By Eric Parker
Recent press reports have cast a negative light on franchising, as franchisees are complaining about the practices of some franchisors. If franchising is implemented correctly it’s a great business mechanism to create wealth for “unnatural” entrepreneurs and create jobs. However limited legislation leaves the mechanism open to abuse.
In the current economy many franchisees from franchises that are not supported adequately will fail, giving the category a bad name.
Let’s look at the difference between a “Responsible Franchisor” and an “Irresponsible Franchisor”
A. Responsible Franchisor
- The concept has been developed and proven as a company owned outlet over a lengthy period of time. We call this perfecting the pilot operation.
- The concept should be in a market segment with strong growth potential. The internet boom has rendered some concepts outdated e.g music retail outlets.
- A franchisor support structure should be in place. A well-qualified Field Service Consultant should call on a franchisee at least once a month and review the previous month’s financial results and also advise on operational and marketing matters.
- The franchisor should earn its income from management service fees (royalties) and not from rebates/kickbacks. All purchasing benefits must be passed on to the franchisee. Franchisees should not be forced to purchase from suppliers with unfavourable terms. However, the franchisor may charge a small margin if it handles the administration of central purchasing.
- The franchisor should have a clear country development plan and strict site selection criteria and site selection should be done scientifically, using tools such as Geographic Information Systems (GIS).
- The franchisor should exercise controlled growth. It is difficult to open more than 10 outlets per year with proper support to new and existing outlets.
- The franchisee can expect a favourable return on investment. The franchisee should earn a market related salary and recover their initial investment in between 3 to 4 years.
- The franchisor should have extensive training programmes, not just in the beginning but on an ongoing basis.
- There must be a clear marketing positioning strategy including a price strategy. A marketing fund must be set up in a separate bank account and all this income must be spent marketing the brand. This is a legal requirement by the Consumer Protection Act (CPA).
- The franchisor must welcome input from the franchisees and a Franchisee Council should be set up with strict bylaws indicating the scope and functions of the Council.
- The operations manual should be up to date and functional. The latest trend is having an online manual which doubles up as a complete communication tool.
- Finally there should be a franchise culture in the organisation which encourages a win:win situation at all times.
B. Irresponsible Franchisor
- The concept is not proven over a satisfactory period of time.
- They sell a franchise (instead of awarding a franchise) to whoever has money and are not careful about franchisee selection.
- They grow too quickly and are not particular about site selection. The risk lies with the franchisee who will be responsible for the property lease.
- They have a limited support structure and the staff they do have are busy opening new outlets and not supporting existing franchisees
- They encourage and receive confidential discounts and rebates at the expense of the franchisees.
- They have poor, limited training programmes often just letting a new franchisee work in an outlet for a short period of time.
- They have limited advertising spend and concentrate the expenditure on recruiting new franchisees and not promoting/advertising the brand.
- The operations manual is often outdated and not specific to the brand.
- There is a one sided franchise agreement that protects the franchisor at all costs.
- They have a short term plan to maximise profits for the franchisor at the expense of the franchisees.
- They have a one sided culture that favours the franchisor over the franchisee.
When franchising your business, make sure you use this guide to become a Responsible Franchisor.
If you would like to discuss this topic further please contact Franchising Plus or on (011) 454-2235