FRANCHISE PORTFOLLIO: ALTERNATIVE INVESTMENT IN REAL SECTOR

By Amir Karamoy *)     Franchise is a special right possesses individually or by an enterprise over a business system having a characteristic kind of business, with the objective of marketing goods or services which have been proven successful and can be utilized or use by other parties based on  a franchise agreement – as stated in the government regulation no. 42/2007 about Waralaba (franchise).   Based on the above comprehension, franchise can be defined as (1) a business system (in marketing) that has been proven successful; (2) this system can be utilized  or used by other party based on a franchise agreement. In short, franchise is  the use of a proven system of business by other parties, company or individual. The owner of this proven business system is called Franchisor and the party using it is the Franchisee. Most Franchisees are local and small business enterprises, while  Franchisor are medium or big companies.   Based on the data of 2008 (IFBM) there are 518 Franchisor companies in Indonesia which throughout the year 2008 had opened 41.381 outlets, consisting of franchised outlets and company owned stores – employing 890.128 workers. The franchise sales turn over reached up to Rp. 52,8 trillion (approximately US $ 52,8 million).  However, according to the Trade Minister franchise gross sales reached up to Rp. 80 trillion (US $ 80 million).   Foreign franchise holders are mostly interested in developing theirs company owned stores. While local franchise owners are more into franchised outlets. What is the differences between the two? Company owned store is a branch company or separately unit store owned and operated by the parent company (franchisor). While ownership of franchised outlet  can be from many parties  (company or individual). It can be illustrated contradictory as while company store is owned by only one enterprise, a franchised outlets by public.   Contextual to selling franchise portfolio by a franchisor,  building franchise outlets for the purpose of market expansion is often categorized as investing scheme in the real sector. The franchisor is the one who sells a franchise portfolio and the franchisee who buys is the investor.   At present,  there are two patterns in franchise investment (1) active investment; (2) passive investment. It is defined as active investment since the investor is fully involve in managing and operating his/hers daily business himself/herself (with supervision and guidance by the franchisor) so that the investment quickly returns and his/hers company grows with profit.    In this pattern the franchisor receives a payment from the investor as franchise fee or up-front fee which is paid once and an on-going royalty taken from the gross revenues of franchisee's outlets based on certain percentage as agreed and noted in the franchise/license agreement. While in the passive investment the investor (franchisee) only provide the capital and or asset (store building and its equipment) and the franchisor conduct the daily business operation of the shop or outlet owned by the franchisee. Through this passive investment pattern, usually besides franchise fee or up-front fee payed to the franchisor, every 3 or 4 months net profit from the franchisee outlets sales is distributed. Percentage of the profit sharing has to be negotiated and agreed by the parties affiliated. For example, 40% - 50% for the franchisee and 60% -  50% for the franchisor or vice versa.   Empirically, through several financial simulation ever conducted, franchise return in F & B and retail, are more  stable and on the medium and long term range higher than when investing in the capital market. Investment in franchise portfolio is not influenced by economical  or political issues and relatively stable facing the fluctuated exchange rate as well as  fluctuated regional market stock rate.   Several studies in the U.S..A. (among others: The US Federal Trade Commission, Arthur Anderson, John Naisbitt) revealed that the success rate of franchise business is 92% while non-franchise business 38%. Why is  the investor (franchisee) success rate high? It is since the investor buys a business experience as mentioned above – which has been proven successful. Isn't it true that "experience is the best teacher?"   If franchise should become a scheme for investment in the real sector than it should be recommended that regulation concerning franchise be more strict. Especially regulation on franchise professionalism and transparency on the initial franchise offering. For example, when a franchise is being offered by a franchisor, it is a requirement to disclose its financial  report which has been audited by a certified accountant (public accountant). And each franchise permit given by the Trade Ministry or Trade Local Office, should be based on recommendation by a professional independent institution or body which function to assess the financial health of the franchise business, such as, financial stability and profitability. KADIN (Indonesia Chamber of Commerce and Industry) and WALI (Indonesia Franchising and Licensing Society) could take the role of establishing  the body mentioned above.   The strategy to create franchise portfolio as alternative investment scheme in the real sector is to develop a reliable and bonafide franchisor, proven to be beneficial. Why? Because only through an experienced and successful franchisor will derive flourishing sound investors or franchisees – never the opposite.   June 19, 2009       *) Indonesia Franchising and Licensing Society - WALI Chairman of The Board and Chairman of the National Committee on Franchising & Licensing - Indonesian Chamber of Commerce and Industry (KADIN). Founder and previously was Chairman of AFI (Indonesian Franchise Association).