It’s a cluttered marketplace out there with a quick online search revealing countless ‘business opportunities’. Many of the founders of these business opportunities present what they offer as franchises. In some cases franchising’s good name lends credibility to the venture while in other cases many sellers and buyers simply don’t understand the true definition of a franchise.
Yes, but is it a franchise?
The word “franchise” in its modern usage stands for “business format franchise”. Franchising is the only business format that ties the long-term business success of the seller, known as the franchisor, irreversibly to the long-term business success of the buyer (franchisee) and vice-versa.
While certainly not the only method to expand a business – other formats include agencies, distributorships and joint ventures – franchising offers a number of advantages. At heart, franchising should be a win-win arrangement for both the franchisor and franchisee. Here are some of the characteristics of a franchise, which also demonstrate that the franchisor has taken his responsibilities seriously.
A philosophy of interdependence
The relationship between the franchisor and franchisee is built on mutual respect and trust. No franchisor can hope to be successful in the long-term unless the bulk of the network’s franchisees is successful. This means that while the franchisor may have company outlets, they shouldn’t compete too strongly with the franchisee’s operations. Franchisees should mean more to the franchisor than a distribution channel for products.
A franchise arrangement is characterised by a number of legal documents including a disclosure document and a franchise agreement. Both documents are important. The disclosure document should give you an in-depth view of the business – including financial projections – while the franchise agreement sets a fair framework for the relationship.
Seek advice from a lawyer with franchising experience to review these documents. If these documents don’t exist or are very biased towards to the ‘franchisor’ then reconsider your investment.
Systems and support
The franchisor should offer both initial and ongoing assistance in training, marketing, organising and merchandising in return for fees. This is one of the critical reasons why franchises succeed where other new businesses fail. The businesses operating procedures should be captured in an operations and procedures manual. This manual is not a ‘nice to have’ but is specified as a legal franchising requirement in the Consumer Protection Act.
A well-developed brand
A franchise concept can be recognised by its strong, distinctive brand. You should see evidence that the franchisor has invested time and money to develop the brand. Here the details do count – from what a store layout looks like to the quality of the website. You’ll want to be reassured that the franchisor has consulted marketing and design specialists.
It is important to note that by offering a business opportunity, the principal supplies interested parties with a product for resale and nothing more. His involvement will rarely extend into the realm of a profitable day-to-day operation. In some instances, limited territorial exclusivity will be granted, this is usually linked to the maintenance of minimum re-order levels. Should the sales drop, this territorial exclusivity may lapse, forcing him to compete on his own home turf with others selling the same product, occasionally even sourced at a lower price.
The team at whichfranchise often hear sad stories of people who have bought a ‘false franchise’ only to lose their initial investment and be left holding a large stock of goods. Are you or someone you know currently evaluating a ‘business opportunity’? Drop us a line and one of our franchise experts will get back to you.