product or service?

• What products or services would they like to sell the most?

Determine if there is a market

2 Source: International Franchise Association (IFA)

Can you make

enough money to make it

worthwhile?

Can you affort it?

Is there a market?

what Business?

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All successful businesses must:

• Satisfy a need or • Solve a problem or

• Respond to a trend Before starting any business, it is critical for the entrepreneur to determine if there is a market for the product or service. Accordingly, it is important to undertake comprehensive market research covering:

• How many potential customers are in the area? • Will the product or service sell?

• What need does it satisfy?

• What problem does it solve?

• What trend or fad does it address?

• What should the appropriate pricing be? • Who are the key competitors?

• How many competitors are there?

• What do they offer?

• How will the product or service be unique?

• What marketing niche can the business capture?

Determine if starting the business is really affordable In order to start a business, the entrepreneur has to have money and in order to stay in business, he / she needs to make money. The single most common reason new businesses fail is that they did not have enough money to begin with. Costs to consider:

• Estimating start-up costs related to:

o Location design and construction o Professional fees o Equipment and fixtures & furniture o Opening inventory and supplies o Insurance o Pre-opening cost (labor, advertising & promotion etc.,)

• Estimate working capital needs (the money required until the business becomes profitable, which includes the entrepreneur’s living expenses, if necessary):

o Salaries o Insurance o Utilities o Advertising o Rent

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o Interest on a loan, if applicable

• Assess, evaluate and identify the sources of funding:

o Yourself o Family & Friends o Savings and investments o A partner o Selling personal assets o Loans

Determine if enough money can be made to make the venture worthwhile Estimate the profit potential for the business:

• Income

• Expenses • Profit

The entrepreneur / potential franchisee must think about the amount of time and energy it will take to make the business successful. He / she must make a decision as to whether enough money can actually be made to make the entire venture worth the time and energy invested.

Criteria for Selecting a Franchise3 A franchisee should consider the following critical success factors, before committing to a franchise business:

The management’s abilities

• Do the entrepreneur and / or his key team have the technical skills or experience to manage the franchise?

• Do the entrepreneur and / or his key team have the business skills to manage the franchise?

Demand

• Is there enough demand in the area for the business’s products or services?

• Is the demand year-long or seasonal?

3 Source: International Franchise Association (IFA)

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• Will the demand grow in the future?

• Does the product or service generate repeat business?

Competition

• How much competition does the business, including other franchisees?

• Are the competing companies/ franchises well established? • Do they offer the same products and services at the same or lower prices?

• Is there a specialty or niche that the business can capture?

Costs

• How much money will this franchise cost before it becomes profitable?

• Can the entrepreneur afford to buy this franchise?

• Can the entrepreneur make enough money to make the investment worth the time and energy invested?

Brand Name

• How well known is the franchise name?

• Does the franchisor have a reputation for quality?

• Is there any litigation against the brand in any country that could be detrimental to the local operations?

Training & Support

• What kind and how much training and support does the franchisor provide?

• Do existing franchisees find this level of training and support adequate?

Franchisor’s Experience

• Has the franchisor been in business long enough to have established the type of business strength that the entrepreneur is seeking?

Expansion Plans

• Is the franchisor planning to grow at a rate that is sustainable?

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How to Investigate a Franchise4 Like starting any business, buying a franchise involves risk. Studies show that successful franchisees:

• Conduct their own marketing research

• Use their own financial and legal advisors

• Develop thorough marketing and business plans

• Have prior work experience in the industry Prospective franchisees must devote a vast amount of time researching the franchises available and evaluating the strength of the franchisors through:

Finding out What Franchises are Available

• Reading Articles and Ads in Business Publications

o Inc. : www.inc.com o Entrepreneur : www.entrepreneurmag.com o Franchise Times : www.franchisetimes.com o Franchising World : www.franchise.org o Franchise Update : www.franchise-update.com

