The franchise option for business expansion

Business, worldwide, is shifting, with the days of the giant multi-brand, multi-industry corporations numbered and Artificial Intelligence (AI) threatening traditional job security. South Africans, for far too long, have been indoctrinated away from any form of entrepreneurship, with corporations dominating the economy. But with corporates downsizing, unbundling and outsourcing, this opens up the door for the owner/operator mechanism of franchising to come to the fore.

With small business acknowledged worldwide as the engine to every economy and with the emphasis on the promotion of small business and the push by government for empowerment and job creation, franchising provides the ideal solution. Research has shown that the informal sector can be significantly improved and professionally managed under a franchised network. This mechanism also allows business to penetrate the informal market, which is growing at twice the rate of the formal sector. This is also significant in view of BEE which encourages ownership, management and control of enterprises in the South African economy.

Franchising has its roots in small business rather than big business, although successful franchisees grow with the necessity of becoming more corporate in their approach. The common perception of franchising is that of an entrepreneur who has an innovative idea or concept and through franchising, is able to duplicate his concept and grow it at a fast rate. Many existing and new businesses don’t recognize that their businesses could be successfully franchised. The pre-conception that franchising is predominantly a fast-food phenomenon is unfounded – today, almost every business sector can be successfully franchised.

Franchising is the way to go for many companies striving to increase efficiencies and profits. Spinning off businesses to franchise operators creates the huge advantage of decentralization. In a labour intensive business, and with prescriptive and restricting labour legislation, it could be a good move for many companies. The value of having an owner/operator involved in a business becomes clear if you contrast this concept to the operation of some of the massive retail chains in South Africa – some operating hundreds of stores. Controlling all aspects of these stores – from prompt opening, handling money to curbing theft and other losses – is considerably more difficult than when an owner/operator, who has laid his life savings on the line, is running an operation.

There is no question that the real worth of franchising has not yet been seen by most of corporate South Africa. “There is virtually no business which cannot benefit from franchising”, says Eric Parker of Franchising Plus. “Franchising also helps companies take control of their supply chains. Previously, the suppliers controlled the marketing chain through control boards and cartels, but today control has moved to the retailers who build a strong brand and add value to their product or service.”

In essence, franchising is a method of doing business which allows for an expanded distribution base for a product, service or business formula. A franchisor can grow his network using the capital brought in by franchisees who will also accept responsibility for day-to-day operations of their individual outlets. This enables the franchisor to concentrate his efforts, and resources, on further development of the product or service and the brand, while it is in the self-interest of the franchisees in the network to maximize business results at a local level.

For existing organizations franchising offers exciting opportunities as a distribution mechanism. It can be a means of vertical integration that combines a high degree of control with a low degree of risk. “The franchisor controls standards and procedures”, says Maria D’Amico, Chair of FASA “while the franchisee carries the operational and financial risk. By gaining control of its distribution channel, an organization has more control over marketing of its product or service. It is also closer to the consumer level through the franchisees and this increases the anticipation of trends in the consumer market. The opportunity also exists to franchise current operations, or to expand the concept further through franchising instead of the establishment of branches.”

Franchising is often described as a win-win solution, where the franchisor and his franchisees combine forces for mutual long-term benefits. It offers unlimited growth potential to entrepreneurs with a sound concept and the staying power to nurse it from small beginnings into a national, eventually, perhaps even international, concern. FASA’s CEO Fred Makgato warns, however, that those entering the franchise realm must have high ethical standards and a genuine desire to help other people to be successful. “Franchising does not lend itself readily for use as a lifeboat for businesses with cash flow problems, nor is it a suitable vehicle for get-rich-quick schemes that are, by their very nature, destined to be short-lived. For a franchise to be successful, the prospective franchisor must be prepared to make a substantial investment upfront and take a long-term outlook on returns.”