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Within a relatively short period, modern-day franchising, more fully described as "business format franchising", has evolved to become the most popular business concept ever created.
So what exactly is franchising? A franchise is an agreement between the
(the grantor of the franchise) and its
(those who acquire a franchise), granting the franchisee the right to operate under the name of the franchise and use its trademarks, know-how, methods and procedures. Moreover, the franchisee stands to gain from initial and ongoing training and advice offered by the franchisor, as well as having access to bulk deals and group marketing campaigns.
What is a Franchisee?
A franchisee (recipient of a franchise) is an individual with a burning desire to succeed in a business of his own but reluctant to operate in isolation, more often re-inventing the wheel in the process as it were. Franchisees should be: -
Capable of absorbing new concepts quickly.
Willing to follow the franchisor's blueprint to the letter.
Positive people-persons imbued with the necessary enthusiasm to market the business and motivate staff.
Adequately resourced to meet the initial (capital investment) and ongoing (working capital) financial requirements of the business.
Able to manage and control the business, and willing to drive the brand at local level.
Prepared to co-operate with the franchisor's team as well as with fellow franchisees, and play an active part in programmes offered by the network.
Determined to build the business into the best and most successful in the territory.
Convinced of the merits of the franchise and the brand, and prepared to defend both against possible attack by competitors or others.
What is a Franchisor?
The franchisor is the grantor (giver) of the franchise. To be deserving of the title, the franchisor should: -
Know every facet of the business and have a hands-on approach to problem solving.
Be honest and forthright in all dealings.
Have operated the business he wishes to franchise for a reasonable period. Agreement exists that the minimum period should be one to two years but research has shown that most companies wait for six years or more before they roll out a franchise.
Have adequate financial resources to develop the concept and make the necessary investment into the brand.
Want to grow through others, and be prepared to share the rewards resulting from teamwork with franchisees.
Strive for excellence in every facet of the business and determined to grow.
And how widespread is Franchising?
Franchising has taken the world by storm. In the United States, widely seen as the home of modern-day franchising, about 50% of all retail business is conducted through franchised outlets. Closer to home, franchising has made great strides as well, although the sector is far from saturation point. A survey carried out by Johannesburg-based Franchise Directions during 2000 reveals that South Africa had 478 active business format franchise systems that operated through a total of 23 625 outlets. The sector employed 293 000 people and notched up a combined turnover of 58.97 billion Rand, or 12% of retail turnover. This is far lower than the market share franchising enjoys in other parts of the world, and indicates significant potential for growth.
Source: Kurt Illetschko: SA Guide to Franchising
Becoming a Franchisor
To be ethical a franchise system must be transparent. There can be no part of the system itself that is hidden from the prospective franchisee. This principle applies to everything in the system: The pricing structure, how the marketing money is spent, what the franchisee's obligations to the franchisor are, the franchisee's responsibilities during the set-up period, the precise nature of the legal arrangement between franchisee and franchisor - nothing may be kept from the person who has invested in a franchise or is considering investing
The Franchise Agreement
Newcomers to franchising are frequently astounded to find that a franchise agreement consists of 60 or more pages. This in itself is no cause for alarm. On the contrary, because the franchise agreement regulates the relationship between the franchisor and the franchisee, the more detailed it is the better. But bulk alone is not enough - in this case as in so many others, it is not quantity that counts but quality. A good franchise agreement will be written in everyday language and set out in detail what it covers and what the respective rights and obligations of the parties are.
To protect the brand from being brought into disrepute by the reckless actions of an incompetent or wilful franchisee, the franchise agreement must give the franchisor the power to exercise control over the way every unit of the network is operated. It follows that the franchisor must be in a position to reign in an errant franchisee and, if necessary, apply sanctions that would, in extreme cases, extend to the right to terminate the agreement.
