Introduction to Franchising

A franchise is a form of licensing arrangement where a franchisee gains access to a franchisor's exclusive business knowledge, processes, and trademarks. This allows the franchisee to operate a business under the franchisor's name and sell their products or services. In return for obtaining the franchise, the franchisee typically pays an initial startup fee and ongoing licensing fees to the franchisor. Essentially, a franchise is a business partnership in which the owner (franchisor) permits others (franchisees) to operate using its established brand, products, and expertise in exchange for a fee.

The franchisor provides the franchisee with the necessary support, training, and access to established business practices to ensure the success of the franchise.

Franchise Vs Startup

Franchise and startup are two different paths for aspiring entrepreneurs. When you decide to start your own business, you're taking a risk, but it also offers potential rewards both financially and personally. However, venturing into the unknown raises questions like whether your product will sell, if customers will like what you offer, and if your business will generate enough income to survive.

Starting your own business comes with a high failure rate. Statistics show that two-thirds of new businesses survive only two years, and only 50% make it to the five-year mark. To succeed, you have to rely solely on yourself and your efforts.

Achieving your dream of owning a business requires hard work and dedication, especially if you lack experience and support. If this seems overwhelming, another option to consider is the franchise route.

Franchises attract entrepreneurs because they see success stories from other franchisees. They offer a proven and stable business model that has been tested in the market. For instance, if you become a Best Lady franchisee – let’s say Best Lady Cosmetics decided to franchise, most decisions about products, store layout, and employee uniforms have already been made for you. Some franchisors provide training, financial planning, and a list of approved suppliers. However, success is not guaranteed even with these advantages.

Pros and Cons of Franchising

Advantages of franchises include following a ready-made business formula, having market-tested products and services, and benefiting from established brand recognition. On the other hand, franchises have downsides like high startup and ongoing royalty costs. Franchisees must pay a percentage of their sales or revenue to the franchisor, which can range between 4.6% and 12.5% depending on the industry.

There's also the risk of being misled by inaccurate information and paying high fees for a franchise with little or no value. Franchisees may lack control over their territory or the creative aspects of their business. Additionally, securing financing from the franchisor or elsewhere can be challenging, and poor location or management can adversely affect the business.

The franchisor makes money through three main categories of payment in the franchise agreement. First, the franchisee pays an upfront fee to obtain the rights and trademark. Second, the franchisor may receive payments for providing training, equipment, or business advisory services. Finally, the franchisor earns ongoing royalties or a percentage of the business's sales.

Conclusion

In conclusion, franchises offer an established and recognized path to entrepreneurship, reducing some of the groundwork for aspiring business owners. However, it's essential to recognize that success is not guaranteed, and franchises require significant effort and hard work to become profitable.

[*This article generally explains the law in force in Kenya and does not constitute an opinion or a legal opinion. To find out the rules specific to your situation, write to us on info@wjmaxwelll.co.ke or call/WhatsApp on 0733 610 961*]