Understanding the business of franchising
By Giuli Osso –
The word “franchise” in French means “privilege” or “freedom” – in essence giving an individual the “right” to something – in this case the right to operate a business or licence under specific conditions.
Franchising is, without doubt, the most “public” of business formats. You recognise a franchise because it carries a strong brand, has a distribution mechanism that reaches far and wide and provides a uniform product, service and image to the public. The word franchising, however, can apply to many “rights” – from the franchising rights of cartoon characters like Mickey Mouse or movies like the Matrix to the franchise “rights” of soccer clubs like “Ajax”.
Business Format Franchising is defined as a distribution network operating under the shared trademark or trade name with franchisees paying the franchisor for the right to do business under that name for specified period of time. In exchange, the franchisee is able to use the franchisor’s business system or format, including the name, goodwill, product and services, operating manuals and standards, marketing procedures, systems and support facilities. The franchisor, in turn, is obliged to give initial and ongoing services and support.
Product & Trade Name Franchising is characterized as a sales relationship between a supplier and a dealer, product and trade name franchises can be found most commonly in car dealerships, petrol service stations and cold drink bottlers. The dealer is granted the right to sell its products in exchange for fees and royalties and has an obligation to sell only the franchisor’s products.
Get the Facts on Franchising
On a more basic level, franchising is really just an extremely good distribution method. The “franchisor” or person who starts a company or develops a concept, uses others (franchisees) to duplicate his concept and distribute it on a large scale. This inter-dependency forms the basis to the business format and its success lies in the effective implementation of certain basic but clearly defined business principles. The juxtaposed relationship between franchisor and franchisee needs to be fully understood and accepted for the overall business to succeed. The responsibilities of each side include:
- is the originator of the concept
- provides an established and tested business system
- has an established name, brand and trade mark
- sells “clones” of his concept in order to grow the business and build the brand
- supplies the know-how, training and support services
- expands his nework rapidly and cost-effectively
- benefits from pooled operational efficiencie
- buys a ready-made business package
- buys the rights to operate under a well-established brand name
- invests capital, time and effort to replicate a proven concept
- must follow the franchisor’s standards, methods, procedures, techniques & marketing plans
- must pay a fee to the franchisor for the rights to use the trade mark and business systems for an agreed period of time.
- benefits from skills transfer, training and business support
- invests in a viable business that will prove to be a good investment.
THE MYTHS OF FRANCHISING
People read stories about successful franchisees and think: “I could do that!” Perhaps they could, but before they rush out to make an investment they may live to regret, they should do some careful research – not every statement made on issues surrounding franchising stands up to closer investigation. Franchise guru Eric Parker of Franchising Plus in his book Franchising in South Africa – The Real Story dispels some of the myths of franchising.
A franchise guarantees success.
No, it doesn’t! And anyone who tells you otherwise is either a fool or a con artist. A properly constructed franchise is a blueprint for business success, nothing more and nothing less. Every bona fide franchisor will tell you that the success of the franchise depends on the franchisee’s ability to make the best of the guidance and support that the network offers.
There is a franchise for everyone.
No, there isn’t! It is true that franchises come in many shapes and sizes, and cover a wide variety of industry sectors, but all business format franchises have several things in common, of which the following stand out:
- A franchised network’s success depends on the systematic duplication of a proven concept.
- Every member of the network is expected to live, eat and sleep the brand. In practice, this involves a number of activities that interlock to create a successful network, and therein lies the rub:
- Some individuals resent being told in detail how to carry out certain tasks. They think they know a better way of doing things and want to be left alone to get on with it. Of course, they may have found a better way, but as franchisees they can’t just go ahead and implement it.
- Others perceive the franchisor’s efforts to maintain network-wide standards as unwarranted interference in their business affairs. They receive visiting field service consultants with hostility and refuse to share information with them. It is in the interest of the brand, and all members of the network, that the franchisor exercises operational control.
- The requirement to keep the businesses’ administration up to date and submit reports on time often creates friction. Financial and other operational data, received in good time, are the lifeblood of any network, because they inform the direction the business needs to take. Responsible franchisors will not compromise on this requirement.
Franchisees are expected to act like zombies.
No, they’re not! The franchisor has spent a lot of time and money on developing the system and honing it to perfection. Even more importantly, the network’s brand has created certain expectations in customers’ minds. They expect to receive the same product and/or service and enjoy an identical buying experience with whichever outlet of the network they do business. This is the way it should be. Otherwise, why invest in a franchise in the first place? It follows that standardization is necessary. However, if a franchisee indeed discovers a better way of doing things, a good franchisor will want to hear about it. He or she will have put mechanisms in place that allow head office staff to test the merits of the idea, usually in one or more company-owned stores. If the franchisee’s idea is found to constitute an improvement, it will be systemized and released into the network. Proceeding in this manner ensures that brand coherence is maintained.