• Attending Trade Shows and Expositions

o Regional and international trade shows, franchise expos, etc.,

• Researching the Internet

o www.franchise.org o www.franchise.com o www.franchising.org o www.aafd.org o www.franchiseopportunities.com o www.everyfranchise.com o www.franchiseamerica.com o www.franchiseconnections.com o www.ownyourownfranchise.com o www.topfranchises.com o www.worldfranchising.com o www.franchisedoc.com o www.franchiseregistry.com o startup.wsj.com o www.bison.com

4 Source: International Franchise Association (IFA)

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Evaluating the Strength of the Franchisor

INVESTIGATE THE FRANCHISOR’S BUSINESS STRENGTH

• How long has the franchisor been in business?

• How many current franchisees are there? • What is the failure rate of the franchisees?

• Are there any pending or past lawsuits and what have they been for?

• Does the franchisor have a reputation for quality products or services?

• What is the franchisor’s financial health?

o Credit rating, if available o Profitability o Reputation

• What are the financial performance representations?

o On what are they based? o Are the projections based on the franchisor or franchisee-run centers? o How long have the centers used for projections been in business?

• What is the background of the principals / management?

• What is their business experience?

• Have they personally had any bankruptcies?

• Have they personally had any recent litigation?

OBTAIN PROFESSIONAL ADVICE CONCERNING THE FDD AND FRANCHISE AGREEMENT The potential franchisee must seek the advice of a legal firm / advisor / counselor, who specializes in franchise advisory, at this stage and pay special attention to:

• Costs

• Agreement tenure and renewal provisions and conditions

• Termination clauses

• Franchise territory (if any) • Procedures and restrictions

• Training and assistance

• Financial performance potential - gross sales, net profit

• Expansion plans of the franchisor:

o How fast do they plan to grow? o Where do they plan to grow? o Do they have a business plan for the potential franchisee’s area or location? o What is their analysis of the competition in the potential franchisee’s area? o How many units are being planned for the potential franchisee’s area? o How much is going to be spent in regional advertising in the potential franchisee’s area?

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TALK WITH EXISTING FRANCHISEES The potential franchisee must try and schedule a meeting with existing franchisees and emphasize on understanding the following:

• Level of training

• Quality of products or service

• Level and promptness of support • Operations and quality of the operations manuals

• Financial performance history / claims

• Any problems or difficulties with the franchisor

Another key component of the due diligence process by the potential franchisee is to visit / talk with franchisees who have left the system and find out why they left

VISIT THE FRANCHISOR’S HEADQUARTERS

The entrepreneur as part of the due diligence process must also try and organize a visit to the franchisor’s headquarters, where the objective should be to:

• Meet the support team

• Review the operations manuals

WORK IN AN EXISTING FRANCHISE It is advisable that the entrepreneurs try and work in an existing franchise to get to know the system, manuals, training program, support, earning potential, etc.

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Building Blocks for a Franchisee In order to ensure success for any franchising venture, it is important to build a strong foundation by employing a robust and step wise framework for franchise identification and operation. There is a step wise process that needs to be employed (sequentially) in order to identify and set –up a franchise business. The essential building blocks for a franchisee are as follows:

Continued…

•It is the first and most important step for an entrepreneur before they plan to be come a franchisee

•Potential and existing franchisees should develop a sound understanding of the basic and specific concepts of franchising through self education or attending franchise specific trainings and workshops

1. Education &

Training

•Potential franchisees should follow a scientific / rational method to identify a suitable franchise opportunity through a robust process of franchisor due diligence (as detailed in the previous sections)

2. Franchise

Opportunity Identification

•Potential franchisee should evaluate the local market potential and business feasibility (before signing the franchise agreement and paying any kind of franchise fee to franchisor) for the franchise under consideration

•In order to understand the market potential, it is advisable that franchisees conduct a thorough market, technical and financial feasibility for the planned venture either internally or through professionals consultants

3. Evaluating

Market Potential & Feasibility

•If the output of the feasibility study is positive, the franchisee should seek advice from a legal counsellor / firm specialising in franchise advisory to understand and ratify the legal covenants of the franchise agreement

