To Franchise or Not to Franchise?

This article appeared in the March, 2014 edition of Venture.


Even as Jordanian businesses continue to struggle under difficult economic conditions, franchises continue to survive and, in many cases, thrive.  

By Jane Hosking

While buying a franchise may not suit everyone wishing to establish a new business, there are certainly many advantages, especially for anyone with limited experience of the industry they’re eyeing up. When asked why he decided to set up a Subway franchise instead of opening his own fast food restaurant, Haytham Bata noted that the experience shared by the fanchiser proves invaluable. “It’s the know-how which is the most important part. I’m not from the food business, so for me to start anything it would have taken me ages to do it. To learn, to build the experience, it would have taken 10 to 15 years to build this,” he said.

In one and a half years, Bata and his business partners have gone from one store to seven. Their main store is located in Shmeisani and another well-known store is in Rainbow Street. He explained the franchiser provides training to the franchisee and also a lot of information about procedures of best practice. “You have it already in the manuals and you just apply whatever they say. So you save a lot of costs.”

The main idea behind opening a franchise is the purchase of an established concept and proven business model. Not only can this guarantee a greater chance of success for a business, but the franchisee also benefits from the brand name recognition that can instantly bring in customers upon establishing a new store. In addition to this is the exposure through national marketing campaigns by the franchiser.

But certainly the benefits and the brand name do come at a price. While it differs from one franchise to another, there is generally an initial franchising fee when establishing a store and an ongoing royalty fee that’s taken out of a store’s sales. In some cases this fee can be very high. Whether this cost can produce enough in return may vary from one franchising company to another and may depend on how profitable a particular store is.

But in Bata’s experience, he believes the benefits outweigh the costs, noting the buying power of the franchise group that secures the best prices from suppliers, and other support provided by the franchiser through its local development agent. “The local development agent takes care of a lot. They are very much involved in the process of establishing the franchise, especially at the beginning. They work hand in hand with you to develop the store,” he said, adding this includes assistance with purchasing equipment, supplies, picking the store location, training staff, and support with the ongoing management of the store.

A downside to establishing a franchise as opposed to an independent business is a loss of management autonomy. In some cases, even the intricate details of a franchise outlet may be micro-managed by the parent company. This can restrict the creativity of a franchisee and limit their ability to adapt to local needs. But to counterbalance these potential disadvantages is often an increase in security and financial stability.

Bata observes that a lot of small businesses are closing down on Rainbow Street, which is heaving with fast-food restaurants. “They cannot sustain the losses that they incur here, especially during wintertime. If a local business isn’t making money you would close it. The franchises are continually investing from their own money to keep the brand. We can leverage from one store to the other or support one store from the other.” This, he suggests, lowers the risk of opening a business. However he acknowledges that in any business there is always a risk. Due to such risk it is always necessary for anyone interested in purchasing a franchise to do their research and select their franchise carefully.