Strategies for Becoming a Franchisor

Know the Opportunities and Challenges

Ketan Patel Brand & Marketing Director

The Challenges

In many parts of Africa, franchising remains unknown. Political and economic instability,

ineffective legal systems and extreme poverty have discouraged successful African business people from franchising their businesses while

international franchise systems seek other, more stable countries in the world for

expansion opportunities. – African Development Bank

The Challenges

• Franchising is new to most Africans.• Political and Economic situations can change

rapidly adding uncertainty to the business environment.

• Legal systems cannot protect the rights and IP of businesses.

• The number of customers for products and services is limited due to high poverty levels.

• International franchises can make more money with less effort in other markets.

The Challenges

• Limited Locations, Franchisees and Finance Many African markets have the same agglomeration of potential customers that many neighborhoods offer in the first worldInterest rates are prohibitive in many African countries

• Raw Materials, supply chain and communicationsMost African countries suffer from a restrictive manufacturing base which forces importation of raw materials – forcing high levels of working capitalSupply chains are complicated and erraticCommunication systems are slow and defficient

• Africa is not one country – it comprises of diverse markets, cultures and complexities

The Challenges

The Reality

Over 300 shops in 14 Countries across AfricaOver 4 000 000 satisfied customers per month

The challenges can be overcome and have been overcome

but many have tried and many have failed.

The secret is to understand that franchising in Africa

is about “Africans for Africa”.

Franchising is a vehicle that empowers a sense of African

independence and self reliance by helping African business people

harness their entrepreneurial drive and creativity.

Entrepreneurialism is rampant throughout Africa. The key is

letting the secret out and making sure African entrepreneurs learn

about franchising and what it can do for them.

Here is an example of some franchises created by Africans, in Africa for Africa.

African Opportunities

• Franchising is used in varying degrees in 21 of the 53 countries in Africa.

• Franchise associations exist in South Africa, Kenya, Egypt, Zimbabwe, Morocco and Nigeria.

• Over 478 franchise systems in Southern Africa.• 4 out of 5 are of Southern African Origin.• Southern African franchise systems are operating in

African countries where North American and European Franchisors do not.

• Franchising clearly works in Africa.

Can your business be franchised?

To be a successful franchised business the following conditions must be satisfied with sufficient historical trading experience:

1. Consumer Demand• Do you offer a product or service which is in demand by a large number

of customers?• Will demand for such products or services remain for a long time?

2. Replica ability• Can skills for each operating unit be easily transferred in a relatively

short period?• Does your business rely on the personality or individual providing the

service or does it rely on the brand equity of your product or service? • Do you have a universal product that attracts a market in all

geographical regions?

Can your business be franchised?

3. Return on Investment• Are your gross margins high enough to offer a return on investment to

both you as the franchisor and your franchisees?• Will your franchised business provide a higher return on invested capital

for the franchisee, relative to a similar non franchised business?

4. Low Financial Risk• Is your business easy to control?• Is your business growing?• Have you been successful and can you prove it?

5. Non-borrowed cash requirement• Franchised businesses requiring a lower total investment would have

greater competitive advantage in attracting franchisees simply by being more affordable than the alternatives.

6. Low Breakeven Points• Businesses that can generate cash in excess of expenses will tend to be

more attractive to franchisees.

Can your business be franchised? – A Checklist

1. Is your idea unique?

2. Do you have a targeted customer base?

3. Can your idea succeed without substantial adaptation in different markets?

4. Have operational, financial and marketing problems been solved?

5. Can the knowledge be transferred easily?

6. Is there adequate demand for your idea?

7. Is there sufficient profit margin for the franchisee and franchisor?

8. Are good sites available?

9. Are there legal barriers to marketing or quality control?

10. Can my present operation be duplicated easily?

11. Is my operating system adequate?

12. Can I ensure compliance in my franchisees?

13. Do I have control systems in place to monitor franchisees?

14. Will my franchisees earn an adequate return?

15. Do I have sufficient financial resources?

What next?

