Beware Franchise Scams - Understand what franchising's all about

A number of franchise scams have recently been aired on investigative TV programmes like Carte Blanche and The Devi Show that have exposed franchisors that are defrauding people out of their hard-earned cash. In almost all of these cases, the so-called ‘franchisors’ do not adhere to the Consumer Protection Act nor are members of FASA and sadly, the ‘franchisees’ that buy into these systems do not do due diligence or even have the basic understanding of how franchising works. We hope with our series of articles we can elaborate and educate the public at large.

Franchising is, without doubt, the most “public” of business formats. You recognize a franchise because it carries a strong brand, has a distribution mechanism that reaches far and wide and provides a uniform product, service and image to the public. A true franchise is one that gives the right to an individual to use its trademark but also gives him/her the complete business blueprint, training in all aspects of running the business and on-going support.

On a more basic level, franchising is really just an extremely good distribution method. The “franchisor” or person, who starts a company or develops a concept, uses others (franchisees) to duplicate his concept and distribute it on a large scale. This inter-dependency forms the basis to the business format and its success lies in the effective implementation of certain basic but clearly defined business principles. The juxtaposed relationship between franchisor and franchisee needs to be fully understood and accepted for the overall business to succeed. Below we answer some often-asked questions:

How does a Franchise Chain start?

Usually with a good idea! An individual entrepreneur or company starts a business, runs it successfully for a reasonable length of time, has unprecedented interest in the product or service by both the consumer as well as other entrepreneurs and decides to duplicate his successful concept. Once he registers the trademark and develops an Operations Manual, a Franchise Contract and a Disclosure Document, he is free to grant licenses to others (franchisees) to trade under his trademark under the regulations and controls relating to the operation of the business in return for fees. The effective duplication of the concept with a distinctive brand and targeted marketing ensures rapid and effective market penetration and widespread brand recognition.

What makes a Franchise different to other Businesses?

When you walk down a main street in any city and you recognize a host of branded fast food outlets, entertainment shops or office services, you are looking at franchised outlets operated by franchisees. The key to the success of these franchisees is the fact that they all follow a successful formula – from the products and services they offer to the look of the stores. The buying public has more confidence in an established brand which has many outlets and a distinctive offering. With a franchise there is name recognition, buying power that greatly affects the bottom line and ongoing support in the form of research, development, new ideas, market analysis, marketing and the creation of new products. A good franchise is tried and tested and commercial banks and development corporations recognize the lower risk profile of franchising and consequently prefer financing a franchisee.

Why are Franchised Businesses considered more successful than regular start-ups?

The litmus test to prove this theory would be to take the same start up business, set it up independently as well as through a franchise system, and monitor the results. There is no question that a Steers or McDonald’s outlet will have a greater chance of success than Joe’s Burgers. Although the success of any business ultimately depends on the person who runs it, a franchise business, with its business format system, offers a greater degree of protection from the cold winds of the free market with its support system of training, marketing and business administration. Whilst franchises succeed because of support, they also succeed because they follow a system. Below is a list of the responsibilities and expectations of each party that make up a successful franchise partnership.

THE FRANCHISOR…

is the originator of the concept
provides an established and tested business system
has an established name, brand and trade mark
sells “clones” of his concept in order to grow the business and build the brand
supplies the know-how, training and support services
expands his network rapidly and cost-effectively
benefits from pooled operational efficiencies

THE FRANCHISEE…

buys a ready-made business package
buys the rights to operate under a well-established brand name
invests capital, time and effort to replicate a proven concept
must follow the franchisor’s standards, methods, procedures, techniques & marketing plans
must pay a fee to the franchisor for the rights to use the trade mark and business systems for an agreed period of time.
benefits from skills transfer, training and business support
invests in a viable business that will prove to be a good investment.

Is the franchise I am considering joining accredited by the Franchise Association of South Africa? And if not – why not?

In franchising there are always unscrupulous entrepreneurs who, under the guise of franchising, will make empty promises and sell unethical businesses to unsuspecting business operators. The Franchise Association of South Africa (FASA) is the only officially recognised representative for the franchise industry in South Africa since 1979 and its main purpose is to promote ethical franchising.

FASA members voluntarily align themselves and their brands to an internationally recognized body that adheres not only to international best practices but to sound business ethics established through the Consumer Protection Act and FASA’s government approved Franchise Industry Code and possible Ombudsman for the sector.
The fact that a franchisor that is a FASA member voluntarily opens himself, his company and his operations to scrutiny shows his commitment to running his operation ethically and along sound business principles.
FASA members are viewed as credible operators and quality companies within the franchise community and more likely to be accredited by the major banks and lending institutions.
FASA makes a thorough assessment of each applicant company before membership is granted. This would typically include a look at the viability of the concept and that the company has a pilot operation operating for at least a year as well as the presence of appropriate franchise documentation.

Where can I find out more about Franchising?

If you type in franchising into an internet browser you will get a plethora of articles on franchising and its success around the world. Take time to read up on this phenomenal business format that operates in almost every country in the world and familiarise yourself with the many sectors that franchising operates in and then narrow your search to see what is available in South Africa.

Your first point of call must be FASA where, in addition to informative articles, all FASA members are listed for easy reference. We also suggest you sign up to receive the Association’s bi-monthly newsletters that will keep you in the loop on what’s happening in the franchise arena – you can sign up on the website or email enquiries@fasa.co.za. FASA also periodically hosts seminars and workshops as well as franchise expos where you can interact with experts and franchisors.