Thursday, April 26, 2018

FRANCHISE: Knowing how franchising works

Wambugu Wa Gichohi

Wambugu Wa Gichohi 

For franchising to deliver the success that it has been associated with in scaling up businesses, it follows a carefully-crafted disruption modus operadi which ensures parties involved play their roles to deliver the franchisor’s brand promise.

The starting point of any franchising activity is a business owner’s thirst for growth- getting unsettled with organic growth which limits growth to only a few outlets with many inefficiencies replicating therein.

Alternative growth models are sought and when franchising is settled on the real work of making it happen starts. Note that franchising is complementary to organic growth as it does not stop business owners from opening own outlets, as long as they do not infringe on territories allocated to franchisees.

A business owner with at least two outlets and two years’ profitability develops their franchise system by protecting their Intellectual Property (IP), fine-tuning their systems and standards and documenting operations into a franchise operations procedures and training manual, all done at a prototype unit before releasing to other outlets. Franchise-specific market research produces a strategic franchising plan to guide franchise network roll-out. Financing mechanisms of franchise roll out, including franchisee financing schemes, are also thought out and arranged.

Prospective franchisees invest own time and money to run franchised outlets according to franchisor’s guidelines-manuals. Franchisees pay business owner (now the franchisor) initial/joining fees after signing numerous legal documents protecting the franchise system. Such fees include franchisor’s profits on the store used as training center-usually the prototype unit. The franchisor grants/loans franchise rights to franchisees to use franchisor’s brand, IP and entire business systems over the agreed franchise period.

The franchisor trains franchisees on every aspect of running the business using the manuals. Franchisees operate training center as their own, taking home all revenues and paying all costs. Once the franchisee has taken over running of franchised outlet, they must not change anything-strict adherence to franchisor’s formula for standards and operation procedures. Franchisee innovations are discussed at the franchisee council and viable ones piloted at the prototype before roll out to all outlets.

Franchisor offers ongoing support throughout franchise period, for which franchisees pay monthly royalties, normally a percentage of revenue (preferred), fixed sum or mark-up on stocks. Support includes branding, R&D, systems upgrades, stocking, etc.

Franchisor sets up a franchisee council for direct communication with franchisees. Franchisor declares discounts on bulk purchases to this council. Both parties contribute to national marketing, controlled by franchisor and franchisee council, but franchisees pay for and carry out marketing in their own territories. Franchisor designs, produces and distributes all marketing materials to ensure uniformity.

Field Consultant (similar to a sales rep) regularly visits franchisees with a checklist to ensure adherence to franchisor standards and to correct any variances early. Franchisees who cannot keep up after correction are flagged for expulsion and the disengagement process starts as per signed franchise agreement. Expelled franchisee has option to sell out, new buyer must be acceptable to franchisor, otherwise franchisor takes over.

Additional support required, as may be brought out during Field Consultant’s visits (eg. staff recruitment, training and payroll services, accounting services etc,) is paid for separately by franchisee.

Franchisees are independent businesses from the franchisor, have to comply with national laws, set prices according to local conditions, but franchisor standards must be the maintained in all outlets of the same level