Business Development and Financial Services for Small Business
FRANCHISING AS A DEVELOPMENT TOOL
Franchises have been used extensively in the development of rural telephone systems. It is also beginning to be
used as a mechanism for the development of microenterprises through the use of micro-franchises such as the
Micro-franchise, Education and Lending Program (MEL) . The track record of the community telephone
franchises is as mixed as most development efforts. In the case of microenterprises and Small and Medium
Enterprises (SMEs) it is too early to tell whether the model will be successful. The question that is examined here
is whether franchising can be used to achieve private sector development and other development objectives. A
brief outline of franchising fundamentals is presented. This is followed by an examination of the opportunities
franchising presents as a development tool.
First and foremost a franchise system is a business. This business format uses franchises to extend its identity and
reach. This means that the franchises are an extension of the parent company’s business and implies that if a
franchise is not well run it has a negative impact on the parent. As a basic principle franchisors are committed to
franchise profitability and equity growth. Franchise holders are managers of the business extension. Because the
franchise system owner wants to be well represented in the regions where it operates it will place emphasis on
selecting qualified people as franchisees and providing any additional training required. Some franchisors treat the
franchise operator like a member of its team and regard the franchises as an extension of it’s marketing arm.
A franchise program has a number of benefits such as: standard hours of service, image, signage, joint marketing,
franchisee training, standardized accounting, systems and equipment. These benefits will provide clients with
uniform levels of service and quality standards across region. Frequent travellers within the region will know that
they can expect the same services and standards at each location. Franchises offer a systemic approach with room
enough for the owner to express entrepreneurial innovation Through a systemic approach to operations good
business practices in such areas as bookkeeping, minimum signage and hours of service are utilized throughout the
network of franchises.
Franchises can come in different formats. They can be scaled based on the size of the territory, investment or
location. Generally, however, franchises offer a simplified management structure with few layers of management.
Franchise purchasers pay an initial franchise fee and in addition a monthly royalty is paid to the franchisor. This
royalty is generally used to finance such things as training and common marketing programs.
As a business, franchise operators must be able to earn the profit to pay for their expenses and living wage. This
fundamental principle of franchising has three important implications for the parent company and its franchises.
First, the franchise owner must begin with sufficient working capital to get the business off to a successful start. To
accommodate this requirement the initial franchise fee often includes in the initial inventory along with the
Second, the initial fee for a basic franchise can include: the required standard equipment, mandatory pre-opening
operations training, a copy of the Operations Manual, a start-up inventory of the product, shop front signs, initial
set of Grand Opening promotional materials, the standardized accounting system, cash flow to meet the expenses
for three months of the recommended staff complement based on size and type of franchise.
Not included in the Initial Fee are items that will constitute part of the Total Cost for a franchise start up such as
rent, renovations, fixtures, such as furniture, insurance, local business license and Franchisee’s salary for the first
two months. These costs are additional to the cost of the franchise.
Third, the literature advises franchisors to keep in mind that the more carefully a company chooses franchisees, the
less the franchise agreement will need onerous “weeding out” provisions.
Franchise owners should generally have the following characteristics.
They have good business skills
They are able to deal well with people in customer service atmosphere, including training people on
There is a prominent person who ‘knows’ them and will guarantee their suitability to own and operate a
They have the support of their family
They afford the franchise
They like the District Manager
They are good at marketing
They keep business and personal expenses separate
They have the math skills for financial operation
They have a track record of treating employees well
In the United States there is a federal regulation that prescribes the standard information that must be made
available with every franchise offering. The United States’ Uniform Franchise Offering Circular includes
information about the company offering the franchise, its stability and experience. It also presents some of the
major obligations involved with the franchise. These include trademarks, purchasing from designated sources,
territory, renewal and termination of the franchise agreement. In addition, financial information such as potential
the initial investment, financing, average, projected sales, and earnings must be provided. These aspects of the
franchise offering are designed to protect the potential purchaser of a franchise by ensuring that they have enough
information to make an informed decision before they buy a franchise.
