SA Franchise Warehouse

WEIGHING IN ON FRANCHISING

Franchising, like most things in life, holds both advantages and disadvantages. In order to arrive at an informed decision, in addition to understanding the advantages and disadvantages of franchising, prospective franchisees must also attempt to see things from the franchisor’s point-of-view.

ADVANTAGES FROM THE FRANCHISEE’S VIEWPOINT

• The use of an established brand

Under the franchise contract and its terms, conditions and contract period, the franchisee is allowed to operate under the umbrella of an established brand, using a recognized trademark and operating in accordance with tried and tested operational principles.

• A proven system

Unlike a truly independent entrepreneur, a franchisee need not prove the viability of the concept. This has been done for him by the franchisor, who has tested the concept in his own stores. This extends to the product or service, the marketing thereof and the systems and procedures necessary for the profitable operation of the business.

• Start-up assistance

The franchisor will take every new franchisee under his wing. Franchisees receive initial training, assistance with site selection, fitting out and stocking up of the store, staff recruitment and training as well as pre-opening and opening publicity. The new entrepreneur need not reinvent the wheel, and this is obviously a big advantage.

• Ongoing support

The franchisor will provide the franchisee with ongoing operational assistance in all aspects. This will be linked to quality control and appropriate feedback, aimed at helping the franchisee to improve the all-round performance of his business in accordance with group norms. A fact often overlooked by critics of franchising, is that the franchisor’s support structure in growing the brand enables the franchisee to concentrate on building the business and servicing the customer base.

• Peer support

Going into business for yourself can be a very lonely endeavour, with very little opportunity to compare notes with similar businesses.  The franchisees of a franchise network, is a ‘family’ of like-minded business people all set on achieving success. Challenges and problems can be shared individually or in group sessions, seminars and conferences arranged by the franchisor.

• Benchmarking

The success of a good franchisor lies in the ability to benchmark the entire franchise operation, fine-tune the costs and build up the most optimum operating blue-print for all-round success.

• Joint advertising

The benefits of joint advertising, emanating from the advertising levy that most franchisors charge, maximizes brand awareness. The franchisor, with a cumulative marketing budget, can more effectively operate a successful marketing programme from which all franchisees benefit. Moreover, local advertising undertaken by franchisees will often be developed centrally, resulting in increased effectiveness and substantial cost savings.

• Purchasing power

The combined purchasing power of the network helps franchisors secure preferential deals from key suppliers. The franchisor either supplies goods to members of the network, or negotiates favourable terms on their behalf.

• Easier to obtain finance

It is a known fact, that the odds for business success are weighted in favour of franchised operations rather than their independent counterparts and that banks similarly are more favourably disposed to lending to prospective franchisees, especially if the franchise system is an accredited FASA member or has been audited by the bank.

DISADVANTAGES FROM THE FRANCHISEE’S VIEWPOINT

• Taking a business risk

Although franchising offers a much lower failure risk when compared with independent businesses, there is always a risk in going into business. Aspiring franchisees may find it difficult to assess the quality of the franchises on offer, or may discover only after signing the agreement that the franchise is not as it appeared to be.  Meticulous investigation of each opportunity is crucial to a sound decision.

• 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 when going into business independently, but this is countered by the fact that all the research and contacts are already in place, making up for the added costs. This aids the franchisee in establishing the business quicker and shortens the period until breakeven is reached. Many franchise concepts, especially in the food sector, also build store up-grade clauses into their contract. This means that after a certain period, the franchisee will be required to refurbish the outlet at his own expense.

• Rigid operating procedures

The success of a franchised network depends on replicating the proven formula and adhering to the proven business system. Franchisees must remember that although they own the infrastructure of their businesses, they are contractually bound to adhere to the franchisor’s operational guidelines. For individuals who thrive on experimentation and innovation, this may be a bitter pill to swallow.

• On-going fees payable

In addition to the upfront and set-up fee, a business format franchise system requires a monthly contribution in the form of a management service fees (formerly known as a royalty) which is important in sustaining the on-going support from head office necessary to maintain a well-run franchise operation. Some franchisees may regard the management services fee coupled with the advertising costs, which are pegged at either a percentage of turnover or a fixed fee, as onerous.

• Bad decisions by the franchisor

Mistakes by the franchisor, in for example reading market trends, could have serious consequences for franchisees in the network. This is but one reason why it is imperative to investigate the track record of a franchise before signing on.

