Many of us have heard the term “franchising” a number of times. However, we can’t really define what it actually means. If you are thinking about how best to expand your business, the franchising model might be the way to do it. So what exactly is franchising? How does it work? What are the pros and cons of operating in this model? We discuss the answers to these questions in this week’s article.
According to the International Franchise Association, a franchise is “A contractual relationship between the franchisor and the franchisee in which the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor. [In addition], the franchisee makes a substantial capital investment in this business from his [or her] own resources.”
Put more simply, it is a model where an owner of a business (franchisor) sells to an entrepreneur (franchisee) the rights to run a business selling the product or service using the franchisor’s business system and brand.
It is a model where an owner of a business (franchisor) sells to an entrepreneur (franchisee) the rights to run a business using the franchisor’s brand.
Franchisees are independent businesses. They hire and manage their own teams and sell the products or services. In Uganda, Jibu is one of the most successful examples we have of this model. Galen Welsch, the co-founder and CEO of Jibu says one of the reasons they chose this model was because it provides entrepreneurs with the basic “business in a box.” It gives entrepreneurs a big business advantage as they start out.
How it works
The franchisee pays a royalty fee in exchange for the rights to use the franchisor’s business model. In addition, they sign a contract agreeing to operate in accordance with specified terms.
The relationship between the franchisor and franchisee is very important. However, it looks different for different brands.
For example, Jibu will finance the build out for its franchisees. In turn, the franchisee pays a licensing fee to Jibu to show they have skin in the game. Furthermore, they pay an ongoing flat fee every year, which correlates to revenue share.
Types of Franchising
Business Format Franchising. This is the most common model used. Here, you are selling the brand and system. In addition, you are giving the franchisee access to your distribution model. You are therefore selling the whole business and the brand associated with it.
Product or Sales Distribution Franchising. This involves branded sales distribution agents operating on behalf of a central business entity. The franchisor manufactures a product and the franchisee sells it. It is similar to a supplier-dealer relationship.
In this model, it is critical to be decentralized. Focus on your internal structures. Additionally, think about the responsibilities each independent operating company has.
Coca Cola is an example of a company that uses the product distribution model.
Your relationship with Coca-cola is with the brand created by the Coca Cola Head Company.
“The actual drink you’re drinking is made by Crown Bottling that owns the business here,” Galen said.
Advantages of Franchising
- Speed and the engagement
Businesses can build their brand a lot faster than they would have on their own. Additionally, they have a more intimate customer relationship with more diverse customers. - Already established Business brand and systems
Franchisees don’t have to deal with many of the challenges entrepreneurs struggle with when starting out. Some of these challenges include building a brand and putting systems in place. They also benefit from the supply chain economies of scale and the regulatory relationships already established by the franchisor. - Focus on growing the business
The franchisee can focus on building a strong team because the product is already built. A strong team is one of the main elements needed for the growth of a business.
Franchisees don’t have to deal with many of the challenges entrepreneurs struggle with when starting out.
Disadvantages of Franchising
- Sacrifice control: Because it’s a partnership, both the franchisor and the franchisee sacrifice control. As a franchisee, you don’t have total free reign over the business. You have to value the system already created and believe in the brand enough to represent it.
- You earn less: What you are trading for speed is more money. If Jibu had branches instead of franchises, it would probably be making more money.
“However, we wouldn’t be in 7 countries and have 3000 retail points,” Galen said.
Jibu as the franchisor is making more money, although it’s a smaller piece of a much bigger pie.
The ultimate purpose of franchising is expansion. In this case, expansion means increasing the size of your footprint and reaching new markets. In order for this to happen, you need people. You have to have something they can benefit from and provide them with the right incentives to promote and build this in their own context.
Consider the franchising model as you think about growth and expansion of your business. Would you expand faster with franchisees or with branches?
**Flowers to Galen for sharing his knowledge with us!