Franchising has two potential uses in development. Franchises can be used in private sector development as a
business operation model. Franchises also can be used as a method of expanding a business oriented development
program and encouraging local ownership.
In development of the private sector, franchises can form a link between a microenterprise, business services
providers, training and microfinance. Specifically franchises have components that contribute to development in
the following areas.
Reaching the Poor
Franchises are an appropriate means of reaching the poor as long as the project will generate sufficient income to
sustain the worker/owner. Franchises can operate on the micro level of self-employment income through one-
person/one-franchise business. If the franchise is a small business and in some of the smaller and poor
communities, cooperatively owned franchises may work better where the owners can or need to maintain other
sources of income. Cooperative ownership could reduce the risk while the business builds, increase the marketing
and reduce the staff costs if the cooperative owners also work in the shop instead of hiring staff.
Institution and Capacity Development
Franchises are an excellent structure in which to build local capacity. It is in this area that a link can be
created between education development projects and private sector development including business services
providers and training.
Franchises are entrepreneur based and provide sufficient training and ongoing support to enable the franchisees to
succeed. If designed properly the training will be sufficient for a successful start up. Franchises will take advantage
of the local business skills in each community and build on them.
In the start up phase of the operation capacity is built through the provisions of proven, standard operations
manuals and accounting systems.
A second area of support could include a review of the accounting procedures used by the franchise to assist them
in better cash management and inventory control.
Ongoing support, including training and general support can assist the franchise holder in the expansion of their
Over the longer term local capacity is built through performance review and monitoring. The ongoing support is
the regular review of performance by the District Manager with each franchise. This can involve assistance and
recommendations about corrective action if the franchise is operating below target. Effectively these capacity
building features of franchises serve as an enterprise safety net. This safety net comes in the form of support
provided by the parent company to the franchisee. This support is much like an operational and financial audit
combined with coaching.
Another aspect of franchise support is that it can also include assistance in the addition of new lines and the
expansion of service into new areas to better meet the clients voiced or latent demands.
In order to pay the initial fee the franchisor sometimes provides direct financing to the franchise purchaser.
In other situations the franchisor has a banking relationship to whom it steers the franchisee or it can give
the franchisee a prepared a package that the franchise purchaser can present to a financial institution. This
package can facilitate the loan approval process. With the support of the capacity building feature these
micro and small businesses are a relatively safe risk for a financial institution. In some cases where the
parent company support is limited to initial education, group lending has been used to provide the basis for
capacity building when the franchise company is working with a microfinance institution.
In many cultures women make good candidates as franchisees because they already are involved in all types
of trading activity. In addition the empirical evidence that women are better at repaying loans would make
women owned franchises a good loan risk for a microfinance operation. By placing emphasis on the training
opportunities capacity of women’s business skills can make franchising an attractive business model for
In northern countries franchises have a much better record of success than other forms of enterprise. Normal small
businesses fail at a rate of 1:5 while franchises only fail at a rate of 1:10. The structure and support mechanisms of
a franchise system have yet to be proven in a development context but there should be no reason why a similar
track record cannot be achieved.
Expanding Development Program Reach
Development projects, but particularly private sector development projects, that build a business that is based on a
fee for service can use franchises as a means of expanding their reach while at the same time reviewing and
monitoring performance and building local capacity in affiliated locally owned and controlled operations.
Examples of these types of projects could include the following.
Microfinance operations where the sponsoring organization wants to expand the operations but needs to build local
capacity in order to properly manage risk.
Another example would be a Business Development Service. In this case the cost of operations could be keep
under control through the joint research and development of training materials and would allow trainers to hold a
franchise and provide a broader range of services to a wide area with little local infrastructure.
As has been tried in a number of situations agricultural supply and marketing might be better managed if it was
done through locally owned and controlled franchise cooperatives that had the performance review and monitoring
provided by a franchise system.
From this from this overview of franchising and the potential development opportunities that this business model
offers it can be concluded that franchising should receive more serious consideration as a development tool.