• Rebel franchisees

If a franchisor does not impose strict operating procedures and standards that all franchisees are required to adhere to, there is a risk that renegade franchisees will let the side down and cause irreparable damage to the franchise and the brand.

• Restrictions on the sale of the business

An independent operator is free to sell his business whenever he wants, to whomever he chooses. He would not need to concern himself with the suitability of the purchaser to operate the business. Within the franchise scenario, the franchisor plays a big role in deciding the suitability of applicant franchisees. 

• Business failure

In any business venture there is always a chance that the business will fail. The reasons vary from recessionary developments, to a loss of reputation or appeal of the product or service, or perhaps the franchisee is not cut out for self-employment or simply loses the drive to succeed.

Whilst franchisees are urged to consider the pros and cons of buying into a franchise it is also good to look at the advantages and disadvantages from a franchisor’s point of view. Although it may appear that the franchisor stands to gain the most, this is not always true and the responsibility of running and maintaining a successful franchise is an onerous one. 

ADVANTAGES FROM THE FRANCHISOR’S VIEWPOINT

• Less capital required

Although starting a new franchise concept is not for the faint-hearted and requires substantial financial investment to get the brand up and running, franchisees buying into the system provide the funding to effectively grow the brand. Business expansion via the franchise route absorbs less capital than the establishment of branches would require.

• Rapid expansion possible

By employing franchising as the means of driving his business expansion plans, an entrepreneur is able to realise his expansion plans based on the investments made by franchisees. With franchisees providing the start-up capital and assuming responsibility for the day-to-day operations, an entrepreneur can grow his business much faster than by establishing a network of branches.

• Streamlining operating costs

A franchisor is able to streamline operating costs and branch staff costs as each franchisee takes care of their own operating costs. The franchisor can then focus on developing the brand, getting the best possible deals from suppliers and making sure that he services the franchisees.

• Retaining control

Even with a network of franchisees who finance and manage their own businesses, the franchisor always retains complete control over the brand and its development. As a result, expansion can proceed at a much faster pace than would otherwise be possible.

• Enhanced buying power

The critical mass achieved by the increased number of outlets, increases the buying power of the franchisor, improving the competitiveness of the franchisees and increasing market share.

• Dedicated owner-operators

Franchisees who invest their own money are usually more committed to the long-term success of the business than a salaried branch manager. This in turn tends to lead to increased customer satisfaction and accelerated growth of the individual outlets. It also results in enhanced feedback on market trends and competitor activity at a local level, further enhancing the entire network’s chances for accelerated growth.

• Benchmarking

With a pool of franchisees showing consistent performance, the franchisor is able to benchmark and streamline forward planning to benefit future growth.

DISADVANTAGES FROM THE FRANCHISOR’S VIEWPOINT

• High set-up costs

To establish and operate an effective franchise requires capital and the initial input includes the research and development of the system, the set-up of a pilot operation and testing the viability and sustainability of the concept. Although this expense is recouped to a certain degree through the upfront fee charged to subsequent franchisees, the management services fees are also used to run an effective support structure for franchisees.

• Risk in franchisee selection

Selecting the right franchisees is an onerous task. There is always a risk of selecting the wrong franchisees who may damage the brand.

• Obligation to the franchisees

Unlike entrepreneurs who go it alone, franchisors accept money from others and promise them a blueprint to success in return. This places them under a moral obligation to ensure an ongoing successful operation. Given that franchisees are the owners of their businesses, the franchisor cannot dictate changes in business policies, but must secure the co-operation of franchisees by convincing them of the merits of every proposal.

• Reduced income per unit

The franchisor’s income is usually limited to a percentage of franchisees’ sales. This factor must be weighed against the potential for rapid growth and increased contributions from more outlets.

• Poor franchisee selection

Whilst franchisors today use very sophisticated psychometric tools in selecting franchisees, they cannot always predict poor performing franchisees. The intricacies of the franchise contract require franchisors to invest time, energy and funds to salvage, through “intensive care” intervention, poor performing franchisees.

• Pressure to perform

The obligation that goes with accepting franchisees’ hard earned life-savings can weigh heavy on the franchisor. The franchisor has to continually expand and update the brand and grow the business, not only for his own benefit, but for the benefit of his shareholders and franchisees.

• In for the long haul

Any entrepreneur considering expansion through the franchise route must be aware that he is in for the long haul. The commitment to building a franchise network is a long-term decision and cannot be seen as an easy way to make money and then sell-off the business. Changes in ownership can often be detrimental to a franchise brand and often results in the collapse of the system. Total, long-term commitment is a priority.