Transcript 4. THE FRANCHISOR – HOW TO START

BY
MRS. IDY. T. IMIYOHO
DEPUTY DIRECTOR/LAGOS ZONAL OFFICER
NATIONAL OFFICE FOR TECHNOLGY ACQUISITION AND PROMOTION
(NOTAP)
Key Words
 Development
 Nigerian Delicacies
 Franchisor/ franchisee
Development
 Progress
 Growth
Nigerian Delicacies
 Delicious foods from the natural environnent included
into the cultural use patterns of the Nigerian people
Franchise
 Franchising is a contractual relationship between
the franchisor and the franchisee
 It can be described as a “business marriage”
between an existing business (the franchisor) and
the new comer into the business ownership (the
franchisee).
Who is a franchisor/ franchisee
 Franchisor– the person or company that grants the
franchisee the right to do business under their
trademark or trade name
 Franchisee– the person or company that gets the right
from the franchisor to do business under the
franchisor’s trademark or trade name
Types of franchising
Two major types namely
Product distribution franchises
Franchisee simply sell the franchisor’s products.
Supplier-Dealer relationships.
Franchisor licenses its trademark and logo to the
franchisees but typically
Does not provide them with an entire system for
running their business
Some familiar product distribution franchises include:
 Soft drinks ( Pepsi /Coca cola)
 Oil and Gas ( Exxon Mobil)
 Automobile ( Ford Motor )
Production distribution
Business format franchise
This is characterized by an ongoing relationship between the
franchisor and the franchisee. The relationship includes
not only the product but also enables the franchisee to
acquire the right to use the franchisor’s entire business
system ( business name, goodwill, product and services,
operating manuals, standard marketing procedures, system
and support facilities)
Business franchise
 Before a franchisee can exist, a franchisor must be
born.
 A franchisor is an entrepreneur and someone whose
role of entrepreneurship is economic development.
 His role includes initiating change in the structure of
business and society.
 This change is accompanied by growth and increased
output which allows some wealth to be divided among
various participants.
 To be a franchisor is dependent on two things:
 To have a successful and proven business system and
 Secondly; To have the expertise, resources and
commitment to make the business grow. To become a
franchisor will therefore require from the
entrepreneur to invest in time energy and financial
reserves into learning and applying new business
skills.
 A franchisor must also be equipped and prepared to
license knowledge to other business people. Seid et al
(2006.261) believes that the real question to ask when
considering franchising as a method to expand is
whether the entrepreneur should franchise his
business or not. According to them “Not everything
should be franchised. You have to have a concept that
you can teach and that’s very simple for the franchisees
to execute.
 There has to be an advantage to franchising for you
(franchisor) and your future franchisees, and the
concept has to be able to make money.” To become a
franchisor it is therefore important to determine
whether or not the business concept is franchisable.
Franchising is about relationship and the bottom line is
that franchisability means that the franchisee is not the
guinea pig in the relationship
Business system
FRANCHISABILITY OF A
BUSINESS SYSTEM
Often the decision to franchise can be taken too early
for reasons unrelated to the desire to expand or to
build a brand. For instance, the decision could be
based on obtaining finance to cover operating costs or
recoup losses of the existing business. The warning
flags when deciding to franchise a business are:
- A concept/idea only cannot be franchised
In today’s fast-paced world, uniqueness is a fleeting thing. You might have a
totally new and unique franchise concept. –but before long.\, the copycat
operators will be climbing on the bandwagon.
- The business does not show a clear potential for growth.
- The business currently does not achieve a reasonable return on investment.
- The business has a limited operating history. The rule of thumb is that a
prospective franchisor should ideally be able to prove that the business to
be franchised has yielded at least three successive years of profitable
trading.
 Do you have a unique concept? …….
 The general criteria to review when considering
whether a business can successfully be franchised
include
Tried and tested
A Tried and Tested Business
Concept
 The business to be franchised must have been in operation
for a reasonable period to make sure it works. It is
advisable that a two to three year period is appropriate to
give the potential franchisor a better indication of viability.
 It is also important for the potential franchisor to gain
experience on the seasonality of the business, customers,
suppliers, competition, positioning and branding.
 Knowledge on other aspects such as operating costs,
pricing strategies and locations that work and those that
don’t work for the business concept will be extremely
helpful when deciding to expand
Consumer demand
Consumer Demand
 A business must have a measurable set of results to
determine whether sufficient consumer demand exists for
the brand’s products or services in the targeted market. It
is therefore that a well entrenched consumer demand or
trend exist and that the product and/or service will be in
demand for the foreseeable future. The business must
ideally be able to distinguish itself from the competition
and have a high loyalty customer base.
