Franchising

A marketing system where the Franchiser(supplier/mother company) enters into an agreement with the franchisee(distributor/individually owned business) to distribute the product/service on certain agreed upon terms

Characteristics of franchising

Franchise agreement is a formal business agreement

Franchising is a marketing system, NOT a form of ownership

A good opportunity for inexperienced entrepreneurs

Entrepreneur has the opportunity to start his own business based on the success of the successful franchiser

Successful franchisees make the franchiser successful-therefore in the interest of franchiser to assists franchisees wherever needed

When franchiser decided to to franchise the business, a lot of time will be spent on training the franchisees. Franchiser will help to train the franchisee when franchise is opened, but this is also an ongoing process

Franchisee is responsible for daily activities e.g. recruitment of employees, placing orders etc. but he may not change prices of items

Often difficult to distinguish between different franchises owned by different individuals because the business package bought is standardized, and this is what grows the brand and draws customers

In most franchises core products are standard but there is often some freedom of choice on others e.g Mc Donalds with play centers

Costs to the Franchisee

Franchise fee

An initial lump sum payment to franchiser to secure the right to use the name/formula of business for 10 years(renewable)

All costs(shops, furnishing,stock etc) borne by the franchisee,

If franchiser assists with set-up, it is known as a turn key operation, and the franchiser will charge a management fee for the service

Royalties(5-10% of turnover) are paid to the franchiser. Smaller franchise operations often charge a flat rate to facilitate ease of administration

A monthly advertising levy(subscription) is paid by the franchisee as his contribution to advertising done by the franchiser

The franchisees will still do their own local advertising

Advantages and disadvantages for a Franchisee and a Franchiser

Disadvantages for a franchisee

Advantages for a Franchiser

Advantages for a Franchisee

Disadvantages for a Franchiser

Franchisee has a good chance of success because he will benefit from the success of the franchiser

The Franchisee has access to advice from the franchiser. Which will reduce the stress of solving issues on his own

Franchisees often work together to solve problems or buy stock in bulk as their businesses are so similar. This will save time and costs

Cost to establish usually very high and still has to pay monthly royalties.

Could be frustrating and limit creativity for entrepreneur as they have to stick to stick prescriptions of franchiser

Franchiser can expand business quickly without large capital outlay.

Franchisees more committed than they would be as managers running a branch, they are working for profit, not a set salary. So the Franchiser will benefit as royalties will increase

No staff problems

Franchiser does not have direct control over franchisees, yet the success of the franchiser is dependent on success of the franchisees

Admin duties involved in collecting royalties and controlling the brand

The relationship between the Franchiser and the Franchisee

The Franchisee Association of Southern Africa(FASA) ensures the behaviour of both the franchiser and the franchisee is ethical and acts as an arbitrator should be dispute arise between the two parties

A Franchisee forum is established to help local franchises to work together and share info to improve efficiency e.g. bulk buying, sharing services such as printing