By the very nature of franchising, the franchisor, having spent considerable time and money developing the franchise network has an upper hand in the alliance. At the same time the franchisor seeks to attract and retain worthwhile franchisees seeking to fulfill their personal and financial goals through the franchisor’s system. To maintain this balance, the franchisor must play low and prepare a franchise agreement that achieves this position. The roles of each party must be clearly defined and those of the franchisee broadly include the following.
The franchisee provides expansion capital: All franchised units are owned by franchisees, who provide all capital necessary to acquire the franchise rights, build, stock and operate the franchise outlets on pre-agreed terms.
They also pay the franchisor ongoing monthly royalties based either on monthly turnover or a fixed amount, in addition to supporting the national marketing budget and doing their own territorial marketing. Additional support needed from franchisor such as book keeping, staff recruitment and training is also paid for.
The franchisee avails management time needed to successfully run their outlet: Franchisees own and run their units, thereby removing micro-operational headaches from the franchisor who now concentrates on the macro issues of the network roll-out. This also ensures better operational efficiencies as owner-managers are more committed to the success of their businesses than company employees. Franchisor’s therefore look for not just financial investors (franchisors can raise equity funds easily) but individuals who can commit their time-in addition to finances-in running the franchise.
The franchisee provides the franchisor in-depth market intelligence: Franchisees are responsible for all marketing activities in their assigned territories. They have better local knowledge and a stronger foothold in the territories, normally being respected individuals in their locality.
They are therefore better placed and bound to collect and avail to the franchisor valuable in-depth market intelligence that the franchisor cannot get using other conventional business models. This information is valuable in enabling the franchisor to disrupt the market through marketing programs and products that stay at par if not ahead of market trends.
The franchisee provides business sustainability: Ideally, franchisees are recruited locally, meaning they are fully conversant and compliant with local customs, culture, practices and qualifications (where necessary as in the case of the legal profession in East Africa where Kenyan lawyers cannot freely practice in Tanzania), thereby offering a better chance of business sustainability than through company-owned outlets. Family-owned businesses would better wake up to the reality that when the matriarch dies, the businesses die as well. Franchising gives them a real chance to survive the family matriarch.
Constant income to franchisor: The essence of franchising is that the franchisor earns royalties from the business system and intellectual property developed over time.
The writer is a franchise consultant helping indigenous East African brands to franchise, multinational brands to settle in the region and governments to create a franchise-friendly business environment.