CONVERSATION WITH MY BILLIONAIRE FRIEND
(SESSION 23)
An ardent reader of our previous conversations had sent a note –wanting to know if there is another way for a wealth builder who does not have all it takes to build a business to get into the fray and still create wealth.
While reviewing the note with me, my Billionaire Friend suggested franchising might be a fitting option. He said: “remember, I told you initially that I couldn’t describe myself as a real businessman because I did not consider myself as possessing most of the attributes that define one as an entrepreneur. In my wealth-building endeavours, I had to figure out a lot of things. One of the interesting concepts I stumbled upon is the franchise model. I was appointed a director of a company that turned its business around through a franchising arrangement”
We agreed that that would be a good subject to discuss. (Please note:While a franchisor is an established entrepreneur with a licensed business model, a franchisee is a person or corporation that owns and operates the business using the business model licensed by the franchisor. Franchising describes the business relationship between the franchisor and franchisee)
My friend proceeded:
“Franchising is a form of business enterprise for building legitimate wealth through the acquisition of a licence to do business with the brand and/or trademark of a company by an individual or group of people, to enable them to carry out some specified commercial activities in the name of the issuer of the licence. Franchisees are usually people with some capital either borrowed or accumulated, who want to own their business but do not know much about how to start. In a franchise arrangement, a wealth builder can enter into a business relationship in which the franchisor allows the franchisee to sell his products, services and intellectual property in the franchisor’s registered trade name and brand”.
“The buying of a franchise generally reduces the risk of freshly going into some unknown business terrain. However, it still requires and involves lots of hard work and commitment of franchisees to ensure their success. Therefore, wealth-builders need to ensure that the businesses for which they obtain franchises are those that they have an interest in, and about which they can see themselves enjoying doing on a day-to-day basis. This requires wealth builders to carry out some business overview, investigations and research before seeking to obtain franchises, to ensure that their franchise business is one in which they have interest or passion and management expertise”. Franchising is usually used as a means of distributing products or services involving the owner of such products or services, called a franchisor, who has an established trademark for a business system, that enables a franchisee to pay royalties and often an initial fee for the right to do business under the franchisor’s name and management system”.
SO WHAT DOES IT TAKE TO OPERATE A FRANCHISE?
Opening a franchise business involves a relatively low risk of doing business because of the presence of full support of the franchisor. Franchisees must be fully aware of overriding regulations and contents of the agreements reached with their franchisors and must factor into their operations what would make their franchise successful. Usually, franchisors issue franchise licences as a way to expand their businesses and create widespread branches in such a way they could not have achieved on their own. Thus, franchisors seek out wealth builders to help them expand and grow their businesses through franchising at a minimum cost. On another end, franchising allows franchisees to benefit from the opportunity to run their businesses with the licence and support of franchisor companies”.
“Franchise business arrangements have globally proven to be successful for wealth builders, with little know-how about the line of business of their investment interest.Hence in a franchise arrangement, one does not have to worry about building a recognised and trusted brand, developing well-trained support teams, and finding reliable advisors to help them to manage their businesses. The franchisor provides all these in the franchise arrangement”.
“Given that franchises are readily available, wealth-builders are advised not to jump into a franchising business in haste. Wealth builders should first investigate the franchise business of their interest to ensure it aligns with their business intentions and goals. Available franchise opportunities can be differentiated and preferentially selected on how well franchisors support and assist wealth builders in extensively using their licensed brands and trademarks”.
THEY COME IN DIFFERENT CATEGORIES AND FORMATS
Generally, there are three main available classes of franchising:
BUSINESS FRANCHISE
“A business franchise allows franchisees to pay franchise fees and get the system developed by the franchisor with the right to use the franchisor’s name for a specific number of years, which is usually spelt out in the operating franchise agreement.
The business franchise is the most common type of franchise, which allows wealth builders to buy the licence to businesses with established brand names. Such wealth builders’ new franchise businesses would often be supported by the category of the franchise throughout the initial stages of business. Such support may continue to be extended throughout the life of the franchise businesses.
In return for this business support, franchisees will be exposed to having access to experienced professionals and the right to use the brand name of the franchisor. The franchisee is however obligated to pay royalties to the franchisor regularly as per the agreement reached between both parties. The best example of this class of franchise arrangement is found in the fast-food industry. The global example of this class is Kentucky Fried Chicken and McDonald’s. The Nigerian examples include Tantalizers, Tastee Fried Chicken, and Chicken Republic. These franchisors allow franchisees to use their trademarks and brand names and take advantage of the economics of their supply logistics and the secrets behind their menu of foods.
