FRANCHISE: Structural options of franchising

Thursday July 12 2018

Wambugu Wa Gichohi

Wambugu Wa Gichohi 

In the early planning stage to franchise a business it is advisable to consider various structural operational systems in order to ensure effective corporate governance needed to assure franchisees of the safety of their investments, manage the risk, provide the most effective and efficient means to penetrate the market and ensure that as a franchisor resources are available to service the franchisee’s needs.

Prospective franchisees will invest time, money and sometimes a lifetime to deliver your brand’s promise. As such they need assurance that your franchise system will survive to eternity. A solid corporate governance structure is key to this.

Sometimes a separate corporate entity is incorporated to own the franchise network with the existing entity choosing to continue opening company-owned outlets where this does not infringe on franchisee territories.

The old entity licenses its intellectual property rights to the new entity to give the latter a legal base to own the franchise network. Both would need strong independent boards of directors to assure franchisees as earlier stated.

There are generally three basic methods used to structure a franchise system, namely individual franchise, area franchise and master/regional franchise.

In an individual franchise, the target market is divided into franchise territories with a single franchisee acquiring the right to operate and manage the franchisor’s business from a location in each territory.

This system normally generates the highest revenue for the franchisor because discounts, rebates and deductions do not apply on the set franchise fees as in other systems. However, this structure also requires a higher service level as a larger number of franchisees will need to be supported.

In an area franchise, the franchise rights for a particular geographic area-normally within a country or region-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 system reduces the resources needed by the franchisor.

The area developer has the responsibility to service franchisees in his/her area using the franchisor’s guidelines and standards and in doing so reduces the resources needed by the franchisor.

The area franchisee takes a fee for this service performed on behalf of the franchisor thereby, reducing the franchisor’s income.

In a master/regional franchise arrangement, 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.

Normally the parties agree beforehand on the target outlet numbers to be opened per period.

Most foreign franchises you see in East Africa follow this structure. The master franchisee structure is similar to that of an area franchisee.

It is in particular used when the franchise operation is some distance from the franchisor base e. g. in a different country.

Each of the above structural methods has advantages and disadvantages which will depend on the circumstances under which the different structures operate.

A franchisor may therefore decide to use a combination of these options in different markets and for different reasons.

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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