Single unit Franchising is the most common and direct form of franchising where an individual is required to invest in establishing and operating one location using his own hands-on skills. In a Master franchise relationship the investor obtains the rights for a specific country or region, empowering the master franchisee to provide the full range of products and services of the franchisor through sub-Franchising, in just the same way that the franchisor runs its own business.
In a master franchise relationship, the franchisor grants the right to an indigenous business entity or individual (master franchisee) who must understand and develop the business concept in the host country or region, establish a number of successful and profitable operating units and grant franchise rights directly to indigenous franchisees through sub-franchising. Whilst in an area development arrangement, the Area Developer enters into an agreement whereby the rights are obtained to develop a minimum number of stores or units within a specified territory within a specific time limit. The area development arrangement is a kind of multi-unit franchise, whereby the area developer has no resale rights, but rather shoulders the responsibility for meeting a mandatory development schedule for their given region.
Because franchise systems provide a method of doing business that has been tested over time in the marketplace and as a franchisee you will avail the benefits of the experience and expertise of the franchisor, who offers you support every step of the way and because you will have access to accumulated business experience and technical know-how in managing the business. One of the most important advantages of franchising is the provision of professional training for you to be able to develop your skills. In a business context, and when you obtain franchise rights, you avoid the unnecessary trial and error period in starting and operating your own business which generally means lower financial risk as compared with other individual ventures. Many professional surveys show that the success rate of franchises is far greater than starting one’s own business. Franchising opportunities provide brand recognition, management and administrative systems and a proven business model to small business owners. In theory, this should result in franchises having higher success rates than non-franchise business opportunities. But in practice, franchises can and do fail. Additionally, franchising guarantees uniformity and harmony of operating procedures, interior and exterior designs, product display and even sales techniques, which strengthen the corporate image of the individual business units and increases the popularity of products. All will reflect on an added value to franchisees, whereby they benefit from the operating system and the marketing power of the brand name. Franchising is an excellent way to be in business for yourself, but not by yourself, because the franchisor is always there to help.
Franchising means spreading the risk through multiplying the number of locations through other investors. That means faster network expansion and a better opportunity to focus on changing market needs, which in its turn means reduced competitive effects. Also, franchising creates another source of income to you as the franchisor through payment of franchise fees, royalty fees & levies, in addition to the possibility of sourcing private label products to franchisees. This capital injection reflects on improved cash flow, higher return on investment and higher profits. Other financial benefits that you may enjoy as a franchisor are reduced operating, distribution and advertising costs. Of course, additionally, that also means more allocated funds for research and development. Additionally, there will always be economies of scale with regard to purchasing power. On the operational level you can have a smaller central organization as compared to developing and owning locations by yourself. Franchising also means uniformity of procedures, which reflects on consistency, enhanced productivity levels and better quality through effective quality control, as franchisees are usually self motivated, since they have invested much time and money in their businesses, which means working hard to bring in better organizational and monetary results. This also reflects on more satisfied customers and improved sales effectiveness.
Like everything else, franchising has its pluses and minuses. Firstly you need to be prepared to allocate considerable capital to build the franchise infrastructure and pilot operations. Secondly, and at the beginning of your franchise program, you will be required to have the appropriate resources to recruit, train and support your franchisees. One of the greatest disadvantages is whilst you have created a good reputation in the market, you need to know that the trade name can be spoiled by misfits until such time you are capable of selecting your franchisees. As you grow your franchise network, there will an opportunity that franchisees exercise pressure over you in order to implement new policies and procedures.
In a franchise relationship, you will need to have the right abilities, personal attributes and the willingness to work hard. But, maybe the first and most important ability that you need to make sure that you enjoy before applying for a franchise, is the ability to deal with change, in order for you to be able to absorb the new business concept quickly and follow the franchisor’s standards. You also have to be a people-person who is able to manage and control the business at all levels.
What kind of preliminary research do I have to undertake in my own territory before obtaining a franchise?
