Understanding Franchising

OPINION | BUSINESS

By Wambugu Wa Gichohi

Development of franchising has resulted in terminologies and phrases unique only to it being used globally. We explore the most important.

Franchising: a strategic alliance where a business with a tried, tested and trusted brand allows another, normally without any experience in the field, to use the former's wealth of intellectual property (trademarks, patents, copyrights, business model) and its entire business systems to selectively distribute particular goods or services for a specified period on pre-agreed terms in consideration for payment of initial fees and ongoing royalties and fees.

The Franchisor: the party owning the intellectual property and the franchise systems and grants another party the right to operate the franchise using them. Franchisee: the receiving party, in return pays initial fee and/or ongoing royalties and management fees. Business Format Franchising: the franchisor provides specific method/system for running the franchised business. Product/Trade Name Franchising: form of a corporate identity package with limited operational support.

Trade Mark: name, symbol or other device identifying a product or service of the franchisor, which distinguishes it from similar products and services supplied by third parties. Intellectual Property Rights: trademarks, service marks (names and logo combinations), know-how and copyright forming the basis of the franchise system. An Ethical Franchise conforms to international best practice franchise of business standards regarding facts disclosed at the outset to potential franchisees.

In Unit Franchising, franchisor licenses a franchisee to operate a single franchise while Multiple Unit Franchising covers more than one unit, including area franchising- the franchisee gets right to open a designated number of franchises within a defined area over a specified time period and usually loses these rights should he/she fail to meet the development schedule, and master/sub franchising- franchisor grants a franchisee the right to grant unit franchises to sub-franchises within a defined area.

Company-Owned Units are outlets owned/operated by the franchisor to gain continual on-the-ground experience of the franchise and a launching platform for new systems and products. A Pilot or Prototype Unit is used by the franchisor as proof of concept. A Fractional Franchise is a franchised unit set up inside the premises of a larger business, instead of being a stand-alone unit.  In a Turnkey Operation the franchised unit is completely fitted out, equipped and stocked for the franchisee, ready for opening day.

Conversion Franchising involves conversion of independent dealers or unaffiliated businesses into franchisees. Conversion of a non-selective distribution system (i.e., the manufacturer initially sold to a wide variety of distributors or dealers) into a selective distribution system (i.e., sales are made only to franchised distributors or dealers that agree to deal exclusively or to concentrate their sales efforts in the manufacturer's products and to perform specified presale and post-sale services and marketing activities) is a conversion franchising program in the context of product franchising. It differs from conversion franchising in a business format franchise context primarily by the significant role of the franchisor as a supplier of products for resale by franchised dealers.

In a conversion franchise network, the franchisor gains the expertise of an experienced, established businessperson, and though the former independent business owner surrenders a degree of its independence, it gains a stronger trade identity and system of doing business, as well as training, advertising, marketing, purchasing, research and development and other services.

Conversion franchising speeds expansion since there is little or no start-up time or expense. The franchisee usually must adopt the trademark of the franchisor as its principal trade identity, though the franchisee may retain its original trade name as a secondary trade identity. The franchisee agrees to conduct business in accordance with the franchisor's specifications, standards and operating procedures and to pay fees to the franchisor. In Conversion Franchising an established, independent business becomes part of a national or regional franchise system involved in similar type of operations.  It is most commonly found in industries requiring extensive training or professional degrees.   
                                                                                                                                                                                             Conversion franchisees may be more resistant to franchisor control than are traditional franchisees in the early phase of their relationship.

An Area Developer acquires the right to establish one franchise within a specified territory, operate it and subsequently sell sub-franchises or others within the same territory.  He/she assumes the right and obligations of the franchisor and fees paid by the sub-franchisees are shared between him and the franchisor.

To Disenfranchise is to withdraw the franchisor's rights from the franchisee who is in breach of contract and does not respond to warnings.

For the franchisor's rights, a franchisee pays a one-time Initial/up-front/franchise/license fee and pays ongoing payments (calculated as a percentage of turnover or as a fixed fee) called Management services fee/royalty. Franchisor collects from franchisees and exclusively spends on marketing/brand promotion advertising/marketing fee and is accountable to his/her franchisees on how funds are spent. Total Investment is the sum of the upfront fee, the capital required to establish the franchise, the required working capital and any other cost relevant to the granting of the franchise.

The document presented to the franchisees, prior to investment, presenting financial, operational and legal information about the franchise system and detailing aspects of the franchise, explaining the concept and giving information on the business system is the Franchise Disclosure Document. The contract binding the franchisee and franchisor in a specific relationship for a specific period of time is the Franchise Agreement. A Franchise Operations Procedures and Training Manual, is supplied by the franchisor to franchisees in a franchise package to provide franchisees with step-by-step instructions on how to set up and operate a franchised unit to the required specifications.

Micro Franchising is a scaled-down commercial franchise with a low enough price that low income people can afford.  It is the systemization and replication of micro-enterprises, whereby small businesses are replicated by following proven marketing and operational concepts.  It follows in the footsteps of micro financing, micro insurance, micro leasing and micro credit.

Social Franchising is the application of the commercial franchise concept to not-for-profit sectors, usually coupled with subsidization of the goods or services on offer so that they are affordable to the target users.

A Franchise Association brings together franchise industry players in a country and it joins the World Franchise Council, whose Code of Ethics guides ethical franchising worldwide. A Franchisee Council consists of representatives of franchisees and the franchisor as an effective communication channel within the franchise system.

The writer is a Franchise Consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.

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