Franchise lessons from World Franchise Council
What you need to know:
• The above statement is not entirely true, just as it is not entirely false.
• Franchising allows local entrepreneurs to create wealth for themselves and jobs for the employees of franchisees and their suppliers using the international brands.
• Typically, the franchisee also purchases the equipment, kits out the store and buys supplies and inventory needed to run the business from sources approved by the franchisor.
My article published on 26th December 2019 titled “How You Can Acquire an International Franchise” contained some information that might have created judgment skewed against the idea of acquiring an international franchise, in favour of local franchises. The relevant sentence reads “But the most important thing to remember is that by acquiring a foreign franchise, you create wealth for the foreigner-who repatriates all profits-create jobs out there and creates markets for foreign rather than domestic goods, pushing your country into a net importer position”.
The above statement is not entirely true, just as it is not entirely false. This and next week’s articles will draw lessons from the world focusing on Egypt’s now vibrant franchise sector to shed more light on this statement.
The articles are based largely on the words of Dr. Hatem Zaki, the current Secretary General of the World Franchise Council-WFC-(the world association of national franchise associations) who is the Executive Director of the Egyptian Franchise Development Association-EFDA- which has been involved in developing the franchise sector in Egypt over many decades.
He reached out to offer this much-needed clarification after reading my subject article.
Dr. Zaki totally understands where my argument comes from and confirms that Egypt had the same misconception 40 years ago when the first international franchisors landed.
Everyone thought the same, but this opinion changed 20 years ago when the benefits for local economy came clear.
Franchising allows local entrepreneurs to create wealth for themselves and jobs for the employees of franchisees and their suppliers using the international brands, which normally are already proven elsewhere.
Franchising also provides tax revenue, as well as new products and services that are often much in demand in the communities where the franchisees operate.
It is easy to understand why international franchising is beneficial to local franchisees, their employees, suppliers and customers, as well as to foreign franchisors when one understands how franchising works. A franchise exists when one company, the franchisor, grants a second person or company, the franchisee, the right to use the franchisor’s trademarks, brands, reputation, know-how, trade secrets and ongoing support to operate a business. The franchisee pays the franchisor a fee to join the franchisor’s system and to use the rights granted and support given throughout the franchise period, which is often the only revenue a franchisor receives from a franchisee.
Before remitting fees to foreign franchisors, the franchisee deducts and remits to the government withholding tax, thereby contributing to the government’s revenue collection.
The franchisee runs a totally independent business. This means he/she buys or rents his/her own business premises and hires and pays his/her own employees. Typically, the franchisee also purchases the equipment, kits out the store and buys supplies and inventory needed to run the business from sources approved by the franchisor.
This ensures uniformity of offers in all franchise outlets operated under the franchisor’s brand. Finally, the franchisee pays local taxes like any other local business and retains 100 percent of the profits derived from opening and operating the business (the fees to the franchisor are normally based on percentage of turnover, or a mark-up on supplies, hence franchisor doesn’t share in the franchisee’s profits). Many well-known foreign franchisors who are offering franchises in Africa operate using this structure.
