Franchising: Could This Be the Best Option for Startups?
Author: O. M. Atoyebi S.A.N Contributor: Love Ebekhile
When a business idea is first conceived, its founders usually concern themselves with issues surrounding investment, as well as how to sustain or expand the business in the long run.
This, I believe, was what led Franklin Benjamin and Thomas Whit-marsh to form an alliance, when they signed the first franchise agreement for the printing firm in Charlestown, South Carolina. Since then, franchising has gone through a considerable transformation.
To further prove this point, let me aver your mind to the late part of the 18th century European Industrial Revolution, when mass production of consumer goods enabled enterprises to sell their items at a reduced cost, resulting in a surge in consumer demand. Owing to the economic revolution, manufacturers had to sell and distribute items efficiently and cost-effectively over longer distances as the transition from agrarian to merchant economy commenced, which gave need for the grant of licenses to small business owners who could, in turn, sell those goods in the name of the owners.
This article would be exploring the concept of franchising, the possibilities it presents to startup firms, the challenges as well as other alternatives to franchising.
What Is Franchising?
Franchising in this scenario, simply refers to a joint venture between a franchisor and a franchisee. What this means is that the franchisor is the original business which sells the right to use its name and idea to a franchisee, who may in turn, sell the franchisor’s goods or services under an existing business model and trademark.[1] [1]
In practical terms, if a caterer seeks to open a restaurant but does not want to be hassled with the whole process associated with starting a restaurant, it can purchase a license from a restaurant such as Chicken Republic to enable it commence its business under the name Chicken Republic. What the above does, is that prevents the startup restaurant from the stress of trying to convince investors of its reputation, attract customers or even help sustain the business. Notwithstanding, these are just a few benefits of engaging in franchising.
Why Franchising Seems To Be The Best Approach For Entrepreneurship?
Recall that I had earlier highlighted some benefits of franchising, but it really doesn’t end there, because I am sure that in choosing an investment or sustainability option for a business, the business owner/ entrepreneur, must have measured the benefits and the risks, taken into consideration which outweighs the other, the nature of the business etcetera.
In 2019, a research was conducted as to why start-up entrepreneurs seemed to think franchising was the way to go in building a sustainable business. The research showed that entrepreneurs all over the world expressed a consensus on the following points:
- Capital Growth:
Lack of access to funding is considered the most prevalent impediment to expansion for today’s small enterprises. Entrepreneurs often found that their expansion aspirations outstripped their ability to fund them even before the economic crunch of 2008-2009 and the “new normal” that followed.
As a type of alternative capital acquisition, most entrepreneurs choose franchising because it allows them to expand without the danger of debt or the expense of equity. First, because the franchisee supplies all of the capital required to build and operate a unit, it lets businesses develop by leveraging other people’s resources. The franchisor can expand largely debt-free by using other people’s money.[2] [2]
- Staffing Leverage
Franchising allows franchisors to run their businesses more efficiently with a smaller staff. Franchisors can use these initiatives to cut total headcount by having franchisees take on many of the activities.[3] [3]
- Increased Profitability
The above-mentioned staffing leverage enables franchise firms to operate profitably. Because franchisors can rely on their franchisees to handle site selection, lease negotiations, local marketing, hiring, training, accounting, payroll, and other human resources functions, franchisors are able to focus on their core business.
Despite the above benefits, one would wonder why every start-up entrepreneur does not just commence business while adopting the option of a franchise firsthand. Well, this is because the process of selecting the right franchise can be quite complex, as a lot of processes go into it, and most entrepreneurs possess little or no knowledge of what might be the best approach for their businesses. This leads us to the type of franchising options available to startup businesses.
- TYPES OF FRANCHISING OPTIONS
- Job Franchise:
A Job Franchise is a low-cost franchise that can be run independently or with minimal staffing of five (5 or less members of staff). In this case, only a franchise fee and a few initial costs, such as equipment, basic materials, and sometimes a vehicle, are required of the franchisee. A wide range of sectors, most of which provide services, can be franchised in this way a few of which are: Cleaning services, event planning and travel Agencies.[4] [1]
- Product Franchise:
With product franchises, manufacturers control how retail stores distribute their products. Through this kind of agreement, manufacturers allow retailers to distribute their products and to use their names and trademarks. To obtain these rights, store owners must pay fees or buy a minimum amount of products. Tire stores, for example, operate under this kind of franchise agreement.[5] [2]
- Manufacturing Franchise:
Through manufacturing franchises, a franchisor grants a manufacturer the right to produce and sell goods using its name and trademark. This type of franchise is common among food and beverage companies. For example, soft drink bottlers often obtain franchise rights from soft drink companies to produce, bottle and distribute soft drinks. The major soft drink companies also sell the supplies to the regional manufacturing franchises. In the case of Coca Cola, for example, Coca Cola sells the syrup concentrate to a bottling company, who mixes these ingredients with water and bottles the product, and sells it.[6] [3]
Having considered the above types of franchising options available to a start-up business, it is also important to itemize some of the legal steps necessary to set up a franchise a few of which are:
- Payment of the franchising fee by the franchisee to the Franchisor;
- Creating an employment obligation contract;
- Obtaining a license from the franchisor for use of name or trademark;
- Creation of renewal and transfer provisions; and most importantly;
- Conducting due diligence on the franchisor.
From the above prospects involved with adopting franchising as a startup investment option, one would imagine that there are no significant challenges involved with the whole process of franchising. However, this is quite far from reality. Franchising is faced with significant issues such as:
- Less franchise flexibility;
- Hefty franchise fees;
- Lack of business control: This is a really big issue because one of the major reasons for starting a business, is to enjoy the autonomy that comes with starting your business, imagine if you lose that because you are trying to expand or sustain the business.
Conclusion
In determining whether or not franchising is the best option for a startup, would largely depend on factors such as the business objectives, the restrictions on the business, the market intended to be reached as well as the profit and its ability to attract potential investors. Overall, franchising is a great option for enterprises that seek to explore it.
[1] Adam Hayes, ‘Franchise’ Investopedia (2021) < https://www.investopedia.com/terms/f/franchise.asp#:~:text=Understanding%20Franchises,-When%20a%20business&text=A%20franchise%20is%20a%20joint,existing%20business%20model%20and%20trademark [4].> Accessed May 25 2022.
[2] Mark Siebart, ‘The 9 Advantages of Franchise’ (Franchise 500) (2015) https://www.franchise500.com/article/252591#:~:text=The%20primary%20reason%20most%20entrepreneurs,using%20the%20resources%20of%20others [5] Accessed May 26th 2022
[3] Ibid 2
[4] Franchise guardian < https://franchiseguardian.com/franchising/types-of-franchising/#:~:text=A%20Job%20Franchise%20is%20generally,materials%2C%20and%20sometimes%20a%20vehicle [6].> Accessed May 26th 2022
[5] Franchising: Types of Franchises’ < https://www.coursehero.com/study-guides/boundless-business/franchising/#:~:text=A%20product%20franchise%20is%20a,using%20its%20name%20and%20trademark [7].> Accessed May 26th 2022.
[6] Ibid 5.