A franchise is a business model in which a business gives independent entrepreneurs the right to operate with its trademark, methods and supply chain. In other words, these entrepreneurs don’t start their own businesses from scratch. They just take on an existing brand’s logo, products, and ways of producing and selling, and run with it.
You can see why people would want to do business this way; it’s easier to start off as part of a fairly well known brand and leverage on its popularity, than to build one from zero. There are also other benefits, like getting relevant training, finance, and even a site from the franchise owners.
But what could an emerging business possibly gain from being a franchise?
Actually, there’s a whole lot that businesses can reap from letting independent business people run with their logos and products. It’s one way of spreading out into other markets without incurring the cost of directly hiring additional staff. Costs could be even lower if you don’t have to pay for the day to day running of your franchise’s branches. Throw in the revenue you’ll be paid for having your brand name used, and you have a convincing case for starting a franchise.
A number of largely successful franchises exist in Nigeria, especially in the fast food and energy industries. The more well known names here include Mr. Biggs and KFC, as well as the fuel dispensing businesses of Mobil and Total. They get paid to have their names used by independent businesses, which also have to adopt their recipes and service delivery methods and standards. For franchises, an appreciable degree of uniformity across locations is important.
Questions you should ask
Before making up your mind about going the franchising route, you should try to answer the following things.
- Is your business on sound footing? Franchising could provide your business with a faster means to expanding its reach, but it could also gulp a good bit of initial cost. Be sure that your business is able to absorb these costs, which will arise in the period it takes to get your new franchise locations to sustained profitability.
- How well have you covered home turf? You’ll find it a bit easier to spread out via franchising if your brand has a strong base where you’re currently at. But if your presence isn’t recognized on your original ‘home turf’ (geographical or product wise), you might struggle to make an impression by building on such a foundation.
- Is the market in the right shape? Let’s say you’re getting a proposal from a business which wants to come under your franchise. Is their location ideal for the type of product you’ll want the franchisee to sell? What’s the demand for it like (growing or shrinking)?
- What are competitors doing? Find out what the possible competitors to your franchise are doing, and how they’re doing them. What are their strengths and weaknesses, and how can you exploit them? Can you actually compete?
- What kind of franchise would you run? You might go for business format franchising, in which you have strong links with the franchisee. In this case, you’ll sell the right to use your trademark to the franchisee, and provide them help through training, and sometimes, funding. You might even supply them with equipment and inventory.
Another method is product franchising, in which retailers run as franchises of a manufacturer, selling their products to consumers.
Starting a franchise: the franchising agreement
You may start out on the franchising path if your business is ripe for it, and if there’s a big enough demand for what your franchise will be offering. But be sure that you also determine the nature of your relationship with your would be franchisees.
Franchising agreements are crucial to ensuring that franchises work. They are documents which define the business relationship between franchisors and their franchisees. It specifies both parties’ obligations in the relationship; if both parties agree to the details contained in the document, it becomes binding. Franchising agreements are best drafted and negotiated by business law experts.