Operational system
 The business needs to be based on a set of refined and
unified operating processes that have been tested and
proven in operation. These systems must be
documented in a manner that communicates them
effectively to franchisees through operations manuals
and training programme.
 The system must also enable standardization in the
way the product and/or services are offered. It must be
able to deliver the overall image and appearance to the
franchisee namely, the design, décor, signage, site
criteria and layout. In franchising it is important to
present the same “look, feel and experience.”
Can the knowledge to operate the
system be transferred?
 Franchisees and their staff need to be trained on how
to run the business. A franchisee will not know much
about managing a particular business. A business must
be able to thoroughly educate a prospective franchisee
in a relatively short period of time. Factors to consider
are the:
• Is there a specialized nature of the skills required
which will make it difficult to find prospects and;
• Does the business have the expertise to train
franchisees effective and efficiently in the skills needed
by them to succeed
Economic requirements
 A franchised business must be profitable. The
franchisees will be expected to invest financially and
personally to acquire a franchise and thereafter to pay
continuing fees (royalties) and other fees, such as for
marketing (advertising) and additional training to the
franchisor.
 The profit margins on the product or services must be
sufficient to cover these various fees, the franchisee’s
debt (loan to acquire franchise) payment, and still
allow for an adequate profit and return on investment
over the contract period. Other issues to consider are:
• Does the type of business have any short term or
seasonal cash flow problems exist it could affect a
franchisee’s total investment depending on when a
franchise is acquired.
• Will the franchisee be profitable. How many
prospective franchisees can afford the franchise?
• Can the break-even point in a franchised outlet be
reached over a relatively short period of maybe 12 to 18
months or shorter?
Differentiation
 The business must be adequately different from its
franchised competitors. The business should have
some sort of unique selling point which will give it the
competitive advantage required to pursue success in
the market. This advantage could be in the form of a
differentiated product or service, a different target
market/s, a lower investment cost, a unique marketing
strategy which can include the aura of experience in
supporting the business or the acknowledged brand.
Suitability to Adapt
The business concept must be easily adaptable to
be reproduced in any location. Consumer tastes
and preferences can vary depending on the market
and/or geographic area.
Capital Needed to Franchise
 A prospective franchisor will need capital to develop
the franchise system. The funds and resources
required will be needed to build the infrastructure and
to implement the franchise programme. (advertising,
recruiting, training etc).
 The capital required will also depend on the scope of
the expansion plan. If an aggressive expansion is the
target then the start-up costs can be quite high.
 It is therefore important that the prospective
franchisor is financially stable and does not rely on the
franchisees to provide him/her with the finances
needed to grow
• The necessary resources are available to meet the
franchisor’s commitments to existing and new
franchisees.
• The right people are in place to operate and grow the
franchise business but more important, to support and
assist franchisees when required
Commitment
 To be successful as a franchisor a different approach to
managing the business will be required. The
prospective franchisor must also be emotionally and
financially committed to build a long-term, mutually
rewarding relationship with their franchisees.
 It is also necessary when franchising to
 be aware of the continual need to ensure the system
remains competitive through new products and/or
services, innovation, marketing strategies and support
to the franchisees.
 Ensure that there is a direct link between the
relationship with the franchisees and profit. A good
relationship will make it easier for the franchisor to
introduce changes to the system and to motivate
franchisees to look after their customers/clients more
efficient and effectively.
LEGAL CONSTRAINTS
 A good franchisor must have a vision for the future of
his business concept and the strategy and
determination for continued growth and success.
 A good relationship between the franchisor and
franchisee is critical for the success of both parties.
 Since franchising establishes a business relationship
for years, the foundation must be carefully built by
having a clear understanding of the franchise program
There are two main franchising legal documents:
 Disclosure Document and
 Franchise agreement
The advice of an experienced franchise attorney
should be sought to help a prospective franchisor
understand the legal issues and to protect them from
making costly mistakes.
STRONG MANAGEMENT
 A strong management team will make a valuable contribution
to the success of the franchise development programme. The
prospective franchisor will not in all circumstances find it easy
to take everything on his/her shoulders. Being in control of a
franchise system requires a person to wear various hats for
which he or she may not always have the time, experience
and/or knowledge. This will include activities such as
marketing, human resources (recruitment), finances, sales,
training and operational management
Critical to the continued success of a franchise is support which
franchisees required;
Field officers need to be recruited and trained; management
systems need to be created and implemented; accounting
systems need to be on-line; procurement and logistics must be in
place catering for the expected scale of the enterprise. The costs
are all up-front and need to be funded by the franchisor
The cost of franchise recruitment is often under estimated
first, you need advertising and promotional materialsbrochures, videotapes, CDs, printing adverts, show stands,
posters, website and e-mail. Others are sales staff, pay
travel expenses, telephone, fax, media space, trade
exhibition space and investment management time.
