Things to know before acquiring a franchise

What you need to know:

A good franchisor will invest in detailed market research prior to inviting franchisees, and fighting competition should be a collaborative effort-relying only on prospective franchisees to do so will not deliver optimum results.

Their decline from over 42,000 outlets at peak to about 40,000 currently and a fall in revenues by more than 25% between 2014 and 2018 was largely caused by external competition offering better products and by allowing Subway outlets to cannibalize each other by opening within close proximity of each other (https://youtu.be/duQow41bTx0).

While the franchisor often arranges the franchise system in a manner mostly to protect franchisor interests, cognizance that the franchisee is an investor in the business will inform setting up an acceptable system through which to channel grievances, e.g. the Franchisee Advisory Council.

In a previous article we emphasized the need for prospective franchisees to check that they are getting into the right franchise relationship by asking some key questions that we discussed. Additional to these are the following.

First, ask if the franchisor has carried out a competitor analysis to identify who the business’s main competitors are, their respective strengths and weaknesses and what the franchisor proposes the franchisee to do to outsmart them within the assigned franchise territory.

A good franchisor will invest in detailed market research prior to inviting franchisees, and fighting competition should be a collaborative effort-relying only on prospective franchisees to do so will not deliver optimum results.

Second, ask about the proximity of competition and other franchisees in your trading area and what the franchisor will do to protect you from them. Some brands are known to operate open franchise territories, which turns teammates into competitors, for instance, Subway.

Their decline from over 42,000 outlets at peak to about 40,000 currently and a fall in revenues by more than 25 percent between 2014 and 2018 was largely caused by external competition offering better products and by allowing Subway outlets to cannibalize each other by opening within close proximity of each other (https://youtu.be/duQow41bTx0).

Third, ask what the franchisor sees as the biggest threat to the business. The franchise-specific strategic plan of the franchisor should have, as a bare minimum, a detailed SWOT analyzing these four dynamics with ways to turn threats into opportunities.

Not having done so exposes the prospective franchisee to threats that could translate into losses, e.g. if a proposed law would change the way business is done and the franchisor hasn’t taken that into account.

Forth, ask how the franchisor deals with franchisee grievances. The last thing you want is to invest your time and money into a franchise only to later realize that your voice doesn’t count.

While the franchisor often arranges the franchise system in a manner mostly to protect franchisor interests, cognizance that the franchisee is an investor in the business will inform setting up an acceptable system through which to channel grievances, for instance, the Franchisee Advisory Council.

Fifth, ask if the franchise system has a Franchise Advisory Council and if so, whether you can meet the chair person.

As discussed in other articles, this is a communication forum with franchisees, controls distribution of discounts accruing from bulk purchases by the franchise system and oversees the franchise network’s marketing budget to which all franchisees and the franchisor contribute.

In some cases, it is constituted in a way to resolve minor franchisor-franchisee disputes before escalating to other dispute resolution mechanisms laid out in the franchise agreement.

A franchisor without it most likely, unfairly, keeps all discounts and uses the marketing fees contributed by franchisees in whatever manner they wish.

Sixth, ask how marketing is handled and whether you will be expected to handle local marketing separately.

Ideally, national marketing is handled by the franchisor to support the brand for them and the franchisees, using the marketing fund to which all franchisees and the franchisor contribute.

Marketing within individual franchise territories is handled by the franchisees from own budgets, but all marketing materials should be supplied by and marketing messages cleared by the franchisor to ensure uniformity.

Seventh, ask about the terms of exit. When it is no longer tenable to continue as a franchisee for whatever reason, it is important the disengagement is fair and equitable to both parties.

Remember the franchisor owns the brand on which the franchisee operates while in most cases the franchisee owns the physical infrastructure of the franchised outlet.

The ideal exit is where the franchisee gets a chance to sell the outlet to another investor who meets all the requirements of the franchisee profile developed by the franchisor. Where such isn’t possible within a timeframe given by the franchisor, the franchisee should yield to the franchisor to take over the outlet either on pre-agreed buy-out terms or to run it as a company-owned outlet as both parties look for a mutually acceptable buyer.

The ideal exit is where the franchisee gets a chance to sell the outlet to another investor who meets all the requirements of the franchisee profile developed by the franchisor.

The writer is a franchise consultant working to promote adoption of franchising in Africa.

He works with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise.

We turn around struggling indigenous franchise brands to franchise cross-border.

We settle international franchise brands into Africa to build a well-balanced franchise sector.

We help African governments create franchise-friendly business environments for quicker African economic integration under AfCFTA.