franchisor's frequently asked questions
Below are the most frequent asked question we have received from our clients, of which you may also have. Choose the question of your interest and view the answers by clicking on them.
- Why should I franchise my business?
There are numerous benefits of franchising your business as opposed to using alternative growth models. You enjoy lower expansion costs as you use other peoples's money to grow, simpler management as franchisees own and manage their franchised outlets, faster expansion as you are left with the task of supporting your franchisees and better market penetration since your franchisees are well-known and respected in their respective territories
You also get greater commitment by your franchisees who have a big stake in the success of their business as opposed to you company employees, less recruitment of staff (which is the franchise's responsibility) and replacement franchisees in case a franchisee opts to leave since they have the option of recruiting a replacement and you have better potential of going international using any of the three models available. Also bulk buying is possible as you centralize the supply chain to ensure constant standards. The on-going income you receive hits directly into your bottom line, hence assuring you of improved income so long as you can reach break-even point.
- Where do I start?
Start by considering whether franchising is the right model to grow your business. Compare with other distribution models, look at the advantages and limitations of each.
Examine your business against the franchisability test. Once decided, register your trademarks and patents if you already had not done so, look at competing brands that have franchised, what they are doing well, where you can improve. Carry out a franchising market research which will help you develop a franchising business plan.
- What help do I need before franchising?
You will certainly be able to do some work by yourself but other areas require specialized franchising skills. Your business needs to be prepared to fit the franchising model.
You will need services of the following at one point or another: an accountant, an auditor, a tax expert, a labor expert, a franchising consultant, a systemization expert, a franchising attorney, a marketing and PR specialist. In a lot of cases, offloading the assignment to a franchising consultant after making the decision to franchise avails you the services of all the others at a discounted fee.
- Where do I find the help I need to franchise?
You may be able to do a number of tasks relating to franchising on your own, but others need specialized skills. Unfortunately in East Africa, there are very few known franchising experts.
Franchise attorneys are rare and the few available are basically commercial, trademark, patent or intellectual property lawyers who have somehow handled franchising, but normally limited to registration of intellectual property and preparation of franchise agreements.
At Worldahead, we have put together a team of highly trained and experienced franchise-specific resources- systemization experts, marketing and PR experts, franchise attorneys, auditors, accountants, tax consultants, labor experts and international franchising consultants to ensure you access all help you need under one roof.
- Which laws should I be aware of when franchising?
Laws are the basis of engagement, particularly where more than one person is involved. In East Africa, there are no franchise-specific laws in place yet.
Other than industry-specific laws that govern operations of your business in your industry, you will need to familiarize yourself with laws governing: Fair Competition, Trademark, Copyright, Patent and Intellectual Property Law, Consumer Protection Law, Labor Laws, Advertising Laws, Data Protection Laws and the Companies Act.
- How much does the franchising exercise cost?
No set figure but you will need money for the following: consultancy services, trademark and patent registration, letting of space to sublet to franchisees/ kit out outlets before selling to franchisees, development of a prototype unit, local support, new products and marketing, market research and development, sufficient and qualified staff at Head Office to meet commitments towards franchisees, to maintain efficient and effective operation. Rule of thumb; do not rely on franchise fees to finance your initial franchise roll out. You will require anywhere between USD 50,000 and USD 300,000 before you can start recouping.
- How many franchised outlets do I need to break even?
5-10 units depending on several factors: industry margins, financial rollout model adopted, level of investment required, initial franchise fees, brand quality standards, quality of franchisees you attract, system efficiency levels, marketing and advertising etc. Company-owned outlets reduce this significantly.
- Can I get financing for my franchise rollout?
Yes. Various financing options are available, from debt to VC to PE to JVs. We work with a selection of PE and VC funds and banks. Some PE funds tie their exit to achievement of a certain level of revenue by your franchise system and since most like exiting through the stock exchange, this gives your business more value! Should you choose debt, it is important to go with a bank that understands franchising as they have seen your kind of situation many times over. A lot of times, they will only finance 50% for new franchise brands and they can also finance your franchisees up to 50%.
At Worldahead we have formed partnerships with leading local and international banks to develop franchisespecific products. In your choice of a finance partner, you will be better off with one that understands franchise financing and one that has branches across the entire territory you wish to roll out your franchise network.
- How do I set the initial franchise fees?
Initial franchise fees are determined by the strength of your brand, level of system standards set, cost of kiting out outlets and the market going rates for similar brands among other factors. A strong brand attracts a higher fee than a weaker brand and a good franchise consultant will advise you on the initial fee appropriate for your brand!
