It 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. Business Partners and the commercial banks 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 a charge (franchise fee) which various 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 winning and proven business recipe to the franchisee. Many franchisors offer training as part of the deal. They are also instrumental in site selection, lay-out, sourcing suppliers of equipment and material.
This is not available to the non-franchise operator. What many franchisees complain about is the monthly fees. The franchise fees are often based on a percentage of turnover (5% is a popular figure) as well as an advertising fee (often 2%). The franchisee gets some back-up in return and corporate advertising.
It is a judgement call whether it is expensive. If you are a new entrant in the market place, franchising is an attractive option and we also recommend this route.
Is a franchise offering me a guaranteed return on my money?
No, it is for the entrepreneur (franchisee) to go out there and make money. The franchisor gives the basis, offer back-up and training, but success remains in the hands of the operator.
There are continuously new franchise concepts entering the market place. Some will be successful and others not. The entrepreneur has the responsibility to evaluate the franchisor.
How do you evaluate a franchisor?
You are making an important decision when you tie-up with a franchisor. The wrong decision will result in sure failure. Here are a few indicators to evaluate a franchisor:
Track record. Is it an established brand that has a successful track record in the market place? How many franchisees are operating? What does the franchise offer?
Consult already establishes franchisees. Call on the operators with a list of questions and possible concerns.
Financial strength. You can call for the financial statements of the franchisor. You will recall that a well-known pub franchise actually ran into financial difficulty some years ago. This left the franchisees in a predicament.
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 the information. The internet is also a handy source.
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.
Who is FASA?
It is a non-profit organisation established in 1979 to uplift the franchise industry in the country. Not all franchisors belong to FASA.
FASA offers information on franchising, act as mediator between franchisor and franchisee, promote franchising and in general want to ensure a high level of business ethics relating to the franchising industry.
Many well-known franchisors are members of this association which give some credibility but also some comfort to the franchisee and potential franchisee. FASA operates from Johannesburg (Tel. 011 615 0359). The website offers a host of information and is worth clicking on. (www.fasa.co.za)
Which products or services can be franchised?
Many new products, business concepts and services or those currently on the market, can be franchised. A prerequisite to be a successful franchisor is the ability to offer the entrepreneur a proven business concept. This includes the product range or the service to be offered.
Many potential franchisors contact the organisation with the view of franchising their product, but few are actually “franchisable”.
It is advisable to establish a track record and understand the business inside out. Open at least one outlet before considering multiplying the concept.
What are the disadvantages of franchising (from the franchisee’s point of view)?
The franchisor sells the entrepreneur a business concept. This comes with stringent rules and guidelines. The franchisee must comply with this and the franchisor can act should this not happen.
The freedom of entrepreneurship is now restricted and the franchisee needs to stay within the parameters of the franchise agreement. It often has to have supplies from a specific source, sell a prescribed range of products and conform to predetermined quality standards.
The franchise route is regarded as expensive. They also accuse the franchisor 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.