What is franchising?
Provided by Business Partners Ltd, South Africa's leading investor in SMEs
Franchising is a business arrangement between a franchisor (the owner or holder of a business concept, brand or an arrangement) and the franchisee (who acquires the rights to operate in accordance with a franchise agreement).
The franchisor allows the franchisee the right to use its trade name, business methods and know-how. In return, the franchisee accepts certain restrictions on the way he or she conducts their business. The franchisee also undertakes to make royalty payments (franchise fees) to the franchisor.
What are the advantages of a successful franchise?
- It is an easier way for the inexperienced entrepreneur to enter the business world. Instead of re-inventing the wheel, a business concept is offered that has been proven over a period of time. It increases the chances of making money although it is not guaranteed
- Raising finance is easier than a non-franchising operation. Most financiers will consider franchise operations in a different light to a start-up operation that is unknown. Funding is not guaranteed, but it makes the entry easier
- It is normally easier to sell a franchise operation. The buyer knows what the business or brand is about and makes the selling process easier
- The back-up, training, support and expertise offered by a good franchisor is invaluable to the new entrant
- The established brand and the marketing efforts introduced by the franchisor alleviate the pressure of the marketing responsibilities
- The franchisee can call on fellow franchisees to exchange views, share concerns, discuss problems and seek solutions. They have so much in common and it often acts as a sounding board with someone in the same business
Is a franchise cheaper than a non franchise business?
There are various franchise or licence agreements in place today. Many have an upfront charge, called a franchise fee, which varies from R10 000 to R75 000 for the well known restaurants/food outlets. What you get in return for this is firstly the concept.
A franchisor is selling a proven business recipe to the franchisee and many franchisors offer training as part of the deal. They are also instrumental in site selection, lay-out, sourcing suppliers of equipment and material, which is not available to the non-franchised operator.
What many franchisees complain about is the monthly fees that are mostly based on a percentage of turnover. These fees often include a royalty fee (5% on turnover is a popular figure) as well as an advertising fee (often 2%). In return for the payment of these fees, the franchisee receives support from the franchisor and corporate advertising.
If you are a new entrant in the market place, franchising is an attractive option and should be investigated carefully.
Is a franchise offering a guaranteed return on my money?
No, it is for the entrepreneur (franchisee) to go out and make money. The franchisor provides the basis, offer back-up and training, but success remains in the hands of the franchisee.
There are always new franchise concepts entering the market place fo which some will be successful and others not. Ultimately it remains the responsibility of the entrepreneur as potential franchisee to evaluate the franchisor.
How do you evaluate a franchisor?
You are making an important decision when you tie-up with a franchisor and the wrong decision can result in failure. There are several indicators to evaluate a franchisor, such as:
- Track record. Is it an established brand with a successful track record in the market place? How many franchisees are operating? Is the franchise brand growing or closing outlets and losing market share? What does the franchise offer?
- Consult already established franchisees. Call on the operators with a list of questions and possible concerns.
- Financial strength. You can ask for the financial statements of the franchisor to investigate its profitability. If a franchisor is not financially sound, it may not be able to provide you with the support and assistance you'll need.
Where can I find more information on available franchises and what the cost?
There are a few available sources. The well known franchisors have brochures and information leaflets and a telephone call will give you access to this information. Conducting an internet search on different franchise options can reveal much needed information in order to make a decision of whic opportunity to pursue.
The FASA (Franchise Association of Southern Africa) year book that is available from many bookstores and news agencies is probably the easiest and quickest method of evaluating what is available.
What are the disadvantages of franchising (from the franchisee’s point of view)?
- The franchisor sells the entrepreneur a business concept that comes with stringent rules and guidelines. The franchisee must comply and the franchisor can take action should this not happen
- The freedom of entrepreneurship is restricted and the franchisee needs to stay within the parameters of the franchise agreement. It often has to procure from specific sources, sell a prescribed range of products and conform with predetermined quality standards
- The franchise route is regarded as expensive and franchisees often accuse franchisors for not offering value for money in terms of the franchise fees payable
- The franchisee is in the hands of the franchisor and if the product, brand or advertising campaign fails, it may have a detrimental effect on the business
- The franchisee is often disappointed with the level of assistance, hand holding and support offered by the franchisor. The franchisee should realise that it is up to them to make it work
Which franchise can be recommended?
It depends what the entrepreneur expects from a franchise since franchises vary from small drain cleaning operations to family restaurants with a set-up costs in excess of R2 million.
As is the case with any other business to be considered, the entrepreneur should take stock of his or her own requirements, skills and preferences. What are they good at? What do they prefer to avoid? How much money do they want to invest? The working conditions, working hours and the nature of the product are further considerations.
A franchise gives a key to enter the business world, but it is for the franchisee to make it work. They need to be comfortable with the business they are about to run. There are successful and less successful franchises on the market, bt ultimately it is for the entrepreneur to study and evaluate the options available.
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