FRANCHISE: Franchise terms one should know

The second major component of a franchise strategic plan deals with terms of the franchise.

How long shall the franchise run? This differs across industries, guided by how long franchisees are likely to realize returns on investment and make a reasonable profit-hence the need to run a prototype unit and conduct thorough market research prior to franchising.

What are the on-going fees. The monthly royalty, (franchise management fee) is the franchisor’s cash-cow. Based on either a percentage of turnover or a fixed sum, the rates differ per industry. For high turnover franchises, even a small percentage returns tidy profits for both franchisor and franchisee. Product-based franchises eg fuel franchises use mark-up on products supplied rather than monthly royalties- a mark-up on goods exclusively supplied to franchisees.

The national marketing fee is another ongoing fee charged by franchisors. Used to support marketing the brand nationally-advertising and marketing materials produced centrally by the franchisor-, franchisees contribute in addition to them undertaking marketing activities in their territories. The amount varies depending on the brand’s strength, but an industry average of 4.5 per cent of monthly turnover has been reported in most franchise jurisdictions.

Additional services-book keeping, payroll and IT system support-offered by some franchisors to their franchisees are paid for separately. The franchise strategic plan has to indicate these.

What is the ideal franchisee legal structure? Different types of business formations- sole trader, partnership, societies, trusts, limited company- offer different challenges and the franchisor has to decide which combinations are considered ideal to run their franchises.

Fourth is VAT registration. Some tax jurisdictions exempt lower turnover levels from VAT registration; it is in the franchisor’s interest that all franchisees register for VAT upfront. This, together with a robust IT system, guards against franchisees under-declaring monthly turnover to short-change the franchisor.

Then the franchisees territories. In-depth market research unearths the best way to organize and award franchise territories, with changes ideally informed by ongoing market intelligence.

Sixth is a description of the franchisee premises. Store location, layout and appearance guidelines are stipulated here, including whether or not to allow franchisees to set up in franchisee-owned premises- which might cause problems to the franchisor evicting a non-performing franchisee.

Seventh is how national and key accounts falling in franchisee territories are to be handled. The franchisor has a choice to handle them directly or assign them to the area franchisee, most customers prefer the former.

Eight is the franchise renewal procedure. The plan should clearly indicate KPIs the franchisee must deliver for franchise renewal and how such renewal shall be handled.

Ninth is the procedure for selling a franchise/ divorce. The franchisee is the real investor. A clear and mutually acceptable procedure should be stipulated by the franchisor covering both franchisee-voluntary sales and franchisor-forced sales for non-compliant and under-performing franchisees.

Tenth is on-going franchisee training. Regular refreshers needed to enhance compliance and new system training are necessary. A plan should be in place to handle them.

Eleventh, a deliberate plan has to be put in place to protect customer data coming into possession of franchisees in the course of their work, regardless of legal requirements

Finally, procedure on death or incapacity of a franchisee has to be planned for otherwise chaos would reign, particularly for sole proprietor franchisees. Shall the outlet revert to family or the franchisor who would pay off the family?

The writer is a Franchise Consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.

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