The franchise sector continues to steam ahead and grow around the world as popular brands duplicate themselves. According to Bendeta Gordon of Franchise Directions, a greater number of new systems were seen in education and training, building, office and home, retail and food. Overall franchisors showed a 12% growth in turnover in real estate, building, office and home and entertainment and leisure. This growth represents a growth in jobs and contribution to gdp. In 2010 the sector created 37 660 jobs in South Africa and contributed 11% to GDP.
Such figures give a case for the franchise business model. As the global market continues under stress, the franchise model appeals to many business people because it has been tried and tested. In the United States almost half of all retail sales are made through firms operating under the franchise system like McDonald’s which has a brand franchise. Franchising is becoming increasingly popular in this country. South Africa appears as a Western country because of the availability of international brands. It is possible to get a Starbucks coffee and a McDonalds burger in Johannesburg. There is no need to travel all the way to America to buy a good pair of jeans or designer clothing. Most are available at Sandton Cit
y or any of the numerous shopping malls. If you miss the British High Street try, Melrose arch where shops line streets and to remind you of Europe.
What is a franchise?
Franchising is really the ‘hiring out’ or licensing of the use of ‘good ideas’ to other companies. A franchise grants permission to sell a product and trade under a certain name in a particular area. If I have a good idea, I can sell you a license to trade and carry out a business using my idea in your area. The person taking out the franchise puts down a sum of money as capital and is issued with equipment by the franchising company. The firm selling the franchise is called the franchisor and a person paying for the franchise is called the franchisee.
Where materials are an important part of the business (e.g. confectionary, pizza bases, hair salons) the franchisee must buy an agreed percentage of supplies from the franchisor, who thus makes a profit on these supplies as well as ensuring the quality of the final product. The franchisor also takes a percentage of the profits of the business, without having to risk capital or become involved in the day-to-day management.
The franchisee benefits from trading under a well-known name and enjoys a local monopoly. Training is usually arranged by the franchisor. The franchisee is his or her own boss and takes most of the profits. Franchises are commonly found in Quick Service Restaurants such as McDonalds as well as in other food outlets and 24 hours services such as 24 hour plumbing.
Frequently Asked Franchising questions
Should I buy that franchise?
There are a few things to look at among others.
- Is the franchise growing or declining. If the number of franchisees is growing this shows that the franchise is going well. Zimbabwe has seen the number of SPAR franchises growing, they seem to be doing well, but lately, a few of them have been closing down. More research is needed to establish whether the SPAR franchise is a good one to buy.
- Increase in litigation: Are there many legal cases against the franchisor in the courts and what has the trend been like? If litigation is increasing, this may mean that there may be issues with the franchisor.
- Study the financials: Financials always paint a picture of the how the operation is running. Most franchisors’ income is from franchisees and if the balances are going doing this may be an indication that the franchisees are struggling to pay their franchise fees and this is not a good thing. Another thing is also that the franchisor will be able to give you the required support.
- Sales trends: If annual sales volumes are decreasing this is a sign that the business is subject to highs and lows and the current economic challenges will be felt bitterly.
- Visit existing Franchisees: Get a feel of how the franchise going by chatting with to franchisees and ask a few questions. How do you feel, how have the last few years been and would you do it again. Sounds like marriage
Q: How should one evaluate a franchise
A: Ask for a disclosure document. A disclosure document is a good source of information about the chosen franchise. The document should include information such as start up costs, training given, feasibility studies, expenses and the approximate time required to break even.
Q: How are franchisees chosen?
A: Most companies use models created by consultants together with sophisticated application forms and personality tests. Franchisees should be self starters, entrepreneurial and be able to work alone, A franchisor is looking for be a good fit between the skills, strengths and attributes with the franchisee.
Q. What qualities are the most important for franchisees?
A: It may be passion and drive because when the going gets tough, that my be all you have to keep you going.
Zimbabwe does not have that many franchise businesses operating possibly due to the harsh economic climate experienced in the last few years. In this situation, there will be few businesses to compare with and to get information from, but the taste of the pudding is in the eating. If your gut feeling tells you to go for, then go for it, I am sure your odds will be better than starting a noname business where you will need to build brand awareness. As for the rest of us, we wouldn’t mind having Chicken Licken, KFC, Wimpy, Steers and maybe even McDonalds and Burger King! There is nothing wrong with dreaming. Imagine all the big shops at Sam Levy’s Village or Westgate. Gees, I had forgotten about Debonnaires Pizza and Romans pizza, real pizza, not the little stuff they sell in Zim.
Franchising is also going green and social, so maybe we’ll find social franchising in Zimbabwe soon!! That would be nice!
Get more information on franchising
- Franchising. (businesshelp.lloydstsbbusiness.com)
- How to franchise your business. (businesshelp.lloydstsbbusiness.com)
- Video: Tips for Buying a Franchise in Minnesota (minnesotaattorney.com)
- Be a successful franchisee (entrepblog.com)