The nuts and bolts of the Micro Franchisor Development Programme
By Kobus Oosthuizen
The basic principles of traditional franchising are relatively well understood, however the development of emerging franchisors and their business models within emerging markets presents unique challenges, inherent to the environment and era we find ourselves in.
How do you determine whether a business operating in the emerging market, without the benefit of proper management accounting systems, has the potential to be replicated and franchised on a commercially viable basis?
How would emerging franchisors, who invariably do not have access to the necessary resources, fund the high cost of developing and packaging a franchised business in a statutorily compliant manner that is also aligned to best industry practice and the requirements of the Consumer Protection Act (CPA)?
Experienced franchisors typically would have acquired their knowledge over several years working across various industries within the franchise industry. How does an aspiring emerging franchisor who, until now, has operated as a one-man business and has no prior franchising experience, acquire even a basic knowledge on how to package a franchise?
20 Is often quoted as a magic quantum of franchisees a franchisor needs to collect sufficient management fees in order to be sustainable, and to be able to provide the necessary support structures to their network. In view of the fact that emerging franchisees are generally smaller businesses with lower turnovers and a limited ability to afford management fees, how does the emerging franchisor survive until they achieve critical mass?
In order for franchisors to recruit, establish and support a network of franchisees, they require access to a number of specialist resources, from skills and financial assessment specialists to marketing consultants, project and procurement managers, trainers, IT and system whizzes, operational support experts, accountants, legal authorities, premises sourcing and lease negotiation professionals, and more. How does an emerging franchisor gain access to these expertise on a commercial basis?
We know that most successful franchised operations were established by a team of two experts — one a technical, product, operations and procurement expert, and the other a financial, legal, administrative and strategically inclined guru. How does an emerging franchisor, who is mostly the operations fundi, find a suitable partner to fill the administrative/ legal/funding/strategic roll to drive sustainable network expansion?
The Department of Small Business Development (DSBD) is funding a 3-year programme, that will employ a 3-phase strategy to develop 15 emerging franchisors to a stage where they can operate a sustainable franchise network.
The DSBD has already pledged significant funding towards the project and the Department of Trade and Industry, FNB and the Jobs Fund have also expressed serious interest in becoming involved.
The 3 phases of the Micro Franchisor Development Programme:
Identification, education & packaging
As important as it is to assess the ability of the business model to meet the requirements of sustainability and replicability, it is equally important to consider the potential ability and acumen of the business owner to assume the role of franchisor. Not every business can be franchised so it is important to have a clear understanding of the drivers contributing to the success of a specific business model.
In addition to managing franchise relationships, franchisors must be well-versed in the theory and best practices relating to franchise principles and running a franchisor operation. It is also crucial that franchisors appreciate and comprehend their operational support and legal obligations in terms of a typical franchise agreement.
The bulk of the intellectual property relating to a business system resides in the mind of the proprietor; in order for it to be of value to the franchisees, it must be articulated and reduced to writing. Packaging is the process whereby the necessary prescribed documentation is compiled, in a manner that ensures the franchisor is compliant in terms of the regulations of the CPA and best industry practice.
Piloting & optimisation
The format of the original business established by the potential emerging franchisor, with reference to its product range, resources required, corporate identity, target market and operational processes, probably differs from the intended or ideal business format to be replicated and adopted by future franchisees.
As it is not considered prudent to publicly offer a franchised business opportunity which has not traded on a similar format and business system before, it is good franchising practice for the intended model to be subjected to a pilot phase until profitability has been proven and all other key attributes of the business system have been optimized. Specific reference is made to aspects such as point-of-sale (POS) and back-office systems, design and layout, corporate identity, supply chain negotiation, and product or service range.
The pilot phase also serves as the final opportunity to complete the packaged elements such as the disclosure document and franchise agreement.
Replication phase via the micro franchisor support hub
This phase suggests that a viable business system exists and that it is franchise-ready. All the franchisor now needs is franchisees who are willing and able to invest into and run their own owner-operated businesses, a well as the infrastructure to recruit, establish and support such franchisees to ensure their sustainability.
As we remarked earlier, franchising is a resource-intensive affair requiring access to financial means and skills and even so cash flow would typically remain negative until the scales are tipped by the number of management fee-paying franchisees in the network.
The establishment of a subsidised micro franchisor support hub is pivotal to the success and sustained existence of a micro franchisor with single unit origins. This hub will operate on a shared services principle where the micro franchisors will have access to the same set of specialist resources required to expand their networks. Such shared resources would include teams of specialists operating across a number of brands who are focused on specific disciplines such as franchisee assessments and recruitment, franchisee training, legal agreement preparation, premises lease negotiations, project management, brand marketing, the invoicing and collection of management services fees, and many others.
Once a micro franchisor reaches a level of maturity where their management services fee income is sufficient to employ its own resource support base, it may be time to withdraw from the support hub.
We look forward to giving this project serious momentum over the next 12 months.