Franchising Q & A
The Most Commonly Asked Questions on Franchising
Before embarking on buying a franchise you need to cover all the basics, ask all the questions and be satisfied that you understand all the implications of investing in a franchise.
According to FASA, “A franchise is a grant by the franchisor to the franchisee, entitling the latter to the use of a complete business package containing all the elements necessary to establish a previously untrained person in the franchised business and enable him or her to run it on an ongoing basis, according to guidelines supplied, efficiently and profitably.”
The litmus test to prove this theory would be to take the same start up business, set it up independently as well as through a franchise system, and monitor the results. There is no question that a Steers or McDonald’s outlet will have a greater chance of success than Joe’s Burgers. Although the success of any business ultimately depends on the person who runs it, a franchise business, with its business format system, offers a greater degree of protection from the cold winds of the free market with its support system of training, marketing and business administration. Whilst franchises succeed because of support, they also succeed because they follow a system.
When you walk down a main street in any city and you recognise a host of branded fast food outlets, entertainment shops or office services, you are looking at franchised outlets operated by franchisees. The key to the success of these franchisees is the fact that they all follow a successful formula – from the products and services they offer to the look of the stores. The buying public has more confidence in an established brand which has many outlets and a distinctive offering. With a franchise there is name recognition, buying power that greatly affects the bottom line and ongoing support in the form of research, development, new ideas, market analysis, marketing and the creation of new products. A good franchise is tried and tested and commercial banks and development corporations recognise the lower risk profile of franchising and consequently prefer financing a franchisee.
Usually with a good idea! An individual entrepreneur or company starts a business, runs it successfully for a reasonable length of time, has unprecedented interest in the product or service by both the consumer as well as other entrepreneurs and decides to duplicate his successful concept. Once he registers the trademark and develops an Operations Manual, a Franchise Contract and a Disclosure Document, he is free to grant licenses to others (franchisees) to trade under his trademark under the regulations and controls relating to the operation of the business in return for fees. The effective duplication of the concept with a distinctive brand and targeted marketing ensures rapid and effective market penetration and widespread brand recognition.
When you walk down a main street in any city and you recognise a host of branded fast food outlets, entertainment shops or office services, you are looking at franchised outlets operated by franchisees. Although many franchisors operate their own company-owned outlets, they usually operate from a head office and control the day-to-day running of the franchised business and the servicing of all its franchised outlets.
Since its inception in the 1950’s, franchising has developed into a global phenomenon, stimulating entrepreneurship and creating jobs and wealth throughout the world. Franchising is making huge strides in developing countries as it is one of the strongest mechanisms for SME growth.
If one considers that in the United States there are over seventy different business sectors that are franchised, it becomes clear that any area of business – be it food, wholesale, retail, manufacture or service – can be successfully franchised. Franchising is often referred to as the “innovator of new business” as it is the one business system that introduces novel concepts and patents new products. Franchise sector trends vary according to market conditions; food is always popular with new concepts continually being launched. In recessionary times, the DIY and motor repair franchises do well as people opt to do things themselves or repair rather than buy new.
Any business, which is run under a management structure can be franchised. However, not all franchised businesses will succeed. There has to be a demand for the product or service and the concept must be proved in practice to be successful. That said, the range of “franchiseable” sectors is huge and South Africa (which has less than 20 franchised sectors) has a long way to go to reach the range that is found in leading franchise countries like the United States and the United Kingdom which tops 80 sectors.
Whilst consumers do want variety they also want the familiar and therein lies the secret of franchising. By duplicating a good product or service, a franchise concept reaches out to thousands of people who feel comfortable and safe buying their product or using their service. Hence the unprecedented success of fast food franchises. But people still want variety and the appearance of a new, say chicken franchise on the market, can spark renewed interest because it may offer something a little different or a totally new buying experience.
The answer may lie in an old saying: Wise is he who learns from experience. Wiser still is he who learns from other people’s experience! It’s a question of tapping into a business concept that has already proved itself, that has the infrastructure, that has captured the market. All the franchisees have to do is invest in a business, follow the business format and put in the effort as an owner-operator.
The most obvious drawback lies in the acceptance of the franchise system itself. Although a franchisee becomes his own boss, he is contractually bound to adhere to the franchisor’s operational guidelines. For someone who likes doing things “his way” this could prove a problem. The cost of buying into a franchise, with its structure of up-front fees and set up costs, is often very high and a franchisee is obliged to pay ongoing management service fees (royalties) for the duration of his contract period. Restrictions may also be placed on the franchisee’s ability to sell the franchise as the franchisor has a say on the proposed buyer’s suitability.
The concept of franchising has elements that can be easily misconstrued and misrepresented. There are always unscrupulous entrepreneurs who, under the guise of franchising, will make empty promises and sell unethical businesses to unsuspecting business operators. To try and protect you, the consumer from such operators, the global franchise fraternity have united under the World Franchise Council, made up of franchise associations throughout the world, who try and lay down ethical standards for the industry. With government gazetting the Franchise code and the imminent appointment of an ombudsman for the sector, FASA will become an even stronger entity in controlling ethical franchising in South Africa. Until such time, we advise prospective buyers to focus on companies that are members of FASA in good standing. Although being a member is no guarantee that the business opportunity you invest in will be profitable and without its problems, and that there is risk in any business venture, we trust that our members will provide you with a genuine business opportunity.