You need to study the business or industry in which you are interested in operating as a franchisee. Some of the questions you need to ask include; Is the market growing, stable or declining? How seasonal are the products and services? Can competition be described as severe? How sensitive is your target market towards price? Are there available locations that meet the business criteria?
Once you have identified the business category you are interested in, you will need to thoroughly research all the franchise opportunities that are available in those categories. Read all the marketing materials you can, but bear in mind that the most attractive and glossy brochures do not always mean a good franchise. Your main evaluation criteria should be focused on the kind of support the franchisor company provides. You will also need to further investigate the franchisor company’s history, experience, support and training. Seek help with relation to compiling a financial plan including projected revenues, costs and profits for a minimum of three years.
Yes, it is essential to ask the franchisor for a complete list of all his franchisees. Don't be satisfied with a selected number of them. If the franchisor is reluctant to give you such information, then you need to ask yourself why. Some of the important questions you can ask other franchisees of the franchisor include; How do you evaluate the initial training? How do you evaluate the on-going support? Were there any disputes between you and the franchisor? How do you rate the efficiency of communication between you and the franchisor? However, you need to be careful in analyzing the answers as business success depends on the success of the relationship between both parties and there can mistakes from both sides.
From the outset you need to consider the professional services of a franchise consultant to guide through the franchisor evaluation process. As your interest grows in the franchise opportunity, you will be presented with financial projections and a franchise agreement. By this juncture, you should have a good understanding of the selected franchise. Yet, it is prudent to seek neutral advice from a financial adviser and a specialist franchise lawyer. This is money well invested as it saves you from making unnecessary mistakes.
Simple location criteria for a retail store location for example, must include good population density, good visibility of the store from distance, easy accessibility, reasonable annual rent, good businesses clustering, sufficient foot traffic, potential growth & development, presence of land marks, major trades and famous brand names.
It is advisable to contact a franchise consultant to help you investigate areas of strength in your business and be taken by the hand in building your franchise system. It is a complicated process and can't be undertaken by individuals without experience. You can't also copy other franchisor’s systems and documents, as it is unethical and may not fit your business. In every situation it is vital to undertake a financial study of your business to calculate the level of investment required to establish it. It is also important to be able to identify your initial and on-going support to franchisees including training, marketing, launch support, information technology, chain supply, transfer of systems, designs, layouts, software and others, all of which need to be included in your franchise proposal. You will also need to plan your proprietary/ branded products that will be sourced or channeled to your franchisees. You can develop a number of promotional tools to promote your franchise such as multi-media presentations and a franchise prospectus. For legal agreements and intellectual property rights, you need to contact a specialized lawyer to draft a win/win franchise agreement, register and protect your rights. Your franchisee relationship management system is of prime importance and needs to use most up to date information technology and practices.
The Operating Manual is your confidential workbook that describes the procedures and standards your franchisees must follow. It has comprehensive guidelines on advising a franchisee on how to operate the franchised business. It covers all aspects of the business, including general business procedures. It may be separated into different manuals addressing such subjects as accounting, personnel, advertising, promotion and maintenance. When writing your operating manuals, you need to develop unique page design & layout, decide on contents and start writing in detail, your business policies & procedures. It must have sections on your obligations towards your franchisees, store/unit/area opening, opening & closing procedures, recruitment procedures, corporate identity, accounting system, point of sale, pricing structures, ordering procedures, receiving procedures, storing procedures, product display, sales & cash system, customer service, cleanliness, maintenance, security, the environment, time management, financial dexterity and reporting system. It must also include illustrations on organizational charts, job description formats, recruitment procedures, employee evaluation formats, site selection criteria, site development progress plans, store designs, suppliers’ list, product list, product receiving checklists, product display map, cleaning and maintenance procedures, schedules & formats.
In business format franchising, the franchisor licenses the franchisee to use and/or sell the franchisor’s product, goods, service and trademark and use its business technique. The franchisor also teaches the franchisee the entire business format including marketing, selling, inventory, accounting and personnel procedures. Furthermore, the franchisor provides support via training and communications for the duration of their business relationship. Restaurants, retail and many service businesses are business format franchisors.