This arrangement sometimes requires the franchisors to continuously train their franchisees to ensure the maintenance of famed products and services of top quality in line with the franchisor’s standards. They may also guide their franchisees with internal audits to help block income leakages. Marketing expertise is provided chiefly to franchises to optimise franchisors’ profitability, business expansion, enhanced business images, etc”.
In total, this arrangement benefits both the franchisee and the franchisor. It is highly recommended for newly retired employees who do not have business ownership experience to take advantage of the available franchise support system to start good businesses of their own”.
PRODUCT OR SINGLE OPERATOR FRANCHISE
“The other category of franchises is the product or single operator franchise. This franchise focuses on giving out franchise licenses to individuals who sell products and delivery services in specific fields. The franchisors in this arrangement allow franchisees to use their brand names and trademarks, provide them with uniforms and equipment to properly represent franchisor brands and provide support to franchisees to deliver products and services to third parties. Product franchises are an excellent option for start-up wealth builders, independent contractors and home businesses. The investment outlay needed under this franchise class is usually smaller than that of the business franchise. Examples of independent contractors’ franchises are companies that have already established good names and reputations for their contracting services in their field of work and issue franchise licence to franchises”.
“A typical example of this is found with large successful plumbing contractors who give out plumbing services franchise licences to smaller contract plumbers who then allow clients to have wider access to plumbing services. This franchise arrangement gives such franchises greater technical and marketing reach and the support of a team of management professionals, which helps franchisee plumbers to manage client bookings, payments and complaints better. As stated earlier, this class of franchising is best for contract service businesses”.
MANUFACTURING FRANCHISE
“Manufacturing franchises are the third classification of franchise arrangements. In a manufacturing franchise, the franchisor allows the franchisee to produce products and provide services using the franchisor’s brand name and trademark. This type of franchise is very popular with food and drink companies in the manufacturing industry. The best example of this franchise is with soft drink companies. Here, the parent company would produce a concentrated syrup and then sell it along with the right to use its brand and trademark to a bottling franchisee company which would mix the syrup with various ingredients and then sell the bottled drinks. An unlimited choice available to wealth builders who still feel very passionate and ambitious after building their franchise businesses to successful levels, but want to expand to other locations or other businesses, is to simply retain control of their existing franchise and continue generating profits from them while expanding to other businesses outside their franchise”.
REGARDLESS OF THE CLASS, THEY PROVIDE A GREAT LEVERAGE
“Indeed, franchises of all classes have many advantages over other entry strategies for new business builders, who have problems and difficulty coming up with original ideas about which business to engage in. The first of such advantage of franchising is instant brand recognition. When wealth builders start businesses of their own, they have to build their brand recognition from the start. This is usually difficult at the beginning, especially with business builders who have to compete in areas with existing strong competitors. In such places, it is better to enter into business as a franchisee of an existing strong franchisor. Under that arrangement, the franchisee business builder will use the logo and brand power of the strong, existing franchisor to attract loyal customers and generate good revenue and profitability.
The second advantage is the corporate support provided under franchise arrangements for start-up business builders. This is so because most corporate franchisors go out of their way to succeed and thus, give strong support to their franchises to ensure their success too. We must not be unaware that business builders starting their businesses for the first time would most likely go through tough times because they are entering unfamiliar terrain. The corporate support provided by franchisors also includes providing classes and training workshops to ensure that franchisees know how to better open and manage their businesses. The franchisors also provide some mentoring, coaching and consultancy for their franchises. The power of the franchisor’s entire brand, therefore, grows appreciably for his ultimate benefit”.
“A big advantage of franchising to wealth builder franchises is the strength and benefit of a continuous flow of revenue during the lifespan of their business. This is the biggest advantage of franchises as a form of business for wealth builders. Once franchise owners can run their business well and get comfortable with their location, they can continue to collect monthly revenue above their expenses, thereby resulting in profits that should grow over time.
Another advantage of franchising as a business arrangement for wealth builders is flexible responsibilities.
Being franchise owners, wealth-builders would be confronted with many responsibilities. However, once the business of their franchisee has gathered some momentum of its own, then the franchisee would be better able to control their responsibilities. Before then, the franchisee’s responsibilities are shared flexibly to minimise the risk exposure of the franchisee of their businesses. Franchisors in some cases help to hire managers and other professionals for their franchises to ensure the delivery of high-quality franchise arrangements. Franchising as a business advantage for wealth builders is an unlimited choice of franchising. This is because there are franchise opportunities in dozens of industries, with thousands of brands to choose from.