PLANNING
 Many endeavors where a business expands through
franchising stumble due to a lack of adequate advanced
planning. Failure to plan appropriately can for instance,
result in the initial under capitalization, cash-flow problems
and panic management. An appropriate strategy to
implement franchising as a mechanism to expand and/or
grow an existing business therefore needs to be carefully
planned and developed. This will ensure that franchising is
pursued in a controlled manner and the steps required are:
Feasibility Study
 A feasibility analysis evaluates most, if not all, risk
associated with an undertaking planning to grow a
business through franchising. These studies are in fact a
low cost risk management tool. It is also a controlled
process for identifying problems and opportunities,
analyzing the strengths and weaknesses of the business
and identifying any modifications to the business concept
necessary for the realities of the market.
 A good feasibility study will not only help to reduce
risk and uncertainties but will make it possible to
determine objectives and define what is needed for a
successful outcome when franchising.
 A feasibility study must also formally assess the
viability of the business as a franchise.
Other factors that are also an integral part of a feasibility study when
planning to franchise are:
• How much of the estimated market each franchisee can serve. This
is usually in terms of the allocation of a marketing area. On this
basis it can be determined how many franchisees the market can
accommodate.
• A range of royalty (management service) fees can then be applied to
determine the potential income per franchisee.
• To determine the basic maintenance cost needed for the franchise
system. This can be established for instance, by dividing the
average income expected to be generated from a franchisee into the
estimated operating cost to determine how many franchisees are
needed to meet basic maintenance costs.
 A feasibility study also looks at the viability of an idea with
the emphasis on identifying potential problems and
attempts to answer the important questions such as:
• Will the business work as a franchise
• What is needed to ensure success
• How much investment is required
• Have alternatives been considered
• Is the design or location economically justified
• Can the operations be a financial success and managed.
 The information gathered through a feasibility study
must be incorporated in a business plan. The business
plan is a more detailed and in depth document that
sets out the vision and direction for a business to
expand through franchising.
Pilot operation
 A critical factor before embarking on setting up a
franchise system is the pilot operation. Although
one pilot operation of the business would seem
to be the general norm of potential franchisors, it
is advisable to have more than one pilot outlet in
different areas. The pilot operation/s will assist
the potential franchisor to:
• Understand the operational dynamics of a franchise
system.
• Provide valuable insights into the business operations,
customer appeal etc. which will allow time to improve
the business processes and evaluate supplier services
before presenting the final franchise operation to
potential franchisees and ;
• To assess the viability, profitability and
consumer/client demand for the franchise product
 Testing the business through the pilot operation approach
is an invaluable tool for managing future risk and a
possible breakdown in the relationship with franchisees.
Admittedly such an approach can be costly and time
consuming if done correctly. On the other hand it gives
the potential franchisor more knowledge and experience
but above all, peace of mind when developing the franchise
system.
STRUCTURE FRANCHISE OPTIONS
 In the early planning stage to franchise a business it is
advisable to consider various structural operational
systems in order to:
• Manager the risk
• Provide the most effective and efficient means to
penetrate the market and;
• Ensure that as franchisor the resources are available to
service the franchisee’s needs
 There are generally two basic methods used to
structure a franchise system, namely
 Single unit (direct/Individual) Franchise
A single franchisee acquires the right to operate ONE
franchise unit and manage the franchisor’s business
from a location within a defined marketing area.
 Multi Unit Franchise

Area Franchise:
 The franchise rights for a particular geographic area are granted
to an area developer. The area franchisee may then either
develop individual franchise units for its own account or find
independent franchisees to develop franchise units. In the latter
instance the area developer can have an equity interest in its
“area franchisees.
 The area developer usually commits to the franchisor to develop
a certain number of units within a specified time period

Master (or Regional) Franchising:
 The franchisor grants the development rights in a
particular market, usually a country or region, to a master
franchisee who then takes on the responsibilities of the
franchisor in the particular country or region. The master
franchisee then develops the franchise system within the
country or region. The development is in full accordance
with the franchisor’s standards and quality control.
 The individual franchise system normally generates
the highest revenue for the franchisor. On the other
hand however, this structure also requires a higher
service level as a larger number of franchisees will
need to be supported.
Conclusion
Although any type of business can be franchised, not every
franchise succeeds.
There is no doubt that franchising offers an ideal blueprint for
business success, but if the foundation of the franchise is not
solid there is little chance of success. Being financially sound,
having a strong management strategy, a strong brand and a
family of motivated and profitable franchisees – all go together
to achieve long –term success of the franchise.
 Franchising …….
the wave of the moment