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How franchising can benefit SMEs

Business
Financing of small business is a big challenge and one of the innovative ways in which a small business can gain recognition is through pursuing a franchising model. But what is franchising and how can it benefit players in the SME sector?

Financing of small business is a big challenge and one of the innovative ways in which a small business can gain recognition is through pursuing a franchising model. But what is franchising and how can it benefit players in the SME sector?

by Clive Mphambela

Franchising is a business system that creates a network of interdependent business relationships allows a number of small businesspeople to share, a common brand identity, a tried and tested successful method of doing business, a proven marketing and distribution and logistics system and sometimes a common financing method for their businesses.

In short, franchising is a strategic alliance between groups of people who have specific relationships and responsibilities with a common goal to dominate a specific markets by getting and keeping more customers than their competitors.

It is basically a marketing system that networks businesses owned by different individuals under a common brand name and common business model.

Franchising is also one of the business strategies that an existing large company may use to capture additional market share. For example, a fast foods restaurant business may want to invite smaller players in the same sector to adopt its brand and way of doing things by “joining’’ its franchise. But how does this benefit the SMEs that decide to join the larger group?

What are the benefits of becoming a part of a franchise?

Being part of an established brand name Franchising is a business strategy that helps a small business to get and keep quality customers. Because the larger business (franchisor) has already established a marketing system that has created a strong image in the minds of current and future customers and about how the company’s products and services can help them, the franchisees get an immediate benefit because they do not have to incur the upfront costs of developing a new brand. Franchise systems also usually have well-developed methods for distributing products and services that satisfy identified customer needs, lowering the entry costs of the SME that will be targeting that market segment.

What is involved in “buying” a franchise? There are many misconceptions about franchising, but probably the most widely held misconception is that as a franchisee, when you become part of a franchise network you are “buying a franchise”.

In reality the franchisee is simply investing his or her assets and capital in an existing business system that utilises the brand name, operating systems and ongoing support from a centralised point. Every franchisee in the system is simply licensed by the franchisor to use the brand name and operating systems and methods designed and owned by the franchisor. Thus a franchise network creates a business relationship that is in fact a joint commitment by all franchisees to acquire and keep customers in a particular segment. Legally, all franchisees in the network are bound to do business using the prescribed marketing and operating systems of the franchisor.

To be successful in franchising, entrepreneurs must understand the business and legal ramifications of the relationship between the franchisor and all the franchisees in the network. In a franchise set-up, focus is on working with other franchisees and the central franchise company managers to market the brand, and fully use the operating system to drive business success. This collective approach to business means that other franchisees are not competitors but allies in business.

All network partners share the task of establishing the brand as the dominant brand in all markets entered and reinforcing the customers’ familiarity with and trust in the brand. So in this respect franchisees work as a team with others in the entire system, sharing the responsibility for quality, consistency, convenience, and other factors that define the franchise, ensuring sustainable repeat business for everyone. This increases the value of the brand name over time and may lead to great business success for the franchisor and franchisees.

Does the franchisee own the business? This is an important and difficult question in the whole franchising concept. The “ownership mentality” destroys the reason franchised and company-operated units are successful. To really think about it, if the franchise businessperson thinks they have “bought” the franchise, they then become an “owner” and begin to think and act like an owner. However, this has been shown to lead franchisees to want to deviate from the main franchise and even want to change the system because of their own needs. You will wonder what you are paying the royalty for, and you will begin thinking of other franchisees as your competitors. For these and many other reasons, you do not want to think of yourself as an “independent owner”.

The correct way to think of a franchise business as a franchisee is that you own the assets of your franchise unit, which you have chosen to invest in someone else’s brand and operating system and ongoing support. You own the assets of your company, but you are licensed to operate someone else’s business system and you don’t own the brand.

How can SMEs become franchisors as well as franchisees?

For SMEs and small businesses, franchising is definitely a new growth option. It is through collaborative effort that the future of SMEs in the relevant sectors in Zimbabwe can be anchored on. Similar businesses can group their assets together, create and agree on one brand and invite other small players to become part of a bigger business network, be it in fast foods, printing, real estate services, small accounting firms etc. Franchising is a collective way to grow and it is through collaborative effort that it is possible to discover areas where opportunities exist.

l Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers’ Association of Zimbabwe. BAZ expressly invites players in the MSME sector and all other stakeholders to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686, 0772206913