Chapter 8

Franchising
Chapter 8
Franchising
 Learning outcomes
• Theme 1: Franchising
- Discuss the different types of franchising
- Discuss the different franchising models
• Theme 2: Franchising a business
- Analyse the advantages and disadvantages of franchising
- Explain where to find the most suitable franchise
- Evaluate a franchisor and franchising opportunity
- Discuss the aspects to be considered when franchising a business
- Evaluate whether a business is suitable for franchising
- Discuss franchisee recruitment
- Analyse the franchise package
 Learning outcomes (cont.)
• Theme 3: Supporting the franchisee
- Discuss the various forms of support franchisors should provide franchisees
- Analyse the impact of the Competition Act (No. 89 of 1998) on franchising
practices
- Explain the aspects to be considered in international franchising
 Franchising defined
The word franchise originates from French and refers to privilege
or freedom
FASA (Franchising Association of Southern Africa) defines a franchise as a grant by the
franchisor to the franchisee, entitling the latter to the use of a complete business package
containing all the elements necessary to establish a previously untrained person in the
franchised business and enable him/her to run it on an on-going basis, according to
guidelines supplied, efficiently and profitably
 Types of franchising

• Business-format franchising

• Product and trade-name franchising

 Business format franchise
Franchisor offers the franchisee a clearly defined packaged of
deliverables and services. Usually included:
• Strong corporate identity – trademarks and logos
• Complete system to conduct business
• Hands-on assistance: site selection, staffing, etc.
 Business format franchise
• Franchisee pays both upfront fee and continuing fees.
• Characteristics:
o Most popular
o Franchisor needs larger infrastructure
o Expansion financed by franchisees
o Examples: Spar and Wimpy
 Product and trade naming
With this type of franchise, the franchisee is expected to focus
on the franchisor’s product range.
• Warranty policies, service levels and appearance of outlet controlled
by franchisor
• Franchisee may not sell a competing product
• Used in automotive, petroleum
and soft drink distribution industries
 Franchise models
Type of
Development model Master franchise
Company-owned unit Retail franchise
Joint venture Management franchise
Unit franchise Simple operator franchise
Conversion franchise Investment franchise
Fractional franchise Tandem franchising
Area developer Social franchising
Regional master franchise
 Formal assessment:
Task 3
• You may consider franchising your business at
some point. Discuss with justification, the type
and model of franchise that your business will
enter into.
 Classification of franchises
• Automotive franchises • Fast food and restaurants

• Building, office and home services • Health, beauty and wellness

• B2B services • Pet services
• Children’s franchises • Real estate and property

• Cleaning franchises • Retail

• Computer, Internet and cellular • Sport and recreation

• Travel and tourism

 Advantages of franchising
• On-going advice, training, • Buying power
research and development • Infrastructure
• Reduced capital outlay with • Business synergy
increased profits • Increased success rate
• Brand awareness • Exit strategy
 Disadvantages of franchising
• Loss of independence
• Restrictions on products, pricing and location
• Ongoing royalties and advertising fees

• Balancing support with own ability to run business

• Damaged system-wide image = overall failure

• Duration is limited
 Disadvantages of franchising (cont.)
• Services could be expensive or non-existent
• Contract may protect rights of franchisor only

• Even with support cash flow may still cause the franchise to fail
• May be a fad or vehicle for fraud
• Franchisors do not fulfil initial undertakings

• Trade name not as valuable

Finding the most suitable franchise
• Franchising Association of Southern Africa (FASA)

• Advertisements in newspapers and magazines

• Personal referrals

• International Franchise & Entrepreneurs Expo (IFE)

 Evaluate franchise opportunity
• Initial screening
• Access the franchisor’s history - scrutinise the franchise business
carefully to determine the following:
o The chances for business success
o Whether the franchise fee is justified
o The potential long term profitability of the business
o Whether the franchisor is really good at marketing and
purchasing
 Evaluate franchise opportunity contd.
• The product or service
• Financial aspects
• Market research
• Change of ownership
• Franchisee support provided
by the franchisor (explained on next slide)
 Franchise support by the franchisor (contd)
The franchisee should expect at least the following:
• The operations and procedures manual
• Assistance in finding the right franchise facility
• Guidance during the establishment of the unit - necessary specifications
• Adequate training of the franchisee and key staff
• Continuous advertising and promotion of the brand name
• The availability of a field force of the franchisor that can provide good business advice
and is able to support the franchisee during a downturn
 Franchising a business
• Preliminary planning
• Establish network potential
• Financial projections

