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The Power of Franchising
The power of franchising lies in taking a tested recipe for success into as many markets as possible. By some accounts, more than 35% of retail sales in the world’s largest economies are transacted through franchised outlets. In South Africa, this percentage is significantly less at about one-third of the above. This is because many of our best-known branded stores are centrally owned and managed by large holding companies. But with the current rate of growth of the local economy, fantastic opportunities are frequently opening up in South Africa for interested parties to secure their own franchises.
What is Franchising?
Franchising is simply a method of doing business, and a unique form of distribution. The word “franchise”, meaning privilege or freedom, has its origins in French. Thus, franchising offers people the freedom to own, manage and direct their own business, being in business for themselves but not by themselves. The best way to describe franchising is to see it as a “business marriage” between an existing business (the franchisor) and the newcomer to business ownership (the franchisee). It involves a contractual relationship between the franchisor and the franchisee, which governs the way the franchisee carries on his or her business.
The franchise owns the business, though the franchisor provides ongoing training, guidance and other services. The concept of a franchise aims to bring new business owners into the market, keeping risk at a minimum. The collective number of outlets operating under one brand and one standard not only support each other, but also reinforce the brand in the mind of the consumer.
A franchisee buys the right from the franchisor to open a “branch” of the business in a certain area. The franchisee agrees to operate under set rules, uphold a certain standard, and maintain a specific way of doing business. The franchisee may also agree to buy the raw materials only from the franchisor. The franchisee pays a regular fee to the franchisor for the right to trade under the brand name of the chosen franchise. In return, the franchisor promises the franchisee that the business he/she is buying is tried and tested and has proven successful. The franchisor agrees to train the franchisee to run the “branch” and to supports him or her in all aspects of the new venture.
Franchising is without doubt the most successful business mechanism in the modern world. It continues to provide the widest possible entrepreneurial opportunities for people from all walks of life and from all backgrounds.
To Franchise or Not to Franchise
Buying a franchise is like finally getting your hands on a recipe for that “to-die-for” chocolate cake. You have in your hands the formula to make things happen, but it is up to you to activate activate it. Similarly, a franchisor only provides you with a blueprint for business success – he will give you the tried and tested recipe, but he won’t bake the cake for you.
The decision to buy a franchise is a complex and personal one. People who buy franchises might want to operate their own businesses without the hassle and the struggle of developing and maintaining growth and profitability on their own.
The primary benefit of buying a franchise is that the chance of failure is much lower than what it would be if you were starting a business from scratch. Most importantly, people buy franchises because they don’t want to make wrong decisions when starting a business. Franchising, if approached correctly, can significantly improve the chances of establishing a profitable business.
This higher probability of success, though, should be weighed against the willingness to part with a certain percentage of profit, and with a certain loss of independence. Highly independent people might find the format according to which they have to run the business too restrictive while others may be perfectly content with the aforementioned restrictions given the amount of stability offered by a franchise.
The transitional nature of the current South African labour market makes the freedom to take control over one’s own future and security an attractive alternative to formal employment. Finding a franchise that suits one’s interest and ambitions could be the first step towards creating the freedom and peace of mind of which we all dream, and only some ever realise.
The Challenges of Franchising and Resultant Key to Success
The first challenge is to choose a business that you can afford, that you enjoy, that gives you the training and the know-how, that gives you the support you need, and which provides the financial return you want. The second challenge is to take the proven formula for business success and make it work for you. The challenge of a franchise opportunity lies in three vital ingredients, namely opportunity, means and motivation.
The key to success lies in the franchisor and the franchisee’s interdependent relationship. The franchisor, who has run a pilot operation for at least a year and shaped a system that’s tried and tested, seeks to expand by selling franchises by replicating his business system. The franchisee then buys the licensed rights to clone the package in a specific area for an agreed number of years. By investing his capital, time, effort and motivation, the franchisee will, with the help of the franchisor’s protected know-how, branding, manuals, equipment, products, operational systems, expertise, quality, standards and controls, training and support services, be able to make a success of his business.
Advantages and Disadvantages of Franchising
Certainly, the most important benefit of owning a franchise is the rate of success of these as opposed to independent start-up businesses. The latter has a failure rate as high as 90%, while franchised businesses have a failure rate of only 15%.
Advantages:
• A proven operating system
• Increased potential for success
• Support from other franchisees and franchisor
• Training, skills and ideas transfer
• Buying power
• Brand recognition and effective marketing
• Consumer confidence
• Value, consistency and comfort
Disadvantages:
- Not for everyone – a person who is too entrepreneurial may find a franchised environment with strict business principles, systems and procedures too restrictive.
- Service Fees – buying into an established franchise system means paying management service fees.
- Contractual obligation – buying into an established franchise system also means you are locked into a contractual agreement for a set period of time. But, in the end, that is what makes the franchise and you successful.
The Responsibilities of Each Party
Seen in a comparative way, each side’s responsibilities are as follows:
The Franchisor:
- 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 corporate power, know-how, training and support services
- Gains a new outlet with minimum capital investment in setting up
- Expands his network cost-effectively
- Benefits from franchisee’s financial and management investment in network growth
The Franchisee:
- Benefits through a business start-up based on a ready-made business package
- Buys the rights to advertise and sell goods or services and in effect clones the whole business package of the franchisor in a specific area for a specific period of time
- Invests capital, time and effort to replicate the business according to the franchisor’s system
- Must follow the franchisor’s standards, methods, procedures, techniques and marketing plans
- Must pay a fee to the franchisor for the right to use the trade marks and business system
- Must market the brand, work the operating system and use the support system to get and keep customers
- Gets a blueprint on how to succeed in an independent business
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