FRANCHISING: A VITAL INCOME OPPORTUNITIES FOR TODAY’S INVESTORS
A Franchise is an agreement or license between two parties, which gives a person or group of person (The franchisee) the rights to market a product or service using the trademark of another business (the franchisor). Both franchisor and the franchisee have a strong vested interest in the success of the brand and keeping the customer happy. Franchising is one of the greatest systematic transfers of know-how in the business world. A good franchise program is designed to take people without experience in a specific business and teach them how to run a successful operation following a detailed formula. New franchisees are successful only if they can learn to follow the system. The franchisor expects you, as a new franchisee, to be flexible, eager to learn and determined to “get it.”
Since franchising is relatively new in Nigeria, creating a platform for information and education is essential to its further development. The small and medium Enterprises in Nigeria has not fully tap the various opportunities franchising offers, this oversight could be blamed on lack of awareness. Franchising has become the most popular business model for self-employment. The range of opportunities has never been broader, with franchise companies now established in virtually every industry.
SMEs in Nigeria face severe constraints but Franchising (as a business model) provides entrepreneurs immense opportunities (technology transfer, marketing/business support services, skill acquisition, etc) to increase SMEs success rate and energise the national economy. Nigerian government has declared its willingness to support any initiative aimed at encouraging entrepreneurship and innovation especially in line with the National Economic Empowerment Development strategy (NEEDS). The African Development Bank (ADB) is supporting International efforts to develop Franchising in Africa and Nigeria is one of the priority markets.
Nigeria offers immense opportunity for prospective franchisor: As the largest consumer market in Africa with a large population of resilient small and medium sized enterprises, Nigeria offers foreign franchisors a larger pool of potential franchisees for International masters Franchises and area development agreements. It could offer a return on investment difficult to exceed anywhere else. The country adaptive private sector, a key factor in determining market readiness for international masters franchising and area development agreement.
Over the past 5 years there has been a noticeable rise in the level of awareness about franchising in Nigeria, Market watchers attributes this development to a number of factors particularly the immergence of several indigenous franchise. Concepts and systems spurred by influx of successful master franchise agreement from South Africa in Telecommunication market, many entrepreneurs from South Africa are moving to Nigeria through Strategic alliances to explore trade investment opportunities. Between 2003 and 2005 more than 10 leading brand name from South Africa including Chicken Liken, Churches, Protea, MWeb etc have established a local presence and many more are coming. Current annual market size for franchising in Nigeria from the entire industrial sector is put at$1.5billion approximately. According to Mr. Nic Louis former president of the South Africa Franchising Association he said that Nigeria can creates 600,000 jobs with few franchisees.
Today Franchising is available to service businesses, manufacturers, retailers, wholesalers, and even professionals services in the medical health care fast food and beverages hospitality, educational services, training management, business support, estate management, health, beauty and so on.
Thanks to the sensitizing efforts of the National Office for Technology Acquisition and Promotion (NOTAP) and the Nigerian International Franchise Association (NIFA), Franchising is steadily becoming understood and accepted as attractive business model by Nigerian entrepreneurs.
Investors should tap into the high rate success rate in franchising: Did you know that more than 90% of franchise businesses succeed, as compared to an extremely high failure rate of other small businesses? Statistics like these are very compelling, and they make franchising an option that aspiring entrepreneurs and small business owners should consider. I encourage prospective franchise buyers to perform extensive due diligence when considering a franchise opportunity.
Before You Select A Franchise: You need to evaluate yourself and make an informed business decision about whether a franchisor?s business opportunity meets your needs and whether you can provide what the franchisor wants and needs in a franchisee. You also need to ask yourself basic questions: What do you want from life at this time? What are your wants, needs, and desires? What are your goals, objectives, and dreams? What are you looking for in a business? Have you decided to leave what you are now doing? Not just the job, but the profession?