4. Legal Advice

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•Like any other conventional business, a franchisee requires finance for business set up

•A franchisee could finance its franchise outlet/s through a combination of owned capital, funds borrowed from friends & family and / or conventional bank financing

5. Means of Finance

•For opening a new franchise unit, a franchisee needs to identify & secure unit location, plant & machinery, raw material suppliers and manpower, amongst other important activities

•Even though it is in the best interest of a franchisor to assist his / her franchisee in the above listed, it is important that a franchisee must know before hand (prior to signing the franchise agreement) the level of support available from the franchisor in this regard

6.Establishing Franchisee

Unit

•It is a fundamental aspect of a 'business format' franchising, that a franchisee learns and imbibes a tested business model

•A franchisee requires training for managing the business (management training) and for its employees / operating staff; this entails requisite trainign on operational, technical and management aspects)

•A franchisee should ask for and seek all the essential training (initial / ongoing) from the franchisor

7. Training Program

•The advantage of being in a franchise business is access to / availability of ongoing support and mentoring from the franchisor

•It is in the best interest of both a franchisor and a franchisee and hence a franchisee should always take the advantange of the franchisor's proven business expertise and experience in the field and specific to the franchise business

8. Ongoing Support / Mentoring

•In the event of any kind of differences / dispute arising between a franchisor and a franchisee, an amicable resolution methodology should be adopted

•Though the franchise agreement includes clauses governing dispute resolution, the issues could be settled outside a formal court of law such as Arbitration & Dispute Resolution Cell (for example the Dispute Resolution Department under Qatar Chamber of Commerce)

9. Dispute

Resolution

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Franchisee Check-List5 The following checklist presents a summary of the key aspects that a franchisee needs to validate prior to committing to a franchise arrangement (details of these aspects have been covered in previous sections of this document)

Who are they (Franchisor)? • Franchisor’s shareholders’ history?

• Franchisor’s officers and directors?

How have they (Franchisor) been doing? • Franchisor’s financial health history? • Franchisors most recent audited accounts?

How long have they (Franchisor) been doing it (Franchising)? • How long has the franchisor been operating? • How long has the franchisor been offering franchises?

• Does the franchisor have a reputation for quality products or services?

• Number and identity of current franchisees?

• Can the entrepreneur choose which franchisees to talk to?

• Have any franchisees been terminated and if so, why? • Are there any pending or past lawsuits and what have they been for?

What package is on offer from the Franchisor? • What are the initial fees, royalties and management fees payable? • What is the typified Return on Investment and does it justify time & effort investment and

opportunity cost foregone?

• Are there realistic predictive financial model available, based on the franchisor’s experience / research?

• What is the total cost breakdown of starting a franchise under the franchisor’s business model?

• What is the total working capital required?

• What is the liquid capital required by the franchisee, net of borrowings?

• Is the franchise agreement term long enough to enable financial returns? • Is there any information on any grants / financial support (for example employment grants)

available?

• Is there ready access to information on lending packages from banks available to franchisees?

5 Source: Irish Franchise Association

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• Has the franchisor documented a comprehensive step-by-step guide to delivering the business model, within the remit of the operations manual?

• Has the franchisor clearly outlined the specifications of all equipment, ingredients etc., needed in the delivery of the offer?

• Are there the requisite details on required quality standards, available?

• Are there details on setting up of the supply chain for the franchisee including approved suppliers / vendors?

• Has the franchisor clearly defined its franchisee selection criteria?

• How does the franchisee recruitment process work?

• What type of initial support will their franchise support office provide?

• What type of ongoing support will their franchise support office provide? • What type of initial training will the franchisor provide? What is the duration and cost

associated?

• Is support / training ongoing or only at the initial stage?

• Is ongoing training compulsory?

• Is additional training provided and at what additional cost? • What types of training facilities are available?

• How does the training work? Does the franchisor train the franchisee and the Franchisee’s staff or does the franchisor train the franchisee to enable him / her to train their own staff?

