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How can Franchising Assist Businesses to Grow?

Colonel Sander’s story has been repeated over time, a man who established a venture, in his prime and became successful. Besides being an inspiring story, his expansion strategy has essential lessons that apply to today’s world. His business grew by leveraging on his trademarks, for example, the KFC mark and trade secrets such as the secret recipe, among others. Through this, Mr. Sanders allowed others to replicate his business format in return for royalties. In 1964, he sold the business for USD 2 Million. It has successfully grown to one of the largest franchises in the world, generating revenues, topping over 6 billion annually.

Colonel Sanders adopted a business expansion model known as franchising. This article marks the beginning of a three-part series exploring the concept of franchising. But first, this article gives a brief overview of the idea.

Franchising defined

According to WIPO, Franchising is where a person(franchisor) who has developed a particular way of doing business gives another(franchisee) the right to use that business model in exchange for a fee. The company has built a specific reputation and has brand recognition. As a result, franchisees can replicate and run the business under the supervision, control, and aided by the franchisor. Also, the franchisor licenses the franchisee to use the former’s intellectual property and knowledge associated with that business. The intellectual property includes brand names, business manuals, trade secrets, among others.

Ideally, franchising arises where a successful business, allows others to use its business strategy, name, etc. in return for some fees to the business owner.

Categories of franchise

According to WIPO, franchising can take different forms: They include;

Production or distribution franchise

Applies, where franchisor/or his representatives manufacture a product and sell it to the franchisee. The franchisee then sells it under the trademark of the franchisor. Ideally, the franchisee is allowed to use the seller’s trademarks in exchange for royalties. For example, if someone manufactures beauty products under her brand, she can let the franchisee sell the products in a given area in exchange for royalties

Manufacturing, Production, or Processing Franchise:

Applies where the franchisor sells the franchisee an essential ingredient or provides some specific know-how, which along with ongoing quality controls by the franchisor, enabling the franchisee to manufacture/produce/process the final product and sell to the consumer. This arrangement is typical with Coca-Cola as it supplies the franchisees with the ingredient to enable them to make the beverage subject to an agreement.

Business format franchising:

The franchisor licenses a franchisee the right to use the particular business model, including the intellectual property associated with it, particularly the trademark. Business format franchising is the most widely used form of franchising. Ideally, it involves replicating the franchisor’s business in other territories. This format is common with fast-food restaurants where there is uniformity of standards across all stores.

A business person can adopt any of the above strategies based on the business one undertakes.

It is noteworthy that any entrepreneur’s goal is to achieve exponential growth of the business. Commerce offers many ways of business growth, such as merging with another party, opening a branch, buying another company, etc. The expansion models have their own merits and demerits.

Consider the following scenario

Miss X fast food restaurant wishes to expand.

For instance, Miss X runs a successful fast food restaurant in Nairobi, Mombasa, and Kisumu. The business becomes famous for teenagers and university students. Miss X considers expanding and must weigh her options.

1. Miss X opens several other branches

Whereas this strategy works for many businesses, Miss X will handle expansion costs, rent, employee welfare, etc. This expansion strategy exposes Miss X to a lot of risks, such as lack of accountability from employees, government interference, etc. For example, Nakumatt failed due to many reasons, which included opening too many branches.

2. Miss X launches a Franchise product

Miss X allows others to use her business strategy, IP rights, among others, subject to an agreement for consideration. In this case, Miss X will enable others to use her business strategy, recipes, brand name, etc. in exchange for a fee. This arrangement is helpful as Franchisees will perform better than employees, there will be a reduction in operational costs as the Franchisee bears the on-boarding and operational costs. There will be more revenue for Miss X.

With this arrangement, Miss X can penetrate the impenetrable regions in Kenya while keeping her brand. Her tax obligations in the franchise shops will significantly reduce as a franchisee will remit the withholding tax.

To the Franchisee, this arrangement is beneficial as it relies on a successful brand; as such, this saves on time to cultivate one; also, franchisors offer training on how to run the business, which means more growth and one relies on an existing customer base.

Despite the merits, this arrangement has its demerits. They include:

For the franchisor (Miss X)

High launching costs: Miss X must engage various professionals such as accountants, lawyers, etc. to advise on the viability of the business. Also, a poor choice of a franchisee may be disastrous to Miss X business when it is not running well and the risk of disclosure of confidential information to third parties.

For the franchisee

Too much control by the franchisor as franchising involves too much compliance requirements with the guidelines issued by franchisors, the vulnerability of the network when one franchise gets a bad reputation, the damage spills over, among others.

Despite the demerits, franchising has acquired a reputation when it comes to business expansion. According to a survey by the International Franchise Association, 61 percent of respondents currently franchise or operate in international locations, and 16 percent generate between 25 percent and 30 percent of revenue from international activities. Franchising offers an alternative means of business expansion, which transfers risks to others and ensures that owners have income. For example, McDonald’s, the world, most successful fast-food franchise, generates about USD 80B in revenue per year. Furthermore, the incidence of borrowing to finance expansion reduces significantly as franchisees cater to many costs.

As such, franchising presents an ample opportunity for business expansion due to the decrease in expansion costs and allows franchisors to operate in unchartered territories.

On the next issue

What laws should both the franchisee and franchisor comply with?

4 Comments

  1. Excellent insight. Very keen to read the next ones on the law. Also if you can venture into local establishments such as Java, Art Cafee and their models

    • Dear Joel,

      Thank you very much for your feedback on this. I appreciate the insight and I will look at them in the upcoming articles. Stay tuned.

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