By following the franchisor's business practices and meeting its standards, franchisees can consistently provide customers with quality goods and services which guarantees uniformity of operating procedures and even sales techniques, which in its turn strengthen the corporate image of the franchised stores and provides the franchisees with an opportunity to focus on increasing sales and profit levels.
Like they say the favorite radio station for any investor is WI FM . Or "What's In It For ME?" One of your key questions you can ask the franchisor is “what is my expected return on investment from your franchise concept?” However, there is no legal requirement that the franchisor must provide you with such information and it is illegal in some countries to promise any sales, profit or ROI levels. In every case, it is your job to undertake financial analysis of the business. Ultimately, your profit or loss will be determined by such factors as your franchise territory, site location and your personal efforts and commitment to success.
A statement of information revised to the current fiscal year that reveals to the potential franchisee information pertinent to the franchise and the franchisor. In some states in the USA and a few other countries, all franchisor companies are required by law to provide this document to prospective franchisees at the first personal meeting to discuss the sale of the franchise and at least ten business days prior to the prospective franchisee signing a franchise agreement or paying the franchisor money to buy the franchise. The disclosure document includes over twenty different items of information about the franchise, including history of the company, required fees and investment costs, and any litigation in which the company is or has been involved in. When you are given the disclosure document, you must sign and date a statement acknowledging that you received it.
I have received a franchise agreement from the franchisor and it had a guarantor/principal as a third party to it. What is it?
Most franchisors require that the franchisee or usually the owner of a corporation obligate themselves to be responsible for and guarantee fulfillment of all contractual commitments, including monetary obligations, made by the corporate or other legal entity owning and operating the franchise. A financial guarantee provides a creditor, or in the case of the franchise relationship, the franchisor, with additional collateral security in the form of the net worth of the guarantor/principal. Most guarantee obligations in the franchise context provide that the franchisor may proceed against the individual franchisee as if it was the primary obligor under the franchise agreement. The individual guarantor/principal generally waives any right to require the franchisor to proceed first against the franchisee's corporate entity.
As a franchisee you will receive periodic visits from the franchisor's support team, guidance on operational matters, updated policies and procedures, constant research, development, new marketing materials and refreshment training. You also expect to attend regular meetings for franchisees to interface and exchange ideas. As for marketing, the franchisor has to offer marketing campaigns, advertising and promotions. Some franchisors offer incentive programs and performance comparisons, such as franchisee of the year award programs.
Building recognition is an essential and ongoing objective of any franchise system and is designed to benefit everyone involved in the franchise relationship. It is important to understand that marketing contribution by the franchisee must be fully used to the benefit of all franchisees and therefore is not considered to be true income to the franchisor. However, until the network of franchisees develops to the point where the marketing levy is useful, consideration may be given to either postponing the charge or reducing the percentage until a predetermined number of franchisees are trading.
The legal contract sets out the terms under which the franchisee will operate the business and usually include granting the rights to use the trade name and business systems, franchisee’s obligations, franchisor's obligations, premises and the territory, duration of the contract, financial aspects including initial franchisee fee and ongoing royalties, contract renewal terms, control of standards, termination and its effects.
This occurs when the franchisee already carries on the same line of business as the franchisor, but wishes to improve or expand by adding the benefits of the franchisor’s marketing, advertising and promotions. There may be the possibility of converting small independent traders who welcome the idea of joining the strengths of a national and/or international branded franchise network, with all the associated benefits. These independent operators acquire the same name and logo, the benefits of mass buying, national customers, national advertising, and generally more power to compete in their marketplace.
Franchising has proven to be one of the most important methods of doing business in today’s world, especially for small and medium size enterprises. It has passed through trial and error that resulted from alternative business relationships such as Agency “the right to sell a product”, Distribution “the right to distribute a product” and Licensing “the right to use a brand name.” Franchising has demonstrated to be a more comprehensive practice by providing the “business system,” which guarantees the commitment to adhere to the performance standards and operating methods.