- How do I set the monthly royalty?
Industry standards plus the brand's strength and the projected income levels rule in making this decision. 4%-12% of gross monthly turnover (net of VAT) is accepted as a good royalty. Very few go beyond 12%.
You may also set a fixed amount per month other than use % of revenue. But remember this money hits your bottom-line directly as it is net of all deductions! Hence the more franchised outlets you have the more profitable your business is likely to be, holding all other things equal.
- Other than the monthly royalty what other fees does the franchisee pay me?
Advertising/marketing levy paid to a marketing fund. This fund applies exclusively to the franchise system and covers activities such as: national advertising, promotional expenses and other marketing communications i.e. Public Relations. Either a fixed amount or a % of gross revenue-not more than 4%.
- What support am I expected to give franchisees throughout the franchise period?
The quality of support given to franchisees determines the success of the franchise system. Consequently, franchisor is expected to support franchisee as follows: initial training using the prototype outlet, support during start-up/launch, on-going training, assistance in selecting sites, supply of promotional materials including signage, stationery, etc, system support, national advertising and PR. NB: any discounts you get on bulk-buying is shared with franchisees.
- Must I disclose the financial position of my business to potential franchisees?
Yes. In franchising, the Franchise Disclosure Document is the equivalent of the Prospectus for a company seeking to list in a stock exchange. Audited financial statements for the last three years are presented as item 21 in this 23 item document. Besides, how else would potential franchisees be convinced that your tried and tested business would bring them prosperity if they joined your system?
- How do I ensure franchisee outlets meet our system standards?
You control the branding of your franchised outlets and all that goes with kitting them out for business. Ideally you should build the outlets to your standards and “sell” the completely kitted out unit to your franchisees.
Alternatively, if you can control quality standards properly, you may give your franchisees the expected standards including source of materials and supervise them at every stage to ensure the end product conforms to your standards. You also control the accounting system and carry out regular system audits to ensure all system standards are adhered to.
- Must we have a franchisee advisory council?
It is the voice of the franchisees, it controls the advertising budget and discounts that the franchisor gets on bulk purchases should be declared (and passed on) to this council. It decides what new (product or other) innovations are to be introduced to the franchise system for review and it is a good avenue for reviewing marketing communication programmes, cooperative buying arrangements and help effect changes to improve the system.
- How is marketing and advertising handled in a franchise system?
Everyone contributes into the marketing kitty. The franchisor handles national marketing and supplies the franchisees with all materials necessary for them to handle local marketing and advertising in their assigned territories, drawing funds from the joint marketing kitty.
- How do I know that my franchisees are declaring the correct monthly turnover figures?
Ideally, the franchisor's IT system should be installed at franchisee outlets to ensure instant upload upon a sale. Occasional impromptu franchisee outlet audits should reveal early any cheats.
- How do franchisee outlets maintain my brand’s system standards?
Through continuous training, constant inspections and corrections by the HQ training and inspection team. Also you control the supply chain such that all products offered are of the same standards.
- Must product offerings be the same in all outlets?
Yes, all outlets must have similar offerings. However, when you go international, local tastes may necessitate you to localize some of your products, while maintaining your internationally available products.
- For how long should I grant the franchise rights to franchisees?
Ideally, franchisees are your partners in growing your brand and need security. Period should be long enough to ensure they can recoup their investment and make a good return. Depending on industry practice, 7-15 years.
- Is the franchise grant renewable and if so for how long?
Yes, depending on your franchisee’s achievement of your agreed Key Performance Indicators. Normally the renewal period would be set out in the Franchise Agreement and should not be more than the initial grant period.
- Can a franchisee discontinue at any time and what is the procedure for discontinuation?
Yes, franchisees are business people and if they see your opportunity is not satisfying them, they are free to exit. The Franchise Agreement will normally set the procedure for this but the Franchisor should always retain the right to approve any new franchisee introduced by an exiting franchisee.
- How many outlets can I franchise in any given year?
Even when finance is not a problem, this highly depends on the support system that you have put in place at HQ for your franchisees. Generally speaking, you should avoid overstretching yourself by opening too many outlets in the early phases of roll out when you are still learning.
A maximum of six per year for the first two to three years would offer you the opportunity to learn and thereafter you may increase as you consolidate the support systems at HQ. with support system comes not just the IT system but also human resources needed to regularly visit, monitor and train your franchisees.
- When should a franchised unit be refurbished?
The OP&T Manual and the Franchise Agreement should always specify this, based on the nature of the franchise.
