How does franchising work?

Franchising is an excellent route to entrepreneurship, as the franchisee accesses a proven business model. The franchisor is the originator and developer of the business model. After proving the business model, the franchisor can license franchisees to use the business model format, the brand and systems for their own gain. In exchange for the business model and brand, the franchisee pays initial and ongoing fees to the franchisor. 

A well-developed franchise consists of the following elements:

  1. Proven business model

The franchisor should have at least one operational outlet, preferably for six months to a year. The proof of concept should provide the blueprint for running the business. The franchisor will use this outlet to develop financial projections and an indication of the establishment cost.

  1. Business systems and procedures

A well-developed franchise will have the necessary systems to run the business efficiently. Franchise systems could include a Point of Sale system, back-office management and, in some instances, CRM systems that can be used for customer retention. All the operational procedures should be documented in an operations manual that may serve as a reference for standards and policies for the franchisee. 

  1. Brand Collateral

A successful franchise will have a unique brand and the necessary brand collateral to market the franchise, including a local marketing toolkit for franchisees.

  1. Ongoing research and development

Franchises should not be static but should do ongoing research and development to stay relevant to market trends and consumer preferences.

  1. Support services from the franchisor

The franchisor should provide initial and ongoing support services. Initial support usually includes assistance with the launch and the first few weeks of operations. Ongoing support could consist of regular meetings regarding the franchisee’s business and updating the operations manual as necessary.

  1. Initial and ongoing training

Franchisees should receive the initial training required to understand how business operations work. Ongoing training, including refresher training and training on new products and services, should also be part of the franchise offering.

In return for the benefits provided by the franchise, the franchisee has the following responsibilities:

  1. Funding for the establishment cost

The total establishment cost of the franchise, including elements such as opening stock, fixtures and fittings, signage and any working capital required, is for the franchisee’s account. Commercial banks have specific franchise divisions that facilitate finance for franchisees. Usually, the franchisee will need at least 50% of the total investment to be available in cash or similar liquid funds. If you would like to learn more about how to fund your franchise feel free to read our previous article on how to get funding for a franchise.

  1. Attendance of training 

The franchisee will be required to attend the initial and ongoing training from the franchisor and ensure that the franchisee’s staff are also trained. Attending training should equip the franchisee and staff to run the business efficiently. 

  1. Compliance with the operations manual

All operational standards and procedures are contained in the operations manual. The franchise agreement requires the franchisee to always adhere to operational standards.

  1. Payment of franchise fees

Franchisees must pay their franchise fees on time to ensure the sustainability of the franchisor. Franchise fees include marketing fees that contribute to national or regional marketing campaigns. Paying fees on time ensures that the franchisor can provide support services and implement marketing campaigns.

  1. Brand ambassadorship

An essential role of a franchisee is to act as a brand ambassador in their community. This includes striving for service excellence in the franchise and not doing anything that could bring the franchise into disrepute.

  1. Local marketing and sales

Although the franchisor will be responsible for national or regional marketing, it remains the responsibility of the franchisee to implement local campaigns and drive sales for the franchised outlet.

  1. Active management of daily operations

Most brands require franchisees to have hands-on involvement in their franchise. The franchisee should focus on the business and ensure it runs efficiently and profitably.

In conclusion, franchising is a mutually beneficial relationship where the franchisor and franchisee play a critical role. Working together ensures brand success and growth to benefit the whole network.

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