• Is the business a sustainable opportunity or is it short-term / seasonal in nature?

• Is the business model legal in Qatar? Are there any aspects of the business (products / services) illegal / not allowed / banned in Qatar?

• Does the franchisor provide pre-opening support / assistance? • Does the franchisor provide a turn-key opportunity whereby they project manage the fit-

out of the unit before the franchisee commences operations?

• Does the franchisor provide on-site opening assistance?

• Does the franchisor own / rent the premises? • Will the franchisor specify the layout and design of the premises?

• Will the franchisor provide initial advertising / marketing assistance? What are the details of the assistance to be provided

• Will the franchisor provide ongoing advertising / marketing assistance? What are the details of the assistance to be provided

• What is the franchisor’s organizational structure and what resources are dedicated to the franchise rollout program?

• What are the franchise operating hours?

• What is the typical pricing rational / methodology? • Are there any territorial and operating restrictions in place?

• Is there enough understanding on aspects related to Intellectual Property protection and licensing (for example Trademarks registration and usage restriction in the country / region etc.,)

• Does the franchisor hold franchisee forums? If so, how often and where?

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Expansion plans of the Franchisor • How fast do they plan to grow?

• Where do they plan to grow? • Do they have a business plan for the potential franchisee’s area or location?

• What is their analysis of the competition in the potential franchisee’s area?

• How many units are being planned in the area?

Verification by Franchisee • Haas the entrepreneur consulted with existing franchisees?

• Has the entrepreneur consulted with an accountant?

• Has the entrepreneur consulted with a solicitor / legal counselor?

• Has the entrepreneur consulted with a banker? • Has the entrepreneur consulted with a franchise consultant?

• Has the entrepreneur considered and compared / contrasted alternative franchise offerings?

• Is the franchisor a member of the regional Franchise Association such as MENAFA (Middle East North Africa Franchise Association) or other associations? If not, why not?

Franchise Fee

• Is the upfront fee for the franchise in line with franchise fees for similar concepts?

• Are the royalty payments in line with the industry standards?

• Is the royalty fee for training and marketing commensurate with the support to be provided by the franchisor?

• Are the royalty payments a percentage of gross revenues or net revenues?

• What is the frequency of franchisee payments?

For an Area Development franchise; the Franchisee should ensure that the initial / upfront franchise fee to be paid to franchisor is proportional and restricted to the number of franchise units being opened (by the franchisee) currently and not applicable to the total number of outlets for which area development rights have been granted, covering the duration of the agreement The ideal structure of upfront franchise fee for an Area Development franchise should be as follows: • 100% fee for the first outlet or the number of outlets to be started initially • Certain percentage of the franchise fee for the other outlets to be opened subsequently as per the

franchise agreement. Ideally the upfront fee should range between (10% – 25%) of the attributable franchise fee applicable for the subsequent outlets to be opened

• The remaining percentage of the franchise fee for other outlets should be paid as and when they are

opened as per the milestones defined in the franchise agreement

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The franchise agreement / contract The franchise agreement / contract should ideally contain all the clauses mentioned under the Franchise Agreement section of this document (unless certain sections do not apply in the context of the Qatar legal and regulatory framework)The franchisee needs to get the franchise agreement vetted and validated through a local legal firm specializing in offering legal counsel related to franchising

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Guidelines for Franchisor Any business typically goes through the following lifecycle prior to becoming a franchisor:

1. The Business Idea The concept or the business idea is a starting point and is self-explanatory in that any entrepreneur thinking about Franchising requires either a new business idea or to be operating an existing business and must have appropriate and specific objectives set in place, such as expansion or promotion of efficiency.

2. Business in Operation In this stage the potential business idea is tested by converting it in to a business in operation. The business is operated for at least couple of years at more than one location. This helps in validating the acceptance of the business’s products / services over a certain period of time and at different locations.

