The arrangement of franchise in business has been accepted worldwide by a lot of businesses cutting across almost all sectors in business. Franchising has helped a lot of start-ups and entrepreneurs who wish to do business as a notable brand but for themselves and paying agreed percentage or amount annually or otherwise as agreed by the two partners. Here are the steps to creating a business franchise.
Franchisor: Owner of a brand or business venture
Â Franchisee: A partner wishing to use the franchisor’s brand in carrying out his business
Franchising is an exciting marketing method. If it’s properly structured and well run it provides benefits and satisfaction for both parties however it’s not an easy ‘route to riches’ for franchisor or franchisee, nor is it a panacea for the ills of a ‘sick’ business. Franchising can be described as the practice of the right to use a firm’s business model and brand for a prescribed period of time. The word “franchise” is of Anglo-French derivation – from franc, meaning free. For the franchisor, the franchise is an alternative to building “chain stores” to distribute goods that avoids the investments and liability of a chain. The franchisor’s success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
Establishing a franchise has to be undertaken with skill, patience and capital. The time scale for establishing a franchise system and preparing it for marketing can be as long as three years and it can take another three to five years before the franchisor begins to see net profits and cash flow. The capital requirements of a franchisor have to reflect these time spans. However once the network moves into net profit and achieves relative maturity, the return should make the effort and investment worthwhile. Examples of reputable companies that run franchise include but not limited to: McDonalds, Mr. Biggs, Golden Tulip Hotels, Boston Pizza, Embassy Suite Hotels, Dunkin Donuts, Wendy’s, PostNet, Metal Supermarkets, Intercontinental Group Hotels, 7-Eleven, Netspace and a whole lots of others. Even government owned establishments like NNPC in Nigeria is into the business of franchising.
The franchisor typically helps a new franchisee get off the ground, providing advice concerning location, setup, equipment, staffing, supply sourcing, advertising, staff training and other aspects of starting a new business. While you might have the ability to design and implement many of these elements yourself, the franchisor has proven experience that draws on years of trial and error. Also, you’ll benefit from any large-scale advertising campaigns the franchisor implements.
In return, the franchisee might pay the franchisor a start-up fee, a percentage of future gross revenues and a set fee for advertising costs. Also, the franchisee usually cedes over certain aspects of the business so the franchisor can protect the brand. For example, a franchisee might agree maintain certain quality standards, keep prices in line with the franchisor’s overall business strategy and participate in large-scale marketing promotions. These limitations protect the integrity of the franchise system, preventing a few poorly run franchises from ruining the whole system’s reputation.
ADVANTAGES OF FRANCHISE
As a Franchisor
- You have a business running for you but not run by you.
- You product/service reach more target with almost no effort from you.
- Your brand network increases thereby increasing in popularity.
As a Franchisee
- Starting up with a brand name already enjoying recognition
- No much advertising and sensitization needed
- Choice of the location can be chosen by you (Except otherwise stated in agreement)
- Franchise in business helps generate more sales as soon as you start as customers are attracted because of level of quality and consistency as it is mandated by the franchise agreement as standards are not to be compromised
- Franchise increase your chance of success in business
- Most likely, the franchisor trains the franchisee and also supports in the form of general advertisement, operation procedures and assistance and management support.
DISADVANTAGES OF FRANCHISE
As a Franchisor
- Franchisee may compromise quality and standard hereby affecting brand
- Might not be able control international franchisees
- Other reputational risks may abound
As a Franchisee
- General franchise business decisions might not consider the franchisee
- The franchisor is not compelled to renew the franchise agreement and might put the franchisee out of business
- Business must be done according to the operational manual of the franchisor
- Annual payment of franchise fee
- No complete control if you decide to sell your franchise business
- Your choice of location might be restricted except otherwise stated in agreement
- Franchise agreement may be terminated if other products/services is sold/rendered within the complex/office.
Types of Franchise
The different types of franchise include:
i.) Single Unit Franchise
ii.) Buying an Existing Franchise
iii.) Multi-Unit Franchise
iv.) Area Developer
v.) Master Franchise
Many franchise companies are looking for the right people to work with as this enables them to expand their business and awareness to different parts of the nation. But before investing money in any franchise business there are many things you have to understand such as asking yourself the following questions:
- Why do you need to buy the franchise?
- Is it right for you?
- What sector of franchise do I go for?
- Do I have enough capital for my initial investment?
- How many people will I employ?
- How to structure your profit?
The common thing about all franchise business is that you will be richly rewarded for your hard work and success. Some will reward you through royalty fees, housing project, medical insurance, traveling expenditures and many more.
Points To Consider Before Franchising
Franchising your business can be a very successful way of expanding. Some of today’s largest businesses have used franchising to finance and accelerate their growth into global brands. However franchising must be properly planned:
It must be pilot tested with company-owned and operated outlets
Business must be successful, distinctive and replicable
Take proper professional advice – Solicitor, Banker, Accountant and possibly a Franchise Consultant
The Franchise Agreement must be written by an experienced Franchise Solicitor
Take time to write an operations manual
Choose franchisees very carefully and slowly
Avoid overselling and forecasts
Have first class trainings
Focus on Franchisee satisfaction and profitability
Keep developing the Franchise and maintain standards
Ensure marketing, advertising and PR is first class
Proving The Business Concept
The average stand alone small business has an 80% chance of failure in its first five years of operation. Prior to franchising, a small business should operate for at least this time (and certainly no less than three years) to prove that it has a viable concept, ongoing market demand, replicable systems, and a management, logistic, marketing and training structure capable of supporting franchisees in a variety of locations. If not, the business may well become another statistic. During this period, it is highly desirable for the intending franchisor to open several outlets using their own capital in which they can test the adequacy of their systems, procedures, training etc. The lessons learned during this phase will reap dividends after the successful commencement of franchise operations.
Getting Proper Advice
Experts who are skilled and experienced in franchising can give you competent advice relevant to your franchising plans. Be sure to seek out these specialists.
In conclusion, Entrepreneurs and Start-ups who wish to start the franchise business should think of sectors such as Food Franchises, Retail Franchises, Hotel Franchises, Automotive Franchises etc.