Franchising as entry point for new business entrepreneurs

Franchising, or business franchise model, or franchise model, is a contractual business model or relationship whereby an established brand, known as the ‘franchisor,’ allows an independent business owner, or franchisee, to use its brand, business model, goodwill, business name, and other intellectual properties like trademark and slogan (tagline). The franchise business model is usually the business route chosen by those who want to start a new business, have funds but do not have much idea on how to start it. That is because the franchising system allows you to acquire a ready-made business, with a consolidated brand, market acceptability and know-how already tested. Franchising is a business model that involves two parties, the franchisor and the franchisee. The franchisor is the company that owns the brand and the business system, while the franchisee is the individual who purchases the right to use the brand and the business system.

The franchisee operates a business using the franchisor’s trademarks, products, services, and operational support systems including social media as a child of communication. A franchise is a type of licence that grants a franchisee access to a franchisor’s proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor’s business name and style. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee (sign-on fee) and annual licensing fee. Examples of franchises in Nigeria are: Kentucky Fried Chicken (KFC), Domino, SPAR, Marriott Hotel, Radisson Hotel, Cold Stone Creamery and Pizza Hut. There are two main bodies overseeing franchise operations in Nigeria, the National Office for Technology Acquisition and Promotion (NOTAP) and Nigerian International Franchise Association (NIFA).  There is no specific law currently in Nigeria that regulates franchise contracts. The NOTAP Act, Chapter N62, Laws of the Federation of Nigeria, 2004 (NOTAP Act) regulates the transfer of foreign technology to Nigeria.

Globally, franchising has become a popular business model in recent decades, and this is for good reasons. It is more popular in advanced economies than developing nations. It offers an effective way to expand a business while minimising risks and maximising profits. This is especially true for service-based industries such as the dry cleaning, retail banking services, barbing, restaurant, fast food, etc. Franchising is not very popular in Nigeria because of lack of trust by most founders of businesses in other entrepreneurs. It is rumoured that the proprietor of a popular sweet, glamorous and sensational fast-food chain in Nigeria will not reveal the content of her spices to even the workers in her organisation. Only her and her children are in charge of food production. This is because employee turnover is very high in Nigeria as every successful worker wants to bear his or her own name. The only four countries to have a McDonald’s franchise in Africa are Egypt, Mauritania, Morocco and South Africa. This is due to ethical issues.

There is fear of the franchisee running afoul of authorities and statutory rules because of making “quick money syndrome” and spoiling the business of the franchisor which took the franchisor many years to build. This is based on a Yoruba proverb that literally means: “A man with just only a bag will not mind the occurrence of war”. The benefits of franchising for service-based industries include:

(1) Access to Proven Business Structures: Franchising is a great option for service-based industries because it allows entrepreneurs to access established proven business structures. By procuring a franchise, franchisees get access to an established business model that is glaringly popular because it has been tried, tested and found satisfactory. This means they can save time and money by avoiding mistakes that new business owners often make, as well as benefit from the franchisor’s experience in running successful businesses.

(2) Support and Training: Another benefit of franchising for service-based industries is the improved support and training franchisors provide their franchisees. Since the success of the franchisee’s business is tied to the success of the franchisor’s brand, franchisors invest in helping their franchisees succeed. This often includes comprehensive training, ongoing financial support, and access to resources that help franchisees operate their business more efficiently. Each franchisee receives initial training and ongoing support as needed. This ensures that franchisees are fully equipped to manage their business and provide high-quality services to their customers. There is also regular mentoring by franchisors.

(3) Established Brand Name and Goodwill: Service-based franchises benefit from the established brand name and goodwill of the franchisor. This saves franchisees from the challenges of teething stage and the initial marketing and advertising costs required to establish a new business in the market. The franchisor has already invested in building a recognizable brand, so franchisees do not need to spend as much time and money to attract customers to their business.

(4) Economies of Scale: Franchisees benefit from economies of scale that franchising provides. Being part of a larger system allows franchisees to benefit from negotiated rates and lower unit costs of goods and services. This means that franchisees can maximise profits while keeping costs low.

Great Opportunity for Rapid Expansion: Franchising offers services-based industries the potential for rapid expansion. Franchisees can start their business quickly and expand to new locations easily by leveraging the franchisor’s established business networks, brand name, and goodwill. The franchisor benefits from the expansion of its brand without the expenses that come with opening new locations themselves. Franchises also allow for cross-breeding of workers which allows for wider experience and increased productivity.

Tax Efficiency: Finally, it is more tax efficient to operate under a franchise than to operate a new business name. This is to avoid the cost of registration with the Corporate Affairs Commission (CAC) and the time wasted in registering a new business .

To conclude, franchising is the best business model for service-based industries such as logistics, retails, tailoring, fast food business, restaurants, hotels and petrol filling stations. Customers tend to stick with brands for their shopping and will prefer to buy from their reliable and trusted brands. Franchising offers a lower risk option and higher chances of success for newly established entrepreneurs looking to make it big with already known brand names.