3. Planning Stage The planning stage consists of two important elements, which are critical for any business before it starts its journey on the path of franchising its brand. The planning stage includes:

1. Business Idea

2. Business in Operation

3. Planning Stage

•FRA

•Franchise System Development

4. Implementation Stage 5. Franchise

Launch Stage

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• Franchise Readiness Audit (FRA)

o The FRA (typically conducted by a professional franchising consultant / expert) is conducted to determine the ‘franchisability’ of the business. This is a very essential process, which must be conducted in full earnest prior to franchising an existing business. The Franchise Readiness Audit shall indicate whether the existing business and the promoters have in place the key prerequisites for franchising and whether there is merit in franchising the business

o The FRA process also helps to determine what may be the additional steps that a business needs to take (in the areas of corporate, operational, human and financial resources) to ensure that it has the right capabilities and orientation towards franchising

• Franchise System Development

o Once the franchise potential of a business is ascertained, the next step is the development of the franchise system

o The system development involves creating a comprehensive franchise program, the standard operating procedures, developing a marketing and sales strategy, finalizing the franchise financial plan and other elements to ensure a comprehensive suite of support services can be offered to prospective franchisees

o The following list provides a holistic view of different activities conducted / documents & systems to be developed during the franchise system development phase:

− Strategic Planning and Program Structure

§ Concept Research and Review

§ Development of the Franchise Structure

Ø Type of Franchise Offered Ø Territory Determination

§ Finalizing the Franchise Revenue Sources

Ø Initial Franchise Fee Ø Royalties Ø Advertising Fee Ø Additional Income Sources

§ Franchise Financial Planning

Ø Investment Ø Franchise operational cost

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− Franchise Documentation

§ Franchise Agreement

§ Disclosure Document

§ Franchise Registration Applications and Fillings

§ Franchise Prospectus

§ Franchisee Due Diligence Framework

− Operations Services

§ Standard Operational Manuals

§ Supply Chain Plan

§ Manpower Plan

− Advertising and Marketing Services

§ Franchise Marketing and Branding Plan

− Franchisee Training Plan

4. Implementation Stage In this phase the company will primarily deploy the business strategies / plan formulated during the Franchise System Development stage. Further, this stage will include:

• Development of franchise support program/s

• Logo and Trademark Fillings and Registrations • Streamlining of operations (including IT systems) as per Standard Operating Procedures

(SOPs)

• Developing the franchise supply chain

• Executing the Advertising and Marketing Services Plan including

o Letterheads, stationery and signs o Display and point of sales material o Shop fittings and layouts, o Promotional material

• Executing Franchise Sales Plan including

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o Press advertising, including publications featuring business opportunities. o Franchise directories o Franchise seminars and exhibitions organized by various Franchise Association /

entities o Franchise prospectus and services for franchisees

The initial cost associated with franchising includes associated components related to all the activities listed above, as well as the next stage; i.e. ‘Franchise Launch’. Additional information on cost incurred by a typical franchisor is provided under Franchise Operating Cost for Franchisor section of this document.

5. Franchise Launch Upon execution of the franchise sales plan (preliminary component / phase); the franchisor will expect to generate enquires from investors seeking to understand and invest in the business as franchisees. A franchisor needs to build requisite capabilities in terms of a dedicated team to work with prospective franchisees. Conducting franchisee due diligence and careful negotiations with prospective franchisees is a key component in the franchising process. A franchisor needs to provide support to its franchisee not just in identifying and setting-up of the location / premises, but also in the initial marketing / promotional campaigns, leading right up to the (grand6) opening of the franchisee outlet. Careful planning and implementation helps franchisors to avoid problems (with franchisees) at later stages; these could entail:

• Problems of enforcing standards

• Franchisee independence

• Financial underperformance by the Franchisee It is important to note that the Franchisors rushing into recruiting Franchisees generally tend to have more problems than Franchisors who take time to implement the franchise system effectively and recruit suitable Franchisees.

6 This also involves media attention and or through invitation to known personality / celebrity as chief / one of the guests for the grand opening of the franchise outlet.