• Setting up franchise fees

 Establish network potential
• Identifying the target areas for expansion and assessing the potential of
each of these target areas
• Ranking the areas according to potential – consider logistical
constraints that may negatively impact ability to service and support
franchisees in these areas
• Timelines and milestones for the development plan, with due
consideration of commercial realities that may impact the development
plan
• Careful planning should take place to guard against over-saturation of
an area
 Financial projections
• Projections from pro forma financial statements and profit and loss account
• Cash flows for the first 3 to 5 years of operation
• Develop a sound business plan - address the different costs and projected income
related to the franchise
• Establishment of a franchise infrastructure
requires substantial initial investment
by the franchisor
 Setting up franchise fees
• Upfront fee

• Renewal fee
• On-going fees
– Income from management fee;
additional income (rent, build to equip etc.); income from product supplies;
income from administration and accounting services

• Network marketing fund

 Network marketing fund
• Central marketing fund operated by the franchisor on behalf of the network
• Earmarked for product advertising to the benefit of the network
• All franchise outlets will gain equally from group advertising

• May be paid as a fixed amount or

as a percentage of turnover
• Paid on a regular and continuous basis
Network marketing fund
 Franchisee recruitment: 5 step approach

1. Generate enquiries
2. Set follow-up procedures in motion

3. Invitation to a meeting

4. Enter into concrete negotiations

5. Formal agreement
 Step 1: Generating enquiries
• Develop a franchisee-information aimed at prospective buyers and their
professional advisors
• Introduce and present your franchise at seminars and exhibitions
• Compile an introductory visual presentation (on videotape or DVD)
• Offer to speak at small-business events and provide the press with information
about your franchise
• Advertise in newspapers and magazines and with FASA
 Step 2: Set follow up procedures in motion
• Determine who will deal with initial enquiries
• Keeping a record of every franchise enquiry; provide prompt response
• Keeping track of promising enquiries
• Reacting in writing when further information is requested by enquirers
• Send questionnaire for completion by the enquirer – after it has been
returned, look into the applicant’s background, financial standing, and
any references provided
• Start the follow-up process by inviting the applicant to attend an initial
interview
 Step 3: Invitation to a meeting
During the personal meeting:

• Give the applicant in-depth information about your business

opportunity

• Show company-owned unit

• Discuss the necessary investment in broad terms

• Encourage him/her to ask questions (do not offer detailed financial

information)

• Assess his or her potential for your organisation

 Step 4: Enter into concrete negotiations
• Positive negotiations: offer comprehensive information folder to
entrepreneur
• Entrepreneur should sign the Initial Undertaking (dated to record the
receipt of the Disclosure Document)
• Agree on the location of the unit
• Prepare customised financial projections and statements (including
earnings requirements of the franchisee and other specifics)
• Encourage the prospect to discuss the disclosure document, financial
figures, and franchise agreement with professional advisors
• Stress confidentiality obligations
 Step 5: Formal agreement
• Once all details finalised sign formal franchise agreement
• After the agreement has been signed, the following should
be done:
– Bank the cheque for the upfront fee
– Schedule the franchisee’s training
– Set the ‘start-up assistance package’ in motion
 Franchise package
• Disclosure document
• Franchise agreement
• Operations and procedures manual

• Cooling-off period
 Disclosure document (FASA, 2006:10)
The Disclosure Document contains:
• Directors’ and key executives’ business experiences
• Company’s track record
• Description of the franchise
• Initial investment required
• On-going payments due to the franchisor
• Termination, renewal, goodwill or assignment of agreement
Disclosure document (cont.) (FASA, 2006:10)
• Number of existing franchisees and their success rates
• Franchisor’s assistance in selecting approved sites
• Training and support guaranteed to the franchisee
• Financial information about pilot operation
• Financial data on the franchisor
• Certificate from auditor or accountant on business being a
going concern
• Confirmation of directors on viability of the system
• Total investment required (indicating all costs)
 Franchise agreement (FASA, 2006:10)
• Parties (signatories) involved in the agreement and their relevant objectives
• Period of the agreement and the right to renew or extend the contract
• Set-up requirements such as obtaining finance, renovating the premises,
shop equipment, legal obligations, and so forth
• The rights to sell or transfer ownership of the franchise
• Obligations to the franchisor, such as buying supplies or services
• Construction and functioning of the franchise – hours of business, look and
feel etc.
• Terms and conditions for termination of the contract (breach of contract)
 Franchise agreement (cont.) (FASA, 2006: 10)
• Description of exact training and support offered
• Precise price, commissions, and rental fees involved
• Precise boundaries of the territory awarded, if any
• Functioning of the franchise: management, involvement of franchisee, and
right to sub-franchise
• Operating systems guiding and driving the franchise
• Accounting system to be used
• Description of your heir’s rights in the event of your death
• Definitions of all terminology that will be used repeatedly throughout the
document
 Franchise agreement (cont.) (FASA, 2006: 10)
• The franchisor may require that the franchisee records upfront, prior to the
execution of the agreement, that he or she:

