What are some of the best practices in franchising?
In our last two posts, we introduced the concept of franchising, explained its benefit to parties, and later discussed the various laws governing franchise agreements. In today’s post, we will explore the franchising model under the lenses of a CEO and eminent businessman, Mr. Simon Gachomo.
Mr. Gachomo has served as CEO in some of Kenya’s best companies, such as Longhorn Publishers, and has left an indelible mark in all those companies.
Mr. Gachomo agreed to answer some of the franchising questions to assist potential entrepreneurs in making sound decisions before venturing and during the franchise relationship.
1. Mr. Gachomo, what do you think about franchising as a means to start a business?
In a word, it is the safest investment option when you choose the best franchisor and have conducted thorough due diligence.
2. What are some of the best industries to venture into franchising?
Well, franchise businesses are myriad and span across many industries right from food to clothing. In choosing whether to operate your business as a franchise, you should consider the market. Some franchises are very exclusive, and if such customers do not exist, you will be wasting your resources. Notwithstanding the above, remember, some businesses may not be franchised, such as those that rely on someone’s creativity.
In my view, a potential franchisee can venture into a franchise of his choosing so long as the potential market for the franchise exists.
3. How would you describe the local franchise market in Kenya?
Kenya is ripe for franchising. With the proliferation of international brands such as Carrefour, KFC, and domestic ones like Artcaffe, Kenya is indeed on a growth tangent.
4. What are some of the factors that an entrepreneur should consider before choosing a franchise partner?
There are many factors that a franchisee should look at before venturing into franchising. The main ones include:
Capital- Prospective franchisees should ensure that they have enough money before venturing into franchising. Some repositories such as Franchise Direct provide for the cost of buying into a business model. It is, however, advisable to engage the franchisor in writing to find out the exact prices.
An established vehicle. It is advisable to incorporate a company that is preferably a private company limited by shares that will be licensed to use the franchiser’s mark.
Success and Failure stories: Majorly, most franchise businesses typically have established operations worldwide. It is essential to look at the franchise and evaluate its successes and failures in other parts of the world. Evaluating successes and failures ensures that you are buying into a franchise that enjoys success.
The existence of the franchise in the country- Some franchises have their operations bases in Kenya while others do not. For franchises that do not exist in the country, make sure you conduct a market survey to ensure that potential customers are aware of it in the local market. For example, many people know about McDonald’s despite lacking a physical presence in the country.
Opening the corporate closet- Ideally, this involves looking into the company’s closet and evaluating elements such as accounts and past litigation. Due diligence ensures that there are no skeletons.
Intellectual property registration: in a franchise business, the franchisor licenses the franchisee to use its brand(s) in exchange for payment. As such, the franchisee should ensure that the franchisor has applied for and obtained registration in Kenya.
Whether the franchisor launched a pilot franchise- Ideally, before any franchisor starts a franchise product, they conduct a pilot to assess the viability of the business. A pilot franchise is essential to the franchisee, as it will be able to gauge the franchisor’s expectations.
The above pointers highlight some of the key considerations that a franchisee should consider before buying into a franchise business.
It is essential to look at the franchise and evaluate its successes and failures in other parts of the worldMr. Gachomo
5. Should a franchisee engage experts before starting a franchise business, and if yes, why?
Ideally, franchise businesses are complex and involve many disclosures that a reasonable person might not understand. As such, you should engage experts in the field. The most common are lawyers and accountants.
6. What are the key indicators of an excellent expert?
Well, the most obvious thing is to look at their qualifications and experience. Most experts will sing and dance to their successes on social media. Additionally, some key directorates do provide recommendations for experts. For example, Chambers and Partners do provide recommended lawyers. Please ensure you engage a lawyer who is knowledgeable in intellectual property law as it is the critical element of franchising. On the other hand, ensure that the Institute of Certified Public Accountants has registered your accountant.
7. What are the next steps upon identifying the potential franchisor?
Upon identifying a potential franchisor, the franchisee should request that the franchiser supply it with the disclosure documents. Disclosure documents provide the franchisee with information regarding the franchise. It is through the disclosure document that the franchisee can make an informed decision on whether to proceed with the transaction.
After both parties have met the disclosure requirements, they enter into a franchise agreement.
8. You mentioned the franchise agreement, what is it?
It is a document that outlines terms of engagement between both parties.
9. What key terms should a prospective franchisee appraise?
Franchise agreements are quite complex. That is why I indicated earlier on the need to engage an expert. However, in my experience, a franchisee should ensure the following terms are present:
Provision on training by the franchisor– Given that franchising involves replicating the franchisor’s business; the franchisor should train the franchisee on its expectations. Many disputes arise because the franchisor did not instruct the franchisee, or the franchisee did not comply with the training offered.
Defined territory- Parties should agree on the region that the franchisee will operate and whether it is exclusive or not. Setting out the area is very important for several reasons; the key includes competition issues.
Duration of the franchise agreement- Any agreement should have a defined period. The parties should agree on the contract period, renewal notices, and cancellation policies. The franchisor should set out the time required to give notice, define terms on what it considers as a breach, and how to renew the contract.
Franchise fee and total anticipated investment- The franchisee should ensure that the franchisor sets the franchise fee and the amount it should invest.
Intellectual property- intellectual property such as the trademark (brand name) is the bedrock of franchising. As such, the franchisee should ensure that the franchisor has registered the trademarks and owns them. It is critical to engage an intellectual property lawyer on this.
Royalties- the franchisee should ensure that the franchisor outlines the expected fees and payment modalities. Parties should also agree on who bears the brunt of paying withholding taxes.
Operating protocol- The franchisee should ensure that the franchisor provides it with an operating manual as it outlines how the franchisee should run the store.
Force Majeure clause is a clause that excuses performance due to extraordinary events that prevent parties from performing a contract. Such events include terrorism, acts of God, and pandemics. As 2020 has taught us, it is crucial to provide a term that exempts parties from performing a contract due to extenuating circumstances to avoid conflict.
10. What are some of the best practices that parties should adopt to ensure the success of the franchise?
A franchise relationship is like any business. How you interact with your customers is the same way you should interact with the franchisor. Thus, you should treat the franchisor the same way you treat your customers.
In my experience, perhaps what causes friction between the two parties revolves around finances, operations, unrealistic expectations, and advertising. The franchisee should follow the accounting standards set by the franchisor and comply with the operations manual. Similarly, both parties should set out their expectations and should factor in fluctuations in sales. Regarding advertising, in practice, the franchisor bears the advertising costs, and the franchisee contributes the funds to facilitate advertising. What causes friction between the two protagonists is when funds are underutilized. To avoid this, the franchisee should provide the necessary funds, and the franchisor should be transparent with the use of funds.
A franchise relationship is like any business. How you interact with your customers is the same way you should interact with the franchisor. Thus, you should treat the franchisor the same way you treat your customersMr, Gachomo
11. What happens if the franchise is not working?
A franchise, like any business, is prone to external factors and can fail. Parties should limit their expectations, and the franchisee should ensure that the contract provides for the resale of the business.
12. Parting shot?
With enough capital, necessary skills, and expertise, any person can venture into franchising. It is one of the safest methods of starting a business as one relies on an existing clientele and utilizes a proven business model. An entrepreneur enjoys the benefit of foreseeing how the company has operated in other places and can plan accordingly.
Also, I would advise potential franchisees to engage experts before investing.
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