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Building Blocks for a Franchisor An entrepreneur having established and operated a business successfully for a couple of years (at least) and considering the franchising route must take cognizance of certain key aspects. There is a step wise process that needs to be employed (sequentially) in order to ascertain the franchise potential of a business, develop a franchise system and start offering franchise to potential franchisees. The essential building blocks for a franchisor are as follows:

Continued…

•It is the first and most important step for entrepreneur consideringfranchising as a potential mode of expansion for his business

•Potential and existing franchisors should develope a soundunderstanding of the basic and specific concepts of franchising througha process of self education or attending franchise specific trainingsand workshops

1. Education &

Training

•Potential franchisors should assess, whether their existing businesshas the potential to be become a promising franchise, which couldeasily be replicated and operated successfully in different geographies

•Every franchisor should have the requisite managerial, technical,operational and financial capacity to manage their franchisees and thebusiness owner should employ a structured process of analysingwhether they are committed to fulfilling the responsibilities of afranchisor to ensure sustainable growth for their franchisees

•It is recommended that the Franchise Potential and Readiness isassessed through external consultants specialising in franchising

2.Assessing Business Franchise Readiness

•Potential franchisors should have a strong / robust franchise system inplace, before they start franchising their brand

•A franchise system development involves a Strategic & Financial Plan,Franchise Documentation, Standard Operations Manuals, Advertisingand Marketing Plan, Training Plan and other documentation

•Potential and start-up franchisor could develop the franchise systemthrough Professional consultants specializing in franchising or throughan in-house team of professionals with the required expertise

•The process of franchise system development typically entails 6 - 9months

3.Franchise System

Development

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Continued…

•A franchisor is required to share a franchise agreement withprospective franchisees and this agreement forms the sole contractbetween franchisor and franchisee and serves as a basis for any kindof negotiation or dispute resolution

•Hence it is important that the business seeks professional legaladvise to draft a watertight franchise agreement which is thefundametnal basis for governing the relationship between thebusiness and its franchisees

•It is to be noted that the franchise agreement drafted as this stagewould be a generic agreement and might need customization basedon the laws of the land in which the business is franchising its brand

4.Legal Advise

•Once the franchise system is developed / designed, a potentialfranchisor would need finance to implement it

•Implementation of the franchise system includes executing all theplans and initiatives laid out as part of the structure of the franchisesystem and specifically entails the marketing and branding activities,establishment of the franchise supply chain and setting up of adedicated team to manage the entire 'franchising operations'(franchisee identification, management and support)

•In the process of becoming a franchise, the business is expected toinvest upfront in the development and implementation of the franchisesystem. The 'real' Return on investment commences only when thebusiness has identified 2-3 franchisees and those franchisees havealso started operations

•A franchisor could finance the cost of franchise system developmentand implementation either through owned funds or debt financing

5. Means of Finance

•Once the franchise system is developed and implemented, the potential franchisor can start the process of marketing its business to potential franchisees

•The franchisor needs to invest time and effort to ensure that a suitable franchisee is identified to carry forward its brand in a particular geography

•For identifying a potential franchisee / business partner, a franchisor could take assistance from professional franchise specific consultants engaged in 'match making' (for e.g. WFA, Francorp etc.) or through particpation in regional / international franchise exhibitions

6.Identifying a

Potential Franchisee

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•Once the business has identified a franchisee for its brand (post a thorough due diligence on its capabilites), it needs to work closely with the franchisee to ensure that the franchisee employs the right standards to establish the business in its (franchisee's) country of operations

•Once the franchisee has commenced operations, a franchisor is required to provide continuous support specially through regular training and marketing support

•A franchisor also needs to invest in developing the product / service portfolio on a continous bais and accordingly assist the franchisees in implementing the changes / modifications

•A franchisor should ensure that a dedicate franchise relations team is in place to provide the initial and ongoing support to its franchisees

7.Franchisee

Support

•Another important step, for a franchisor is the continuous monitoring of the franhisee's operations

•The franchisor should institute a system of periodic checks and audits to assess the performance of the franchisee from all aspects i.e. compliance to quality standards, financial performance, operational efficiency, investment in client acquisition & relationship management etc.