If you think your business might be franchiseable then you will need to offer franchisees the following:

1. A Strong brand2. A complete business system3. A Franchise Agreement –

• the rights to use your business format in a certain defined territory

4. Architectural, engineering or simple design support to ensure that the business is recognized and associated with your system

5. Support services under the contractual terms of a franchise agreement • Marketing• Operational and compliance support• Brand support• Innovation

The Brand

3rd Party Brands

• Develop a brand with a reputation that other people will spend their money on.• The brand must be distinctive and appropriate for the places you want to

franchise in.

• You need to protect your brand and its trademarks

What is a Trademark?

• A trademark is a sign which can be represented graphically and is capable of distinguishing the goods or services of one trader from those of another.

• The Values of a trademark:• Guarantee Function :

• Goods or services are of a uniform standard or quality• A well recognized trademark acts as a substitute for

experience. If a customer has a good experience with a trademark on one occasion – the customer is likely to repeat the business with the same mark.

• Communication or advertising value:• A strong trademark can offer its owners a means of

communicating directly with customers on both emotional and functional levels. The owners can rely on the image that the trademark contains to communicate with the customer

• Trademarks are a class of legally recognized assets.• Like any asset – we must protect / insure them

The Trademark Process

When registering a trademark or a number of trademarks in a country the following procedure is usually followed

• Which Brands?• When it is decided to venture into a new territory one of the first

things to be decided upon is the brands that are to be exploited.• Have they been registered?

• Once the brands have been chosen, it will be necessary to establish as to whether these brands have been registered in that specific country. We keep an updated schedule of our brands and countries in which trademarks have been registered or applied for registration.

The Trademark Process

• Registering Brands• Should the brands not be registered or applications made we

then start the ball rolling, for Innscor owned brands we write a letter to our Patent and Trademark lawyers requesting them to approach their associates in that country and apply for the registration of the identified brands.

• It is prudent to have a search undertaken to establish as to whether anyone else has registered the brand or applied to register the brand in that country. There are known instances where individuals have registered brands in a country with the sole intention of extracting payment from the genuine owner of a particular brand when they decide to open up in that country.

The Trademark Process

• Validity• Once the application has been made to register a brand, that

brand is in essence protected from the date the application is submitted. The length of time for this procedure to be completed varies from country to country. In Zimbabwe it can take one year to four years, whilst in some other African countries in can take up to seven (7) years.

• Protection of the trademark is granted for initial periods of between seven (7) and ten (10) years, depending on the country and then are renewable for further periods of between ten (10) and fourteen (14) years.

• However it must be borne in mind that should the registered owner of a brand not make any attempt to use the brand within five years of the registration, then that mark becomes vulnerable to an action for cancellation.

• Change in ownership, any changes to the ownership of a Trade Mark must be recorded at the Trade Mark Registry to be enforceable against third parties.

The Business System

• Franchisees invest in your Franchise for the opportunity to run a business based on its historical evidence of capacity to deliver products or services profitably to an identified market.

• You cannot sell an idea as a franchise. You must have proven - in practice - that the idea works and that you can successfully transfer the "know how" to another person operating at "arms length" from you.

• What are the components of the know how?• Operations Manuals• Preventive & Detective Controls• MIS• Site Location Criteria• A & E • Equipment & Signage• Approved Suppliers • Marketing, PR and Advertising Expertise

• You will need to draw up and prove a comprehensive operations manual that details what a franchisee does, how they are to do it, and to what performance and quality standards.

The On-Going Support

• One of the biggest practical differences between a simple distribution scheme and a fully fledged business format franchise is the extent of the initial and continuing support services offered by franchisors to franchisees. (BFA)

• Franchisors take on responsibility for • Product and Service development, • Marketing, Promotions and PR, • Procurement and Purchasing systems• Financial and administrative services• Quality, Value, Service Levels• Network Communications and Discipline. • Business Planning• Field Audits• Brand Equity

The skills involved are not the same as those required by field managers in company owned networks and there is an investment involved in making sure the necessary support services can be delivered to your first franchisee as well as your fiftieth. (BFA)

The On-Going Support

• The extent of support offered varies according to the kind of business that the franchise is in and according to how it is structured. • A job franchise network will offer extensive administrative and

financial services to its franchisees.• A management franchise (where the franchisees employ and

manage) will not be so much involved in day to day administration but will be providing training to franchisees on (e.g.) recruiting and selecting staff amongst many other services related to supporting management functions.

