Do Business Well

Advantages of franchising for franchisees

1. The franchisee will start a tried and tested business concept that has been fully “pilot” tested. Often franchisees do not have the general business management skills or specialised knowledge needed in the proposed business activity. The franchisor owns this knowledge and has the necessary business skills, which he passes on to the franchisee.

2. The franchisor should have developed a long-term strategic business plan including a country development plan, which the franchisee will be exposed to. The franchisor’s strategic vision should provide for the growth and adaptability required for the survival of the brand. A country development plan is the geographic expansion plan that outlines the geographic areas earmarked for expansion, as well as the rate of expansion. The rollout of the franchisee’s store is therefore part of a larger expansion strategy, so the brand that the franchisee has bought into should become more valuable with time.

3. The franchisor should use scientific site selection criteria and give the franchisee a well-calculated, protected trade area around his business. Ideally, the country development plan should be based on a well- developed expansion strategy that incorporates the geographic requirements for the sustainability of a site, e.g. number of households or number of economically active people. This scientific site selection should ensure that each franchisee will have a viable business in his/her area.

4. As a franchisee, you will be the owner of your own business; however, restrictions will be imposed on you by the franchise agreement. These restrictions usually include prescriptions on the use of trademarks, marketing campaigns and standards of operating. By abiding by these prescriptions and specified standards, the risks of business failure are substantially reduced.

5. The franchisee will be able to make use of the franchisor’s purchasing power and other benefits relating to the size of the operation e.g.

• The franchisee should set up the business at a lower cost. The franchisor should be able to source capital equipment and shopfitting at lower prices because of bulk buying and relationships with suppliers.
• The franchisee should find it easier to raise capital. An established franchise usually has a strong brand and goodwill, which will influence a banker’s decision when granting the franchisee a loan.
• The franchisee should be able to purchase goods on an ongoing basis at preferential prices. Again, this is due to the franchisor’s ability to buy in bulk and good supplier relations.
• The franchisee should be offered participation in the franchisor ’s medical aid, provident fund etc. These are benefits that an independent business may not be able to obtain at the same preferential rates.

6. The franchisor should provide its franchisees with both initial and ongoing training both on a theoretical and practical level. The franchisor’s support staff provides “on-the-job” training when visiting the site, while the franchisor should organize special courses and seminars for the franchisees and staff alike.

7. The franchisee should benefit from the franchisor’s ongoing new product and concept development. The franchisor has the infrastructure in place to support a research and development function within the operation, or the resources to outsource this function. New product/concept development is vital for the survival of a product. However, franchisees should also be able to provide their input into product/service development. Numerous new products introduced into McDonalds started as franchisees‘ ideas.

8. The franchisee can take advantage of the brand name and reputation that has been developed by the franchisor. This may reduce the lead-time in making a business successful and may even reduce the amount of working capital required.

9. The franchisee will receive the use of proven systems and controls. This includes Point Of Sale systems specifically designed for the concept and customized accounting packages.

10. The franchisee will tap into the franchisor’s tried and tested price strategy and costing systems. The franchisor can experiment with pricing strategies in a controlled way, e.g. by testing new prices at selected company owned stores first.

11. The franchisee will receive an updated, workable operations manual, which will help him/her to run the business in all aspects, e.g. registering the business, marketing, labour laws, production standards etc. The operations manual is the blueprint for running the business and must be updated regularly.

12. The franchisee should receive regular communication and motivation from the franchisor. The franchisor should organize an annual franchisee conference as well as other communication initiatives to keep franchisees aware of industry trends, operational decisions and marketing initiatives.

13. The franchisee will have a successful, proven asset to sell when deciding to move on. The value of the brand and the goodwill accumulated willcontribute to this.

Disadvantages of franchising for a franchisee

1. A franchisee is subject to substantial control by the franchisor. The franchisor has to ensure that a range of operating standards must be adhered to. These restrictions are obviously absent in independent businesses. It therefore takes a special kind of entrepreneur to become a franchisee. The kind of entrepreneur who makes a successful franchisee is willing to work hard, provide his own input and, most importantly, operate within the prescribed parameters of the franchisor.

2. A franchisee pays an upfront fee and ongoing royalties. This upfront fee can be substantial. The franchisee may therefore need to incur a heavy debt load to start the business. Although these fees and royalties help the franchisor in building the brand and supporting the franchisee, they can lead to an adversarial relationship between franchisor and franchisee.

3. There may be restrictions on the franchisee’s ability to sell the business. The franchisor will normally have first option to purchase the business or approve the potential buyer. This may slow down the selling process and impact the selling price.

4. The success of the franchise operation and the franchisee’s business is heavily dependent on the ability of the franchisor and the other franchisees. To a large extent, therefore, the wellbeing of the franchisee is directly related to the sustained vision and performance not just of the franchisor but also of the other franchisees. It only takes a few bad franchisees to kill the brand in the eyes of the consumer. That’s because the consumer perceives all outlets of a franchise as being part of one organization. So, once again, buyer beware!!

Possibly related posts: (automatically generated)
The Fact of Franchising

• Serious Selling Your Business part 3
• Serious Selling Your Business part 4
• Dealing with commercial banks
• Setting an All-Time Credit Record
• Serious Selling Your Business part 2
• What does a Franchise Agreement cover?
• Relationship Franchise Agreement - Operations Manual
• Selling the Franchise
• Is a franchise the optimal solution? From the prospective franchisor's viewpoint
• Some Franchise Terminology

5 Comments »