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Franchising 101: the franchisor

Article by Absa

The idea of turning your small or medium business into a franchise sounds like a rewarding option, irrespective of which sector you’re in. Not only does this give your business an opportunity for growth, but the financial rewards are lucrative too.

According to www.thebusinessdictionary.com, franchising is an arrangement where one party (the franchisor) grants another party (the franchisee) the right to use its trademark or trade name as well as certain business systems and processes, to produce and market goods or service according to certain specifications.

If you’re an entrepreneur and have always thought of this as an option for your business, but never felt informed and confident enough to take the leap, you’ve gotten hold of the right reading material. We spoke to Henk Botha, franchise development manager for Quick Service Restaurants and Restaurants, and asked him to share some of the knowledge that he has collected over the past 14 years.

When your business comes to a point where the next level can only be reached through an expansion, Botha advises that you should either look at opening more corporate branches yourself, or you could franchise your business concept. “Calculate how many branches or stores you’ll be able to open within which period of time, with the capital that you have available. If you have enough money to support your own plan, you should consider opening more corporate branches, but if you don’t, rather look at the franchising option.”

Looking at the current uncertainty of the financial markets, the timing of this kind of expansion might make you nervous. According to Botha, there aren’t any clear cut indications for when the time is right to turn your business into a franchise. There are however the following questions that you can use as checkpoints:

  • Has your business been running successfully within a proper business cycle for at least a year?
  • Do you know your business inside and out? When you turn it into a franchise, you’ll have to provide precise directions to each franchisee on exactly how they need to run their businesses.
  • Do you have a clear plan for how you want your business to grow? This includes a roll-out strategy that indicates exactly how many branches or stores you want to open and a specific time frame in which you want this to happen.
  • Have you done your research and established if your business has a unique offering within its specific market?
  • Have you created a business model that would be mutually beneficial to both the franchisee and franchisor?

“Once you’ve gotten clarity on whether you’re definitely ready to turn your business into a franchise, the next step is to look at a few of the best and worst-case scenarios.”

Best and worst-case scenario when I buy a franchise?

Similar to any business model, franchising has its benefits as well as a few drawbacks. According to Botha, if your business is established on principles that work, and you manage your finances properly, your chances of failing drastically decrease. “Make proper provision for cash flow, because without it, the chances of failure drastically increase, even if you do make profit.”

Botha listed and explained more pros and cons that go along with franchising:

Pros:

  • You don’t need your own capital to expand your business, because you’re using the franchisees’ money to expand your operations.
  • Once your business has been franchised, you don’t have to manage all of the staff members from every branch or store.
  • Your franchisees will take ownership of their branches and deal with the challenges, effectively relieving some pressure from you.
  • You establish and expand your network much quicker than you would have in other circumstances, which means that you have access to a lot of talented employees who will be willing to work hard to build the business.

Cons:

  • You don’t get the full profit from your business.
  • You have less control over managers and different aspects of your business.
  • It’s more difficult to get franchisees as opposed to hired store managers to work together.

Like everything in life, there are good and bad outcomes to any situation. Though franchises are highly successful most of the time, Botha strongly advises entrepreneurs to never make this decision hastily.

Want to learn more about franchising from the franchisee’s perspective? Look no further: Franchising 101: The Franchisee

Absa is a Proud Partner of the NSBC.