In keeping with high standards set for the franchise, it is advisable to refurbish the outlets just before their décor starts aging. Refurbishment standards will also specify after how long equipment should be changed etc.
- How do I introduce new products once I start franchising?
Through the franchise advisory council, all new innovations are discussed and agreed before introduction to the system. Once agreed the new products are then introduced gradually, first through the prototype outlet and company-owned outlets, finally to franchisee outlets.
- Are franchisees allowed to sell products different from those in the system?
No, all new products must be approved by the franchise advisory council.
- Are franchisees allowed to arrange own supplies?
This decision rests with the franchisor. Normally, franchisor requires franchisee to only buy from the franchisor or selected suppliers. Where the brand quality standards are very high, it may be wise to restrict franchisees to a list of pre-approved suppliers, or to have the franchisor supplying all requirements. If a similar product or acceptable quality can be sourced elsewhere, without harming the trade mark (image or goodwill) of the franchisor, this cannot be prevented.
- How much do new franchisees need to have in cash before joining my franchise system?
Rule of the thumb is at least 50% of the total amounts required should be in unencumbered cash. The rest can be arranged through financing.
- How do I get the first franchisees?
Your company-owned unit managers sometimes will be your first franchisees, other sources are through a carefully prepared marketing plan, franchisee recruitment and vetting of applicants.
- Is prior industry experience by potential franchisees required before they can join my franchise system?
Unless you are franchising a service that requires long periods of specialized training eg legal, medical, accounting, audit, engineering services etc, prior industry knowledge is not a requirement. It is easier to train afresh than to un-train then re-train someone who has had own ways of doing your kind of business on their own prior to joining your system!
- Should prices be uniform in all outlets?
No. A franchisor cannot dictate minimum prices or maximum discounts to franchisees. Prices should be recommended with no sanction or penalty if not adhered to.
- Who pays the staff in a franchised outlet?
Obviously the franchisee carries all outlet costs including staff costs, but some franchisors choose to offer franchisees some HR support such as payroll processing, training etc
- How do I handle franchisee outlet leases to protect my brand?
Ideally the franchisor should be the primary lease holder with subleasing allowed, or where the franchisee is the primary lease holder the lease agreement should allow subleasing, compel franchisee to vacate upon dispute with franchisor and restrict the franchisee from leasing space for similar business within a stated geographical area after parting ways with the franchisor.
This will ensure that should a franchisee be unable to continue, he cannot keep the outlet and the franchisor takes it over and runs it for a period as he gets another franchisee. Unless your country has strong laws, avoid leases on sites owned by franchisees-they may refuse to remove your brand from the site in future should there be disagreements!
- Can I be held accountable for acts or omissions of my franchisees?
Yes! As far as the public is concerned, there is no difference between company-owned and franchised outlets, hence the need to stay very close to your franchisees to minimize exposure through detrimental acts or omissions.
- What reports should I expect from my franchisees?
Timely and detailed reports are required from franchisees on key performance indicators. Reporting helps to: determine whether franchisees are in compliance with agreement, control under reporting of turnover, review the purchase and use of unauthorized products and gain insight into a franchisee’s marketing communications activity. Broad types of reports include: financial, purchasing and sales, marketing plans, expenditure.
- How do I remove a non-compliant franchisee?
Normally red flags should be seen early through the reporting system, systems compliance audits, constant inspection visits and training sessions. Correction should be the first option but where not possible, eviction is imminent. First an audit, then request to comply within a certain period, then eviction notice. Franchise agreement should always protect the brand/franchisor!
- What options do I have should I decide to go international?
Three options: Master/ Regional Franchising, Sub-Franchising and Area Developer franchising models. The Master/Regional Franchisee is a well capitalized and highly networked local businessman in your international destination who you grant a Master/Regional Franchise, using which he recruits franchisees into your system and you share the franchise fees with him. Sub-franchising is where you get a local businessmen in a different specific territories in your international destination country/region (a country/region will normally have more than one territory) to recruit franchisees into your system and you share the franchise fees.
In both cases, the franchisor is not involved in franchisee recruitment and will normally not be physically present in the international destination. The Area Developer model on the other hand is where you set up an office in the target international destination, then grant area development rights to a local businessman to develop the market for you by directly recruiting franchisees into your system. All three options have a very thin line differentiating them.
- What avenues are available for dispute resolution?
First stop is franchisee advisory council (if dispute relates to issues known to other franchisees), then the franchise association (where such exist) before other mediation, arbitration and legal action as may be contained in the franchise agreement.
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