•The level of monitoring needs to be higher during the first few years of operations for an franchisee

8. Franchisee Monitoring

•The franchisor needs to continuosly invest time and effort in improving its product / service offering to ensure that the business is able to adapt to changing market requirements and trends

•The franchisor needs to work closely with franchisees in specific geographies to ensure alignment of product / service offerings to the consumers' needs and preferences in those geographies

9.Continuous

Product / Service

Development

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Franchise Operating Costs for Franchisor7 Franchise operating costs can be divided into two main components:

• Costs associated with the development and expansion of the franchise network; and

• Operational and administrative costs

Franchise Expansion Costs Franchise expansion related costs are incurred when expanding the number of franchised outlets, which includes:

• Franchise marketing

• Franchisee selection

• Franchisee training

• Location related costs

• Start-up assistance

FRANCHISOR’S MARKETING This can be expensive if the aim is to cover the national territory, to attend exhibitions and seminars, and to sell professionally. A more modest target area and careful use of the media could reduce this considerably. Each franchisor has to assess the resources available and determine the appropriate strategy. Marketing costs tend to decline as the franchise becomes better known.

FRANCHISEE SELECTION This may become one executive’s full time job, depending on the rate of opening which is actually planned. Often, franchisors tend to visit the country of the prospective franchisee once the discussions are at an advanced stage.

FRANCHISEE TRAINING The cost of training franchisees depends on the nature of the business and the skills required. In some franchises, familiarization training in running a shop / unit is all that is required and this is not deemed very expensive. In franchises where a high level of skill is required, training or retraining maybe a prolonged process and a substantial amount of it may have to be off the job training. Part of the costs of training maybe recovered if the training is in the franchisor’s owned outlet or the franchisee is responsible to pay for the entire spend on training

7 Source: The Irish Franchise Association

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LOCATION RELATED COSTS The major element here is the selection of premises, where quality retail operations are required to be set up. The franchisor may have to recruit a property manager to find premises and conduct negotiations with landlords. If location is not so important then the franchisee can be delegated to undertake the task, but the franchisor will still have to approve of the location and will normally also get involved in the negotiations with the property agent. Staff time and travel expenses will therefore still be involved in assisting franchisees. The other element on location related costs is advice to the franchisee on layout and refurbishment. The franchisee will normally deal directly with architects and shop fitters in its geography based on the instructions and guidance provided by the franchisor

START UP ASSISTANCE

To assist the new franchisee to get started, the franchisor will normally have one or more of his staff helping out in the first few weeks of operation at the franchisee’s new outlet. The staff required for this task will of course depend on the rate of franchise openings.

Operational and Administrative Costs The key elements under the operational and administrative costs are:

• Provision of services to existing franchisees

• Communication with franchisees

• Management of the national promotion initiatives of the franchise brand (as chalked out)

• Research and development related to the franchise products / services

• Office and other overheads All of these elements are difficult to forecast as they depend on the franchisor’s development strategy and the product or service being franchised.

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Glossary

Common Franchise terms

Franchise a license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control

Franchising a method of business expansion characterized by a trademark license, payment of fees, and significant assistance and/or control

Franchisor the person or company that grants the franchisee the right to do business under their trademark or trade name

Franchisee a license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control

Franchise Agreement the legal, written contract between the franchisor and franchisee defining the scope of work and the rights and entitlements for both the franchisor and franchisee

Franchise Disclosure Document / FDD

the document which provides information about the franchisor and franchise system to the franchisee

Trademark the marks, brand name and logo that identify a franchisor which is licensed to the franchisee

Initial / Upfront franchise fee

the payment made by a franchisee to a franchisor to secure the rights to a franchise. It covers the initial training, pre-operative assistance and the franchise 'right' provided to franchisee

Royalty the regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales

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QDB support for Franchise businesses Qatar Development Bank (QDB) has introduced customized support programs tailored to the

needs of franchisees and franchisors across all stages of the franchising life cycle.