Financing the franchised business: By the time you have signed a franchise agreement, it is likely that you have had at least preliminary discussions with your bank concerning financing. However, it is also likely that although your bank may have given you some positive indications of their interest, they would not have gone so far as confirming their commitment to finance your franchised business in writing (often referred to as a “Commitment Letter”). That’s because at the time you spoke to them, you were not technically a franchisee of anything – so any discussions were strictly hypothetical. Now that you are a bona fide franchisee, it’s time to firm up those discussions. First, check with your franchisor to see if they have a “franchise package” set up with their corporate bankers. If so, preferential lending terms and service charges may have already been negotiated by the franchisor for the benefit of all of the franchisees in the franchise system. Even if there is not, banks will often offer preferential terms in order to keep their corporate clients happy.
Process: Start by visiting your library or going online to look up all the magazine and newspaper articles you can find about the company you're considering. Is the company depicted favorably? Does it seem to be well managed and growing?, then the company will give you their Uniform Franchise Offering Circular, UFOC is a document that contains information franchisors must provide to you by law, designed to assist you in analyzing the merits of your potential franchisor. In fact, a franchisor must provide a prospective franchisee with a UFOC at their first face-to-face meeting or at least ten business days prior to the signing of the franchise agreement, whichever is earlier. You will then pay the franchising fee, which is normally paid in every 5 years, you will also pay, the royalty fee (this is usually 2-5% of the net profit), which is collected monthly or yearly, depending on the contractual agreement.
How small investors can catch in on this opportunity: There are prospective franchisors in Nigeria, just spot the indigenous local need of your local community, look for the franchisor that has the product or services, they will be very glad to partner with you, even with the little you have, there are also a lot of franchisors abroad who are into service business, like cleaning, consultancy, educational services, and son on, you can buy the franchise for as low as $1,500 to $4,000, and you will be amazed at the level of patronage since those franchisor have a ready made customer over there, if any of their ready made customer should come or set up a company here in Nigeria they will always recommend you as an affiliate organization.
Opportunity for big investors: Start-up cost for local franchises in Nigeria is between $50,000 to $75,000 – (45 million or more in local currency). This is a high investment but banks and franchisors are supporting prospective franchisee and a lot of them are raking in millions every day, since we have one of the largest consumer markets in Africa.
How to be a successful franchisee: Identify a good franchise to buy, while it is also important you check the track record of the frachisor, Your ability to learn and apply the intellectual know-how developed by the Franchisor and licensed to you for your use will have a direct impact on how quickly your franchised business turns a profit and yields an attractive return on your investment for many years to come.
How to be a member of Nigeria International Franchise Association: The Nigerian International Franchise Association is a trade association, formed in year 2002, is committed to the development and promotion of franchising in Nigeria. They have three categories of Membership; they are Associate membership, the subscriber membership and the suppliers. Then they have a 15-member board of directors made up of franchisors and franchisee, their aim is to educate potential investors and entrepreneurs in Nigeria on fundamentals of franchising and its proven track record for success and growth in business.
The following area likely to prove strategic in future: Construction Materials/Real Estate, Automotive Products/Services, Educational Services (e.g Pre-school, Information Technology), Health/Beauty/Nutrition/Fitness, Purified Water, Internet Services, Cleaning/Janitorial Services, Social and Spiritual Clubs, Catering/Entertainment outfits.
What Franchisors will request from you: Most franchisors request the following information from you before sending a copy of their UFOC: Assets, Liabilities, Net Worth, Sources of Income, Educational History, Previous Employment, Credit References, Personal References, Motivation for Buying a Franchise.
While the entrepreneur possesses visionary leadership and builds companies from the ground up, franchisees follow the established business model created by another individual. Owning a franchise business, even though it must follow a formula, takes soaring creativity, dogged persistence and business drive. Successful franchisees must learn to balance the entrepreneurial mind-set with the ability to follow the franchise system.
Good luck and Godspeed.
Small business and SME finance expert