As against starting one’s own business from scratch, a franchise business arrangement gives wealth builders some unlimited choices to pick from. Wealth owners will therefore have unlimited brands and businesses that suit their personalities, and passions and genuinely appeal to them to pick from. Franchising also allows wealth builders to have many opportunities to develop the frontiers of their businesses outside their pioneer franchise. In other words, where wealth builders may have stockpiled enough savings of their own to fund other businesses, they can walk into other franchise arrangements and could decide to sell off their existing franchise to expand into other franchises. Hence, wealth-builders who would like to start their businesses after employment for some years or after retiring and obtaining retirement benefits can become self-employed by buying and establishing franchises in their area of interest and start their business enterprises with the support of the management skills and at times products and services of the franchisor. Franchise arrangements by experienced franchisors help to take care of the customer support of franchises in providing everything they need before starting their business. The only risk franchises need to take in most cases is to provide the first investment capital under the franchise business agreement.”
THE DOWNSIDE
“However, you must be warned that franchising is not all bed of roses, as some problems may arise and constitute low ends for franchise businesses. The first of these is start-up cost. Most franchises require huge initial investments which may not be easily available to many start-up wealth builders. Hence, franchise business may not readily be available to wealth-builders with small capital. Indeed, franchising generally requires good access to capital for its success, which is most often obtained through bank loans, equity contributions or cooperatives. However, if capital is obtained via bank loans, as against cooperatives, equities or relying on accumulated savings of some years, such franchises could be exposed to economic and high-interest rates, especially in countries with a high cost of capital, such as Nigeria. This is one low end of franchising as a viable form of wealth building. The aforementioned low ends do not, however, take away the viability of franchising as a good source of wealth building. Franchising only requires thorough investigation, proper planning, and low capital cost as sources for investing in franchises. This, therefore, reminds us of our past conversation about how cooperatives offer us the opportunity of communal sourcing of capital in starting businesses. With cooperatives, two or more poor start-up wealth builders can form a strong cooperative, to buy franchises for building wealth for and on behalf of cooperative wealth-building members. Also, friends can come together under partnerships to put their savings together to take advantage of the opportunity available to them in business franchising. However, operating a franchise is not necessarily a guarantee of business success”.
PERSONAL EXPERIENCE
“In my personal experience of being part of a body that managed a franchise, I must warn that franchises are largely exposed to the dangers of bad environmental enforcement regulations, poor town planning by states and particularly local governments, such as will distort the flow of customer traffic to franchises. A case in point: while operating a high traffic customer franchise, one of our franchised outlets ended up closing down because government suddenly cordoned off the access road to the franchise and customers simply went somewhere else that was easily accessible”.
“High inflation rates are part of the problems of franchise businesses in Nigeria. As of today, the survival of many franchise businesses is threatened by the high cost of diesel, high inflation in the input costs of raw and packaging materials for business operations and the poor quality of human capital in Nigeria. The bad geographical location of a franchise business can be a sure way to failure”.
Again, entering into a franchise agreement with a franchisor that is not a strong competitor and who by itself is suffering from competition fatigue, could lead to the failure of the franchise as a form of business for wealth builders. Wealth builders that do not factor in dealing with changes in demographic trends are another form of threat to the success of their franchise arrangement”
“In general, therefore, we should not assume that franchising is a no-danger form of investing for wealth builders. An important threat to wealth building through franchising is the problem of corporate restrictions. This arises when franchises are entered with franchisors with the weakness of high control wielding over their franchises. A franchisor who wields too much control over his franchises would end up destroying the franchise business arrangement. Hence, franchisees must ensure that the franchisor with which they intend to deal, are those with friendly corporate control over their franchise. Therefore, owning and operating a franchise business under a franchisor has immense overall advantages and is a viable source of owning a business for wealth builders. However, it requires thorough investigations, pre-training and basic talent for such franchise businesses to succeed. It also requires proper investigation of the franchisor’s control over their franchises, finding out the level of assistance franchisors give their franchises as compared to other competing franchisors. Franchise volatility, corporate rules and high cost of entry may also be a put-off. Notwithstanding all these, there are enormous advantages of franchise ownership that wealth builders would need to explore to own and operate their business enterprises, especially those wealth-builders with relatively low capital but with high talent and interest in the areas, they intend to venture into”.
So far…
Can’t wait to catch up with you next week
ayo.arowolo@yahoo.co.uk