A chance to leave the rat race.
This is our favourite myth! Some people believe that they can invest in a franchise, build it up to a level that allows them to earn a comfortable living, and then sit back and enjoy the fruits of their labour. We don’t know of any franchise that delivers on this expectation. The franchisee will be expected to work harder than he or she has ever worked before, with good reasons. Every network’s strength depends to a large extent on market share. Generally speaking, the bigger the share of the market a network holds the stronger it is. It impacts on business realities such as the ability to provide top class franchisee support and to negotiate preferential supply arrangements. Unless every franchisee maximizes unit performance at local level, the totals won’t stack up and the brand will lose power. It is precisely for this reason that some franchisors refuse to accept absentee-owners as franchisees. It has been shown time and again that owner-operated units significantly outperform units that are entrusted to managers, and seasoned franchisors know that.
All franchises are the same.
No, they’re not! Although business format franchising is the most common franchise model, one must not confuse it with product/trademark franchise model which differs in some important respects. Product/trademark franchises focus on the brand name and the product or service. Franchisors will jealously guard these two aspects of the franchise package, but will not provide the level of initial and ongoing support that is the hallmark of a business format franchise. Some individuals will embrace the product/trademark concept because it allows them a greater degree of freedom, but this freedom comes at a stiff price. Business Format Franchising, on the other hand, offers initial and ongoing support, provides access to proven systems and procedures, and operates a dedicated franchisee support infrastructure. Both franchisors and franchisees recognize this, and former product/trademark franchises are increasingly converting to fully fledged business format franchise systems.
Franchised networks are failure-proof.
Not necessarily! While most franchised networks are indeed stable, some exceptions exist. Firstly, there are those who start franchising before they have the necessary infrastructure in place. They believe in the concept and promote it enthusiastically, but eventually they run out of steam and the network folds. As long as prospective franchisees do their homework properly, they should be able to spot these franchisors easily. Our recommendation is that such franchisors should be avoided, no matter how attractive their offer may appear to be. Cases of established franchisors that seem to have everything in place but then suddenly find themselves in serious financial trouble are more worrisome. It is extremely difficult for an outsider to spot them until it is almost too late. Fortunately, such operations can usually be rescued by an entrepreneur who recognizes that the business is inherently sound and spots a chance to acquire its valuable assets at a substantial discount.
Extract courtesy of Franchising in South Africa – The Real Story, written by Eric Parker and Kurt Illetschko and sponsored by FNB.
WHAT FRANCHISING IS NOT
Franchising is just one of many methods of ‘distribution’ and many prospective business owners don’t understand or are misled into buying a business which is clearly not a franchise.
- NOT an Idea
An idea is not a franchise and cannot be franchised. The inherent elements of a franchise revolve around a tried and tested concept and it is the franchisor’s responsibility to pilot the concept, set out the business format and make it work as a viable business venture.
- NOT an Investment Instrument
Those who think they can ‘invest’ in a franchise as they would invest in shares but not be actively involved are mistaken. A franchisee owner is very much an owner/operator, playing an active role in the business and through his hands-on efforts reaps the rewards of his investment.
- NOT a Partnership or Joint Venture
In a franchise agreement between franchisor and franchisee there is no common ownership of the business and neither party is responsible for the others’ debts or liabilities. The franchisor provides the business format system, the trademark and name and the franchisee owns and operates the business for the number of years specified in the contract.
- NOT a Distributorship or Dealer
Both a distributorship and a dealer run independent businesses and are in essence, middlemen for the companies on whose behalf they are operating. Unless contractually bound, they have the right to buy and sell products and/or services from anyone to anyone and are not prescribed by any business format system (as in a franchise). They remain independent entities in law, in spirit and in conduct.
- NOT an Agency
This concept is the one most confused with franchising. In an agency arrangement there are two parties – the principal and the agent. The principal grants the agent the right to distribute the product or products, usually in a defined geographical area and under his own name and not that of the principal. The agent is not required to follow a specific business format and does not have the stringent controls that a franchisor has over his franchisees.
- NOT Multilevel Marketing
Multilevel marketing is the establishment of an unlimited number of levels where members sell products or services and promote the registration of new members as part of the system. Members at the upper levels receive payment according to sales generated and payments made by those lower down on the payment scale.
- NOT Licensing
Seen mostly in movie franchises, character/celebrity licensing, technology transfer and trade mark licensing, involves the licensor giving the licensee the right to use the licensor’s name. The licensor collects royalties and supervises the correct use of the license without concerning himself with how the licensee runs his business.
This article is an extract from FASA’s 2011 Franchise Directory which features a wide range of interesting articles on franchising and also lists FASA’s member base. To order a copy of the FASA Franchise Directory order online at www.fasa.co.za or email email@example.com