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To franchise or not to franchise

Article provided by BDO

Franchising can be a successful strategy for business expansion, but, the business must already be a successful and memorable brand for the concept to work; writes BDO Audit Manager, Anthea Kunz. Franchising should not be adopted as a way to save a business.

Essentially, the process of franchising means granting a third party the right to use the existing business’s trademark or name as well as its procedures and processes to produce or offer specific products or services.

Franchising is a good idea for businesses that have a sustainable or growing demand for their products or services. Several factors must, however, be considered before adopting the franchising route.

Research is key

Businesses thinking about transitioning to a franchise operation need to undergo due diligence and conduct research before deciding to set up operations in every city. Something that is working in Johannesburg may not have the same success in Cape Town or Bloemfontein.

Commit resources to the process

Franchising can be a costly process. Prospective franchisees need to be trained. This requires dedicating time and money to transferring the necessary skills and knowledge. Not only are manpower and training facilities needed, but franchises will require ongoing support to be successful.

The price must be right

The price of the product or service needs to be priced appropriately. It is not a good idea to franchise a business with low margins on selling price. The margin needs to be high enough for the franchisee to afford the royalty, marketing and franchise fees that come with owning a franchise operation. Should the margins be too low then the likelihood of a franchisee pulling out is very high and your time and resources have been wasted, along with it leaving a gap in the market.

The brand must be a good franchise fit

Businesses need to consider whether franchising is the best route to go. Some brands are naturally more suited to franchising such as food and retail brands, whereas brands that perform a service are much harder to manage and keep the same level of service across all franchisees. Should the service levels drop at one of the franchisees, you may feel the brand pressure at head office level.

Timing is critical

South Africa’s economy is characterised by bleak growth prospects and diminished consumer spending. It is important to consider how such an environment could affect fledgling franchise operations. The question here is, “do you have enough capital to float a franchise for the first couple of months to a year if need be?”

On a positive note, franchising can help to grow brands and broaden the business. The notion of ‘many heads are better than one’ holds true when it comes to franchising, especially from a strategy perspective. Building a team of franchisees who bring new ideas to the table can result in even greater growth for the business. For franchisees to do this, they need to believe in the brand and trust that you, the franchiser, are there to support them and that the royalties they are paying for are worth it.

That said, franchising is not a decision to be taken lightly. Operations that do not have significant capital or the right experience may find the process challenging and the terrain difficult to negotiate. We do recommend that you speak to a financial adviser who can help you work out the finances and give you guidance on whether it is the right time to franchise or not.

BDO is a proud Partner of the NSBC.