Is a franchise the right model for your business?
13 November 2019 | Business
Namibia’s Small Medium Enterprise (SME) sector is reported to contribute more than 10% to the gross domestic product (GDP) and 20% to employment creation. These figures indicate that the sector is vitally important to the country’s economic growth.
Franchising in Namibia, as a means to get into business, has increased in significance in recent years and it is a relatively quick way to start a business.
A franchise is a type of license that a franchisee acquires to allow them to have access to a business’ (franchisor) proprietary knowledge, processes and trademarks in order to enable the franchisee to sell a product or provide a service under the business’ name. In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual licensing fees.
Franchises have the benefit of providing the franchisee with access to business experience through the franchisor which they would otherwise not have. This experience can assist in mitigating risk when approaching lenders for start-up capital. Franchisors also provide support in the way of business systems, name recognition, training and numerous other forms of assistance.
Due to brand name association, licensing fees and royalties, the franchisor has a vested interest in the success of the franchisee. This ensures additional ongoing support.
While starting one’s own business may have its benefits such as personal goal fulfilment, it comes with risks. Some of these risks include going to market with an untested product or service and having to build your own brand. Choosing a franchise business model has the following benefits:
• Standardised and tested goods and services.
• A national, regional and sometimes global advertising platform.
• Reliable suppliers.
Franchises are especially popular in the restaurant, fast food and clothing industries. Several South African fast foods and supermarket franchises such as Game, Pick n Pay and Woolworths currently operate in Namibia.
Though franchising may be a viable option when considering starting one’s own business, it has some challenges. For example, the licensing fees and royalties charged by the franchisor can be exorbitant. This forces the franchisee to part with significant portions of their capital and profits.
Many owners also find the lack of autonomy over their own business frustrating. The franchisor may be in a different country, and their standard operating procedures may not be relevant. Franchisees are however, legally required to adhere to these requirements.
Entrepreneurs looking to start their own business often consider franchising as an option. While you get the benefit of a proven product and support, it is critical to choose the right franchise partner that aligns with your passion and skill set.
Here are a few pointers one needs to consider when deciding on a franchise partner:
• Strong support system
When buying into a franchise, it is essential to ponder the support that will be provided by the franchisor. Ensure that ample support is provided during each phase of your business and that it is readily available.
• An understanding of the local business environment
Businesses do not operate in a vacuum; it is therefore necessary to choose a franchise partner with a good understanding of the dynamics of the local business environment. This will influence how the business will operate and whether it will succeed.
• Review the Franchise Agreement
It is vital that before any agreement is signed, the entrepreneur and his/her legal representative review the franchise agreement. This document will provide insight into; the percentage due for royalties, revenue models and licensing fees.
Franchisors are not required by law to register their licenses with the Ministry of Trade, Industrialization and SME Development. It is critical to ensure that the license is being issued by a mandated franchisor. Only master franchisors have the right to approve licenses to multiple franchisees.
As Namibians, we firmly believe that entrepreneurship is the right route to grow our economy. For this reason, I urge all entrepreneurs to carefully consider their options before deciding on the right model for their businesses.
*Mbo Luvindao is Bank Windhoek’s ESME Branch Manager.