o Has read the provisions of the agreement and fully understands them
o Has been advised by the franchisor to obtain independent legal advice on the
terms of the agreement
o Has not relied on statements or representations made by the franchisor, its
employees or agents, other than those recorded in the agreement and
disclosure document
 Franchise agreement (cont.) (FASA, 2006: 10)

o Understands that none of the assistance rendered by the franchisor should be

construed as a warranty for the successful conduct of the franchised business
o Understands that the success of the franchised business depends largely upo
the abilities and efforts of the franchisee to operate it successfully
 Operations and procedures manual
• An introduction to the franchise
• Step-by-step guidelines
• The production equipment
• All details regarding stockholdings, systems and controls, pricing methods
• The business operation where the franchisee is obliged to meet specific
operational standards
• The accounting and administration system to be used
• The duties of the franchisor
• Industrial relations
 Cooling-off period
• A cooling-off period of 14 days must elapse between the
day the prospective franchisee receives the Disclosure
Document and a copy of the Franchise Agreement, and the
day on which any binding agreement can be entered into or
on which the franchisor may accept any payment from the
franchisee.
 Start-up assistance package
• Pre-opening assistance

• Statutory requirements

• Staff selection and training

• Moral support
• Opening promotion
 On-going franchisee support
• Training

• Group-purchase arrangements

• Marketing and advertising

• Trouble-shooting
• Market and product research
• Administrative systems
• Communication
 Competition legislation
Impact on franchise practices:
• Price-setting agreements
• Tying agreements

• Exclusive dealing
• Territorial restrictions

• Clauses protecting know-how and other intellectual property

• Benefits & unique situation of franchises & clauses of franchise agreements

 The CPA and franchising
1. A notice on top of the first page of the agreement must refer to the 10-
day cooling-off period franchisees are entitled to and state the relevant
section of the Act

2. The franchise agreement must contain provisions preventing

unreasonable fees and unnecessary conduct

3. The name and description of the goods/services and obligations of both

parties
 The CPA and franchising (cont.)
4. Information about the franchisor’s directors, members or equivalent
officers

5. Full particulars of the financial obligations that the franchisee incurs

6. Any direct or indirect benefit a franchisor stands to receive

 International franchising
• Assess feasibility
• Develop a master licence: grants the right to open a business in entire
country
• Assess the country: Size of potential market; sufficient interest; attainable
margins; suitable prospect
• Investigate licensee: investigate potential purchaser of licence
• Involve support systems
 Franchising questions
Chapter 7 Franchising - newspaper article on Taste Holdings

Questions

Theme 1: Explain the concept of franchising

1. Which type of franchising is evident in the article?

2. Which franchising model is evident in the article?

Theme 2: Franchising a business

3. What was the advantage of Taste Holdings buying into the Domino’s franchise?

4. What was the disadvantage for Taste Holdings buying into the Domino’s franchise?

5. In your opinion, did Taste Holdings make a good business decision in their purchase of the Domino’s master license?
Explain.

Theme 3: Supporting the franchisee

6. Which aspects should Taste Holdings have considered when purchasing the Domino’s master license?
 Learning activity questions

1. Briefly describe any 3 key aspects that should be included and addressed in a start-up
assistance package. (6) or Explain the start-up assistance package that the franchisor offers
to the franchisee. (10)

2. List the 5 disadvantages of franchising from the franchisees point of view. (5)

3. The existing competition legislation (Competition Act 89 of 1998) regulates competition

matters in South Africa. The Act has impacted on several franchise practices. Describe 3 of
these practices, as well as the preventative measures of the Act. (6)

4. Illetschko (2005: 94 – 95) suggests a 5-step process to franchisee recruitment. Identify

the first 3 steps in order as they appear. (10)
 Learning activity questions

5. Discuss ‘assess the country’ as one of the measures a franchisor should take before
starting a franchise in a foreign country. (6)

6. In South Africa, franchises are currently labeled under 14 main headings, one of which is
‘automotive services’. Identify any 5 other headings of industry sectors recognised in South
Africa. (5)