Definition of a franchise;
- The granting of rights by the owner of a business as a franchisor.
- To operate under the trade mark of the franchisor.
- Making use of all elements and methodologies necessary to establish an untrained person in a franchise.
- To maintain operation with on-going support on a pre-determined basis.
The franchisee pays the franchisor an upfront fee to acquire the franchise and an ongoing service (royalty) fee.The most visible features of any franchise operation are the rights granted to access and use "trade marks", trade secrets or methodologies, trade names and copyright material.
There are two common types of franchises:
1. Product and Trade Mark Franchising
This normally entails the use by a franchisee, of the franchisors trade mark in exchange for fees and royalties and limits the franchisee to only selling the franchisors products.
2. Business Format Franchising
This incorporates product and trade mark franchising but in addition the franchisee acquires the rights and is obliged to use the entire business concept of the franchisor.
WHY FRANCHISE ?
The growth of franchising over the last few years has been phenomenal and indications are that this trend will continue for many years to come. Statistics indicate that in South Africa, there are around 11700 franchised outlets, turning over approximately R22bn per annum, which translates to 9% of retail turnover. Franchising is no longer synonymous with fast food chains but now extends to over 20 types of retail business.
THE ADVANTAGES OF FRANCHISING
Advantages for the Franchisor
- Rapid expansion of a franchise with minimal capital expenditure.
- Maximised distribution of product and services.
- Owner managers of outlets, thus boosting performance and commitment.
- Increase in brand awareness.
- Reduced labour risks.
Advantages for the franchisee
- Access to a proven concept.
- Access to trade marks which would normally take a few years and marketing expenditure to establish consumer brand awareness. The franchisee benefits from the franchisors past and future efforts.
- Generally reaches break-even quicker than the average small business (non-franchised).
- Continuous support and assistance of the franchisor, allowing more focus on profit generation.
- According to statistics the failure rate of a franchised outlet is less than that of a non-franchised outlet.
- General benefits include; experience and advise from member franchisees; bulk buying arrangements; advertising campaigns.
The Publics' view of a franchised operation
The consumer public will normally identify a franchise by it's trade marks and image and as such will associate that with a level of dependable quality and standard of service. Thus a new franchised outlet will immediately attain a certain level of status as associated with the group as a whole.
IS FRANCHISING THE BEST ALTERNATIVE FOR EXPANSION ?
Franchising is not always the best alternative for a business to expand it's operation. The nature of franchising requires a need for multiple outlets to satisfy customer demand. For example, a high end jewellery business would not be suitable as a franchise operation, whereas a fast food business would.
Once a franchisor, you effectively enter into a new line of business, namely that of putting franchisees successfully into business where your success will depend on the collective performance of your franchised network, as opposed to the performance of your core business alone.
Franchising calls for a huge commitment on the part of the franchisor and in turn the franchisee. The legitimate interests of franchisees must be taken into consideration and every decision made should benefit the entire network. A franchisor is expected to remain at the cutting edge of development and brand promotion. Whilst franchising can be extremely successful and profitable, nett returns are unlikely to accrue during the first 2 years.
GOVERNING PROVISIONS REGARDING THE FRANCHISE INDUSTRY
As such there is no specific law governing franchising. The franchise relationship is in law a combination of various legal transactions and a franchise agreement can contain the most varied and apparently unrelated rights and obligations. The franchise agreement is the one instrument used to express such unrelated rights and obligations and is therefore viewed in South African law as an ordinary commercial agreement and governed primarily by the law of contract. In addition to the law of contract and various acts of parliament there are distinct "bodies" which have an influence on franchising in South Africa.
FASA ( Franchise Association of South Africa )
A voluntary organisation to which most franchisors belong. FASA'S "code of ethics" guides the ethics of South African franchising. FASA chairman Ian Lourens is M.D. of Tru-North holdings (Postnet / Cash converters). The Board (council) and the EXCO are mainly comprised of members of franchise operations. Contact FASA on (011) 484 1285 or e-mail ; fasa@fasa.co.za
THE BUSINESS PRACTISES COMMITTEE
The committee, operating in terms of the Harmful Business Practises Act has issued a consumer code for franchising which binds all franchisors whether members of FASA or not.
THE COMPETITION BOARD
The board operates in terms of the Maintenance and promotion of competition act. It has issued various guidelines regarding certain clauses normally found in a franchise agreement, the effect of which may be regarded as constituting restrictive practises prohibited by the Act.