Franchising is the practice of the right to use a firm’s business model and brand for a prescribed period of time. The owner of the franchise is called a franchisor. The person or company that acquires a franchise is called a franchisee. A business definition of franchising as given by Entrepreneur.com is:
“A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).”
With the definition above, common examples of franchise businesses include fast food services such as Tantalizers, Mr. Biggs as well as several petroleum marketers like Forte Oil, Mobil and Total. It may be surprising for many to know that most of the petrol stations around us are not actually built and owned by the petroleum companies whose brands they portray.
The hallmark of a franchise is the fee paid to the franchisor which entitles the franchisee to some rights such as the franchisor’s brand name, mode of operations and in many cases supply chain. With franchises becoming more common in Nigeria, the question for most entrepreneurs is “Do I purchase a franchise or not?” The answer will vary based on a lot of details such as the industry, the makeup of the market, the franchisor’s offering and the fee and/or royalty involved.
Here, we shall discuss some general pros and cons which any investor considering a franchise arrangement should evaluate.
- It is a tried and tested system – A franchise would not be a successful brand if it was failing. The very fact that you are considering that franchise means that it is a well-known and successful brand name. Thus, there is no need for the trial and error methods usually associated with developing new systems. In addition, such systems can cover up some weaknesses in the entrepreneur. For example, if you are weak in sales or marketing, then franchising is the best option as there is a ready made market from the brand name alone.
- You get franchise support – One of the biggest problems that small businesses face is a lack of support in dealing with either the government or other parties. The franchisor sometimes helps with training, finance and even trade discounts. In addition, franchisees can benefit from economies of scale from bulk purchase of materials, thereby lowering costs significantly for the new businesses.
- You spend less on marketing – This ultimately amounts to cost reduction as building from the lintel is far easier than starting from the foundation.
- Staff recruiting may be easier. Top quality staff generally prefer to work for an established brand, and are more likely to apply for job openings there compared to a new business. The brand name alone draws in the best applicants and thus franchisees can recruit from the highest quality pool of human resources.
It will not be a balanced discussion if we were to leave out the cons of the franchise arrangement. The major cons are money, money and more money. Here are a few
- There can be high start up costs – Franchises don’t come cheap, especially successful ones. Franchisors have a standard and expect franchisees to live up to those standards. From construction materials, to raw materials and even employee uniforms, franchisors have high standards which franchisees must live up to. For example, to set up a petrol station with the requirements set out by franchisors will likely cost hundreds of millions of Naira.
- You have to make royalty payments – Every year a franchisee has to make royalty payments in return for branding, operations and advertising, regardless of whether there are direct or visible benefits or not. If it is a foreign franchise, the payments could be in Dollars which leaves one open to devaluation risk and exchange rate risk. Another underlying factor is the fairness of it all. While certain franchisees are likely to benefit more than others from adverts and so forth, the royalty fees hardly reflect this.
- Franchisees are required to share financial information with the franchisor – There is no hiding place in this business model. They know when you are doing very badly or very well.
- Franchisees usually have little room to innovate, as the franchisor usually has a fixed template for operations. So if you are the creative genius, a franchise may not be best for you.
- Lack of support, in some cases – Depending on your location, a franchisor may not give you adequate support. This is associated with the fairness of the system discussed earlier. Some decisions may require consulting with the head office which slows down decision making.
So, what is it going to be – franchising or going solo? You are the person who can give that answer. However, we hope we have made your decision making process an easier one with this article.