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A franchise is a tried-and tested business concept that is sold by the creators of the brand or business to those who wish to start their own enterprise without the hassle of making expensive mistakes.
The franchisor, or owner of the business concept, sells the idea and business model to another person, called the franchisee, for an initial investment and regular royalty fees. Some of the larger franchises in SA include Pick n Pay Family Supermarkets, Spur Steak Ranches, KFC, McDonald’s, Nando’s and Mugg & Bean.
Setting up a franchise would typically require the franchisee to put up an amount of capital, of which the largest portion should come from their pocket. The franchisee would be trained in the methods used by the franchisor, such as marketing, procurement, quality assurance and bookkeeping.
“Establishing a business requires the investment of a great amount of time, effort and money,” says Ethel Nyembe, head of small enterprise at Standard Bank. “Most potential franchise owners do not have the capital needed to launch and run an enterprise effectively, and therefore rely on borrowing.”
Pros and cons of buying a franchise
Keep the following in mind when considering a franchise, according to John Baladakis, chairman of the Franchise Association of SA:
PROS:
Unlike a truly independent entrepreneur, a franchisee need not prove the viability of the business concept. The franchisor has already tested the concept in their stores.
The franchisor will provide the franchisee with initial training; assist with site selection, fitting out and stocking up of the store; help with staff selection and training and also with preopening and opening publicity. The new entrepreneur needn’t reinvent the wheel.
The franchisor will provide the franchisee with ongoing assistance in all aspects of operations. This will be linked to quality control and appropriate feedback to the franchisee, aimed at helping the franchisee to improve all-round performance of their business.
The benefits of joint advertising, emanating from the advertising levy that most franchisors charge, maximises brand awareness. The franchisor, with a cumulative marketing budget, can more effectively operate an effective marketing programme from which all franchisees benefit.
The combined purchasing power of the network helps franchisees secure preferential deals from key suppliers. The franchisor either supplies goods to members of the network, or negotiates favourable terms on their behalf.
It is a known fact that the odds for business success are far more favourable for franchised operations than for their independent counterparts, and banks are generally more favourably disposed to lending to prospective franchisees.
CONS:
Increased set-up costs: “The costs of a turn-key franchise, with its upfront fee and the set standards in furnishings, fittings and equipment are often much higher than going into business independently,” Baladakis says.
Rigid operating requirements: “For individuals who thrive on experimentation and innovation, this may be a bitter pill to swallow.”
Ongoing fees: In addition to the upfront and set-up fee, a business format franchise system requires a contribution in the form of a management service fee (formerly known as a royalty), which is important in sustaining the ongoing support from head office to maintain a well-run franchise operation, says Baladakis.
Bad decisions by the franchisor: “If the franchisor makes mistakes, for example in his reading of market trends, then this could have serious consequences for franchisees in the network,” Baladakis says.
Restrictions on the sale of business: An independent operator is free to sell their business whenever they want to and to whomever they choose, says Baladakis. “Within the franchise scenario, the franchisor plays a big role in deciding on the suitability of the franchisee buying an existing franchise,” he says.
This article originally appeared in the 9 October edition of Finweek. Buy and download the magazine here.
