ithala

Franchising

Franchising

WHAT IS FRANCHISING

Franchising is simply a way of doing business whereby the owner (franchisor! of a proven business system grants the right by contract to an entrepreneur (franchisee) to establish a similar business which will be run according to strict quality standards and trademarks. The franchisee receives marketing support, detailed work manuals, start-up training assistance, advice on equipment and raw material selection and regular visits by the franchisor.

FORMS OF FRANCHISES

MANUFACTURER – RETAILER

A manufacturer takes the responsibility for production, marketing, and national advertising whilst the dealer accepts responsibility for sales levels in his/her area. A prime example of this is the giant motor car concern, Ford.

MANUFACTURER – WHOLESALER

A manufacturer grants a franchise to a wholesaler who, in turn, sells to a retailer.

Example: Coca Cola which franchises the syrup to wholesalers, who bottle the product and then sell it to retailers.

VOLUNTARY CHAIN OR CO-OPERATIVES

Retailers set up franchise co-operatives for the benefit of bulk buying and national advertising. Good examples of this approach include Spar, Link and Plus Chemists.

SERVICE – TRADE MARK

This system is known as business format franchising. This is the type of franchising with which most of us are familiar. It includes Kentucky Fried Chicken, Steers, Supa Quick, Wimpy and the like. It is known as business format, because the franchisor provides the entire business format including product, store lay-out, clear manuals and standards, quality control and ongoing managerial support.

REQUIREMENTS FROM A FRANCHISEE APPLICANT

Before a financial institution considers financing a franchise, the prospective franchisee must have been screened and accepted by the franchisor. This normally involves the franchisee having to pay an upfront franchise fee to the franchisor. Without this, most franchise companies will not consider talking to a financier about proposals, projections and costs.

A trading site must be identified and be accepted by the franchisor (in terms of the geographical trading rights of other franchisees).

A normal business viability study must be completed taking into account the franchisees business acumen, the viability of the business and security offered, with the crux being the potential turnover. Gross profit and expenditure details are normally available from the franchisor.

according to industry norms and success or failure ultimately depends on achieving the necessary minimum turnovers. Industry norms greatly assist the financier in completing projections. An own contribution of not less than 20% would normally be required from a franchisee applicant.