Counting the benefits of franchising

As the South African economy feels the strain of the local energy crisis, higher interest rates, and petrol and food price increases, entrepreneurs continue to look for viable ways to keep their businesses on track and profitable in the face of these challenges. There are, of course, many methods at their disposal, but in the small and medium enterprise (SME) sector, the franchising model is one such method which can be considered.  

Franchising is a business arrangement between a franchisor (the owner or holder of a business concept, brand or an arrangement) and the franchisee (who acquires the rights to operate in accordance with a franchise agreement). 

The franchisor allows the franchisee the right to use its trade name, business methods and know-how. In return, the franchisee accepts certain restrictions on the way he or she conducts their business. The franchisee also undertakes to make royalty payments (franchise fees) to the franchisor.

In the US, franchises account for 42% of all retail sales, and employ 8,5 million people (Source: TKG Group, USA ). As importantly, franchised businesses are amongst the most stable. A US Chamber of Commerce survey reveals that 86% of new franchises are still under the same ownership five years later, and 97% of them are still open for business.

At home, statistics vary, but according to the Franchise Association of South Africa (FASA), franchises suffer only an 11% failure rate compared with a failure rate of approximately a third amongst other small and medium enterprises. Boasting more than 23 000 franchised outlets, the country also employs more than 300 000 people which generates an annual turnover of R128 billion. Based on estimates for 2007, this accounts for an amazing 32% of total GDP (Source: CIA World Factbook).

"The secret of this success lies in the unique combination of a proven business model and the skill, drive and vision of the individual entrepreneur," says Jo' Schwenke, Managing Director of Business Partners, South Africa's leading risk financier for small and medium enterprises.

"Therefore the business benefits from the fact that it is privately owned, but also from the centralised branding, purchasing and the management systems offered by the franchise organisation.

It is this combination that also makes franchises more stable on average than other businesses," says Schwenke.

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