This does not mean, however, that the franchise agreement should be one-sided by recording all the rights of the franchisor whilst placing all the obligations on the franchisee. We have said already that the agreement should reflect the respective rights and obligations of the parties, and it is important that this is done. Many franchise agreements tend to fall down on this point. The reason for this is that the franchisor's attorney compiles the franchise agreement. He may well have an excellent grasp of legal concepts but if he lacks an understanding of the way franchising works, he is bound to overemphasise the rights of the franchisor whilst minimising his obligations. As a result, one often comes across meaningless clauses like: "The franchisor will use his best efforts ..." or " ... this is subject to the franchisor's approval which shall not be unreasonably withheld..." and so on. The first example makes one wonder how you would define 'best efforts' and is this likely to be good enough, whilst the second begs the question "reasonable from who's point of view?" Progressive attorneys with a good understanding of franchising have come to accept the need for a balanced view and the use of language that leaves no room for ambiguity. So, whilst it is accepted, with good reason, that franchise agreements are standard agreements and virtually non-negotiable, badly written agreements that stress the obligations of the franchisee but fail to protect his legitimate rights should be rejected. This will force franchisors that continue to use outdated agreements to have them reviewed, and the sooner the better.
The franchise agreement will explain the terms of the franchise relationship, identify the contracting parties and describe what the grant of the franchise entails. Although legal jargon should be avoided, it is almost inevitable that the term "grant" will crop up and it is essential that you understand its meaning. In layman's language, it means that a franchise is granted, never sold. In other words, you are given the rights to use the franchisor's trademark, expertise, trade connections and all the other things that make up the franchise package, but only for a period and subject to certain terms and conditions. The term of the franchise agreement typically extends over five to ten years, usually linked to an option in favour of the franchisee that the agreement may be extended for a further period. On expiry of the agreement, all rights revert to the franchisor.
Initial and ongoing payments the franchisee needs to make and his obligation to operate the business in accordance with guidelines that are usually contained in the operations and procedures manual, will be explained. The rights and obligations of the franchisor are set out, followed by an explanation of what constitutes a breach of contract, and what the sanctions will be.
Expect to find a provision that will limit your right to sell the business. This limitation is necessary as it protects the franchise against incompetent operators entering the network and possibly bringing it into disrepute. Another common restraint is that restricting you from operating a business in competition to the franchised business, both during the time you are a franchisee and for a limited period thereafter. Both clauses are necessary, but to protect their interests, prospective franchisees should seek competent legal advice to ensure that the clauses are fair and reasonable.
This is in fact the crux of the matter. Like it or not, even the fairest of franchise agreements will contain clauses that could severely limit a franchisee's rights. Such clauses are not necessarily bad, but it is essential that you understand their meaning before you sign the agreement. Given the importance of the franchise agreement, and the cost involved, the legal fee will be money well spent.
The Disclosure Document
By doing your homework. You are entitled to expect that the disclosure document contains all the information you need to make an informed decision regarding the viability of the franchise offer. This would include the history of the business and its office bearers, the activities of the franchise and the level of investment you are expected to make, the extent support you can expect to receive, comprehensive details regarding your legal and ongoing financial obligations, the franchisor¼s business references and a letter by its auditors. Moreover, a list of existing franchisees, complete with contact details, as well as a list of past franchisees who have left the network and why, should be included.
Armed with this information, you can carry out an in-depth investigation that, once concluded, should leave you in no doubt regarding the bona fides of the franchisor. Lastly, an important tip: make sure that your franchise agreement contains a clear reference to the disclosure document. This way, should it emerge at a later stage that the disclosure document was incomplete or less than truthful, the franchise agreement could be set aside by a competent court. Depending on the circumstances surrounding the case, it is even conceivable that the franchisor could face fraud charges.
Payments which franchisees are expected to make to the franchisor can be broken down into initial payments and ongoing payments. Amounts, payment terms and formulae used to calculate the various fees should be explained fully in the disclosure document.
Specialised training to both franchisors and franchisees in the field of franchising and business management is offered by a number of Franchise consulting companies. For further information contact your nearest Seda branch
The followings links will provide you with further insight into franchising.
Franchise Association of Southern Africa
for more free info
- A guide to franchising
Seda Business Start
Marketing Small Business
Financing Your Business
Managing Your Business
Frequently Asked Questions
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