Franchising – Is It Still A Relevant Business Model?

“Franchising” is a hot topic even during recession time. You may ask why business owner want to authorize us to use his “Brand” and “operational manual” to run the business. Won’t they be under a risk?

Franchising model has established itself as a viable business model. I was reading about the different approach to this model. Before going into the details, let’s see what the benefits for Franchisor as well as for Franchisee.

We noted that the Franchisor would need to register the brand as intellectual property and protect its interest. With the standard operating manual, the business can be kick-off in the start-up in the shortest possible time. If you were going to be the Franchisee, surely you want to look into the financial aspect. The questions that come to my mind would be:

1. What is the capital outlay that I must have?

2. What is the running capital and will bank recognize the brand of the Franchisor for overdraft?

3. When can we start seeing profit?

4. What is the manpower needs and can I get them from the current labour market?

5. Will the Franchisor sign up franchisee near by competing with me?

Likewise, you would ask me what the Franchisor looks for when they are selecting Franchisees. Franchisor would look for honest people, take care of their brand, seek their views and opinion, engage them when have new ideas. Most important is the financial status and reports. Integrity is the key for Franchising relationship. Similarly, you also want the Franchisor to respect you for your opinion and views. At times, local knowledge is critical when you are signing up a foreign Franchisor. Franchisor would also look into the management skills and commitment to the Franchising business model.

Interestingly, Franchisor is more concern than the Franchisee. Why is it so? Here is some information I gathered from the Franchising Manager or some times they called themselves “Business Development” managers when I attended a briefing.

Franchisor will set the rules – terms and conditions while Franchisee would focus on the profitability, capital / cash flow, not mentioning the rate of return and return on investment. From the presentation, we would like to see a fair business transaction. Certain countries have specific statutory requirement when you run a franchising model.

As mentioned earlier, there are variations to any Franchising agreement. One of it could start off as joint venture prior to franchising. The other would be area franchising whereby the Franchisee commits himself to open the number of franchisee with a 2 to 3 years period.

Top of the critical success factors would be the spirit of doing business – integrity and long term relationship. We shall then can count on the model of Franchising.