• A Fast Food Franchise will offer services relating to monitoring quality, service, value and operational expertise.

• You will also need to make sure that your franchised business is structured so that your franchisees need your services on a continuing basis and in consequence will want to go on paying you to belong to the network.

The Agreement

• Franchise agreements must be fair and comprehensive. • A good agreement must stipulate the obligations of both parties.• The agreement must cover:

• The geographic boundry• The development obligation• The financial obligations• The general operating standards

• Training• Marketing• Trademarks• Confidentiality• Termination

The Agreement

• That does not mean that franchise agreements are an equal balance of rights and obligation between equal business partners. Franchisors are responsible for the network as a whole and that sometimes means acting against the interests of an individual franchisee for the greater good of the network. Franchise agreements have gone through more than twenty years of development to ensure that franchisors have the appropriate rights to do their job within a framework of fair and reasonable treatment for franchisees.

(The BFA)

Finding Franchisees

• Recruiting franchisees is difficult and expensive.• New franchisors have conversion ratios of serious enquiries to appointment of

around 10:1 Established franchisors have a conversion ratio which is often higher than 50:1 sometimes higher than 100:1. (BFA)

• The recruitment mechanisms open to you are: • Franchise exhibitions

• Be careful to avoid those where your reputation could be spoiled by association with bad franchised businesses.

• Newspaper Advertising • Some national newspapers have developed an active franchise

market. • Trade Magazines

• There are three franchise magazines two of which are available through newsagents. Their support can be important.

• Leads• Existing franchisees have friends, colleagues and customers. If they

are happy with their business they will encourage others.

Becoming a Franchisor

• Research the market to ensure that products and services are competitive and distinctive enough to be franchised.

• Research the fact that the market is growing and not declining. • Produce a Business Plan outlining proposals in full and including a

detailed SWOT analysis – in Africa a PEST is also necessary. • Protect all intellectual property rights by registering trade marks,

trade names and patents with the relevant trade mark and patent offices in all markets that you intend to expand into.

• Test the franchise in the form of a pilot operation lasting at least 12 months - ideally longer if the business is in any way seasonal.

• The pilot scheme should be undertaken at more than one location in order to test the concept in different geographical areas.

Becoming a Franchisor

• A comprehensive pilot operation :1. Prove the viability of strategy and approach2. Highlight problem areas3. Test management systems (if in more than one location)4. Enable the franchisor to fine-tune the package 5. Produce Brand Equity6. FLAGSHIP STORES

• With the pilot operation running successfully, the franchisor can prepare and launch his network.

• The franchisor should instruct a lawyer familiar with franchising operations to draw up a comprehensive franchise contract setting out the obligations of each party - including how the fees, mark-ups on supplies and any other payments from the franchisee are to be calculated. These obligations should be made clear at the outset of any agreement with a franchisee, to prevent possible conflicts in the future.

• Produce a prospectus, UFOC, disclosure document to attract suitable franchisees

• Produce a system to determine the criteria for franchisee selection.

Becoming a Franchisor

• Produce a comprehensive operations manual and training programme for franchisees.

• Establish a central management function and field support staff• Develop a marketing, sales and advertising strategy to promote the franchise

network, especially when competing with rival companies that potential customers are fully aware of the services on offer.

• To commit substantial amounts of time and money before their income stream begins - for market research studies, pilot schemes, promotional material explaining the benefits of the franchise to potential franchisees, the selection and training of franchisees, the production of an operations manual, the formation of a central management team, initial stock and equipment, the launch of the franchise network and advertising.

• Once the network is up and running, the franchisor and the central management team need to constantly monitor the performance of the outlets, to ensure that quality levels are maintained and to identify and assist any franchisees who are in difficulties.

• A franchisor's on-going commitment, through training, product development and other support, is vital to the success of the franchise network.

Becoming a Franchisor

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