Do Business Well

Franchising offers many benefits to franchisors and franchisees alike. It should not come as a surprise, however, that whilst the concept has much to recommend it, it has some drawbacks as well. To assist you in forming a balanced view, we will touch on these aspects in sequence, both from the franchisor’s and the franchisee’s point of view.

Advantages

• Less capital needed for expansion. Franchisees are generally expected to provide the necessary capital for the setting-up of their units. It follows that business expansion via the franchising route will absorb less capital than the establishment of branches would require.

• Rapid market penetration becomes possible. In addition to raising the necessary finance, franchisees, being owner-operators, can be relied upon to take care of operational problems at unit level as they arise. This reduces the pressure on the franchisor’s management team, making it possible to focus Head Office resources on franchisee support and network building activities instead.

• Enhanced buying power. In many instances, rapid expansion leads to a corresponding increase in buying power. This improves the competitiveness of all members of the network and enables them to gain additional market share.

• Operational efficiencies are maximised. Owner-operators have been found to be highly effective. Companies that have converted branches into franchises report significant increases in turnovers as soon as operational control has changed from an employee-manager to a franchisee. Almost without exception, this is followed by enhanced profitability soon after. It should be noted that in some instances, such a turnaround has been observed even though the former branch manager had purchased the business and assumed the mantle of franchisee. This proves that in general, owner-operators tend to outperform managers, even in instances where profit sharing arrangements were in place.

• More realistic forward planning. The franchisor’s future income stream becomes more predictable. Suffice it to say at this point that, given the long-term nature of franchise agreements, the presence of franchisees within the network helps the franchisor to generate more accurate forecasts.

• Better equity position. Loan finance raised by individual franchisees wishing to finance the establishment of their businesses will ordinarily not be reflected in the franchisor’s balance sheet. Only in the unlikely event that the franchisor provides surety for a franchisee would a contingent liability arise.

• Accelerated expansion. Experience has shown that if the franchisor’s business is built on firm foundations and he continues to reinvest profits into the expansion of franchise infrastructure, expansion of the franchise network can be swift. McDonald’s is a shining example in this regard.

McDonald’s reaffirm their unwavering
commitment to franchising

In addition to making an excellent burger, McDonald’s are also model franchisors. Established less than half a century ago with modest funding, the company now operates over 30 000 restaurants located throughout 120 plus countries worldwide. Without franchising, this level of market penetration would not have been feasible.

In South Africa, a market where, due to the sanctions era, McDonald’s commenced trading relatively late. This notwithstanding, the company managed to build over 100 restaurants in less than five years. Yet, according to their in-house projections, they have not even passed the half-way mark towards saturation point yet.

Franchising continues to form an essential component of McDonald’s business strategy worldwide. Although by now, the company has easy access to all the cash it needs and the financial contributions made by franchisees are no longer considered essential, McDonald’s remains firm in its resolve to maintain an ownership ratio of 70% franchised to 30% company-owned outlets. This is a clear vote of confidence in the concept.

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