Understanding the business format of franchising

Franchising is a universally accepted and successful business format that has revolutionized the way small business is run and has contributed extensively to entrepreneurship, skills transfer and job creation. The two most universally accepted forms of franchising are:

Business format franchising

This is defined as a distribution network operating under a shared trademark or trade name with franchisees paying the franchisor for the right to do business under that name for a specified period of time. In exchange, the franchisee is able to use the franchisor’s entire business system or format, including the name, goodwill, product and services, operating manuals and standards, marketing procedures, systems and support facilities. The franchisor, in turn, is obliged to give initial and ongoing services and support.

Product and trade name franchising

Characterised as a sales relationship between a supplier and a dealer, product and trade name franchises can be found most commonly in car dealerships, petrol service stations and cold drink bottles. The dealer is granted the right to sell its products in exchange for fees and royalties and has an obligation to sell only the franchisor’s products.


For a business concept to qualify as a franchise, the following elements must be present:

  1. A successful concept and name

Unlike a business idea or a one-off business, the franchise concept is an established business with a certain degree of success, a proven reputation and an established and recognized brand name.

  1. Proven product or service

In franchise concepts, there is always a sought after product or service that has been proved to be successful and for which there is a demand in other areas. With the franchisor having already taken the set up risks, invested in setting up the business and proved its viability, franchisees are ensured of a better chance of success with minimized risks.

  1. Franchise Contract

The franchise success is based on a contract that ensures that the concept is correctly followed by each and every franchisee that buys into the business and that its brand name, trademarks and systems are protected. Whilst this seems biased towards the franchisor, it also offers a large measure of security to franchisees who can take comfort that all franchisees involved in the business work towards a common goal of success.

  1. The business know how

A reputable franchise system will have its business format fully developed with a comprehensive Operations Manual that gives the blueprint on how to successfully implement the business.

  1. Comprehensive training

The beauty of the franchise system is that it comes with complete training in the business that it offers – from a technical, operational and managerial aspect. As part of the business format, the franchisor undertakes to train the franchisee in the operation of the system prior to the opening of the business, and assist with the opening of the business.

  1. Ongoing training

The franchisor has the obligation to make his brand and business success in the long-term and it is incumbent on him to offer ongoing training that will keep pace with the expansion of the franchise and its future success.

  1. Operational support

Whether it’s on the technical, operational or managerial level, franchisors must continually provide direction in terms of where the business is heading, what research and development needs to take place to take it to new heights and always improve on management efficiencies.

  1. Benchmarking

The mark of a good franchise brand is its continual bench-marking – both amongst its own franchisees and with its competitors. Keeping ahead of the pack is the single most important task of any franchisor.

  1. Marketing assistance

The success of most franchise brands is a result of innovative marketing that ensures that the spread of franchisees is backed by effective advertising and promotion. In most cases funds pooled by franchisees goes towards national advertising campaigns aimed at benefiting both the brand and the individual franchises.

  1. Group benefits

The benefits of belonging to a franchise system are many and they all relate back to the pooling of resources. Whether it’s the sharing of the brand name, the sharing and solving of problems and challenges, the pooling of marketing resources or the group purchasing power that results in lower-cost goods, these unique elements are the reasons why franchising has such a high success rate.

Source: Franchise Association of South Africa – www.fasa.co.za

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