QDB provides both financial and non-financial support to cater to the specific requirements of

businesses across the franchising value chain. An overview of the franchise specific support

programs offered by QDB is provided below

For Franchisee

Support Program / Product

Program / Product Objective Target Segment8

Debt Financing

§ To finance eligible businesses (New & Established Franchisees ) in the private sector where businesses require upfront investment, to start their business operations based on a franchise model or in the case of an established franchisee seeking finance to open additional units / outlets

§ Potential Franchisors

§ Start-up Franchisor

Training &

Education

• To increase awareness regarding the concept of franchising and promotion of best practices within franchising in Qatar by offering training on basic concepts as well as the specific and technical nuances of franchising

§ All franchisees (potential, new and established)

Market Research

Support (JADWA)

§ To provide access to professional consultancy services at a subsidized cost to conduct market feasibility studies in order to assess the viability of establishing a franchise business in Qatar, prior to signing the franchise agreement

§ Potential Franchisees

Legal Support § To ensure that legal counsel / advice is obtained through firms specializing in franchise specific legal aspects

§ Potential Franchisee

Franchise

Exhibition

Participation

§ To enable master franchisees to promote their brand and identify sub- franchisees in the region through participation in franchise exhibitions

§ Master Franchisee

8 Please refer to the annexure for details regarding the classification of the franchisees and franchisors

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For Franchisor

Support Program / Product

Program / Product Objective Target Segment9

Debt Financing

§ The product is aimed to finance eligible businesses in the private sector where businesses require upfront investment, in order to implement a franchise system.Keycomponentsofafranchisesystemwouldtypicallyincludethefollowingo Strategic&FinancialPlanforFranchisingo Marketing&BrandingPlano Salesplano FranchisingSupplyChain&CapabilityPlanningo ManpowerPlanningo StandardOperatingProcedures/Manualso FranchiseeTrainingManuals

§ Potential Franchisors

§ Start-up Franchisor

Equity Financing § To address the need for growth capital coupled with

guidance and advisory in order to ensure that business growth is accelerated in a sustainable manner

§ Established Franchisors

Training &

Education

• To increase awareness regarding the concept of franchising and promotion of best practices within franchising in Qatar by offering training on basic concepts as well as the specific and technical nuances of franchising

§ All franchisors (potential, start-up & established)

Franchise System

Development

§ To assist local businesses in assessing their franchise readiness and if found suitable, enable access to professional expertise in order to develop a robust franchise system for expansion through the franchising route

§ Potential Franchisors

§ Start-up Franchisor

Legal Support § To ensure that legal counsel / advice is obtained through firms specializing in franchise specific legal aspects

§ Potential Franchisor

§ Start-up Franchisor

Franchise

Exhibition

Participation

§ To enable local franchisors to promote their brand and identify franchisees in the region through participation in franchise exhibitions

§ Potential Franchisors

§ Start-up Franchisors

§ Established Franchisors

Country Specific

Industry

Information

§ To provide access to specific industry level information required to ensure compliance with industry / regulatory standards in a foreign geography, outside the GCC

§ Established Franchisor

9 Please refer to the annexure for details regarding the classification of the franchisees and franchisors

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Annexure

Classification of Franchisors & Franchisees

FRANCHISOR Definition

Potential Franchisor • A local business seeking to expand its business through franchising • Has not appointed a single franchisee

Start-up Franchisor • Franchisor having franchised its brand to <= 2 franchisees

Established Franchisor • Franchisors having franchised its brand to >2 franchisees

FRANCHISEE Definition

Potential Franchisee • An investor / entrepreneur / business seeking to establish a new business

as a franchisee of an established brand

New Franchisee • An investor / entrepreneur / business that has secured the franchise rights

for a particular brand and is in the process of establishing the business in Qatar

Established Franchisee • A local business established as a franchisee of an established brand having

more than 2 units / outlets in Qatar and / or a non-outlet specific franchisee operating for >= 2 years in Qatar