10 September 2020

Franchise with Friends

WHAT IF... you raised your impact and market share by scaling through franchisees?

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The emerging phenomenon of social enterprises is booming around the world, since it offers the opportunity to tackle a given social or environmental challenge in an economically sustainable manner. The model of the social enterprise is especially relevant in countries where neither the private nor public sector are well suited (or willing) to address such challenges. Contrary to what one might think however, in such contexts this model is not always a silver bullet. This is mainly because there is a lack of opportunities for the businesses to scale up and have a larger impact. In such cases, Social Franchising – when a social enterprise adopts a franchising model – can offer an innovative and viable solution for both well-established social enterprises and smaller emerging ones. Franchising is an arrangement between two parties in which one party (the franchisor) grants the other party (the franchisee) the right to use its trademark, trade-name and/or business systems & processes, in exchange for a one-time fee and a percentage of sales revenue as a form of royalty.

Turning challenges into opportunities

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Starting a business in the water, sanitation or waste sector can often proof to be very costly and resource-intensive– especially when dealing with complex infrastructure, expensive equipment and needing specialised sector knowledge and frameworks in place. Starting a business model from scratch in this sector can therefore seem overwhelming, since having the necessary resources and capacities in place is not always possible. This is especially the case in undeserved contexts where there is little state support and/or state incentives and where accessing the necessary knowledge, networks and capacities proves more challenging. All of these hurdles put together, can make it difficult for many to successfully develop and test a high-potential business idea in water, sanitation or waste and can even discourage promising social entrepreneurs to start their own business. On the other hand, already well-established social enterprises in the sector with successful business models that might be thinking of entering a new market by scaling up or scaling out, might lack key components for successfully running a branch in a new setting. Such components might include a lack of: 

1)  local network 

2) community support  

3) knowledge of the local market   

These companies might have identified a potential market, but don’t necessarily possess the right local networks or market and cultural knowledge to open a branch there. If they do not have enough resources to develop such capacities, this is an example where the Social Franchise strategy could come in useful.

Moving towards a strategy

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The Social Franchise strategy can best be adapted if an established business and a local entrepreneur find a meeting point that allows both parties to get what they want (or almost):  the local entrepreneur can successfully run a social business (with a proven business model) that will have a positive impact on his/her community and the established company can expand by replicating (fully or partly) their business model to increase its impact, revenues and extend to new markets. 

Whereas the main motivation behind Franchising is profit, Social Franchising is motivated by a social goal. The Social Sector Task Force of the International Franchise Association (IFA) has described social franchising as “the application of commercial franchising methods and concepts to achieve socially beneficial ends”. (Franchise Direct, 2019).

The Social Franchising  strategy recognises that there are many capable entrepreneurs out there with great solutions and ideas for tackling socio-environmental challenges, who risk going unnoticed as a result of unsupportive economic structures. The Strategy is also aware that many well established (even international) social enterprises might want to expand in different locations, but lack local knowledge of the market and culture. Franchising a big established social enterprise with smaller ones that share a similar social or environmental mission, can not only have a better and bigger impact on society, but can allow both entities to thrive (including financially). The strategy is essentially about replicating a successful social business model in a different context and doing so through franchising. This means that the responsibility of the new venture is mainly left to the local entrepreneur, who replicates your business model in the local market. This franchisee in turn receives the necessary support, incentives and capacities for running a successful business and does not have to take all risks related to developing a business model from scratch.  

 

It is important of course to carry out a pre-assessment of the potential franchisee and local market to know whether a replication of your business model and modus operandi would in fact yield the desired outcomes. It could be the case for example, that the franchisee might only benefit from replicating some elements of your business model.  To avoid misunderstandings and manage expectations on both sides, it is imperative to establish an agreement between franchiser and franchisee. This should typically cover the following core points:  

 

  1. Ownership, infrastructure and staffing of the franchisee: 

It must be clear to both parties from the outset, who is going to have ownership and who will be responsible of what. The agreement should include a description of the legal standing of the franchisee, any relevant license numbers, accreditations of service providers and expire dates. There should also be indication of the location where the service will be provided as well as the addresses the facilities. There should be a full description of the staff positions which will provide the service. It is also crucial that the agreement stipulates that the franchisee will inform the franchisor of any changes of ownership, location or category of staffing pertaining to the services provided under the terms of agreement.  

  1. The package of services that shall be provided by the franchisee:  

The agreement must include the list of services that the franchisee will provide  

  1. Brand and marketing:  

It should be specified under the terms of agreement how the franchisee will use the franchisor’s brand and marketing, including for what ends  

  1. Quality monitoring of services provided by franchisee:

It should also be established how the franchisee will meet brand requirements and quality standards and to what extent each party will be responsible of quality monitoring. This could include ensuring that the staff have the necessary skills to meet the brand standards or that the modalities for service provision are in line with the franchisor requirements.  

  1. Reporting: 

Frequency and contents of reports should be outlined as well as what training and support the franchisor will provide.  

  1. Limitations: 

Description of the limitations of both parties and description of the conditions under which the franchisee will use the brand name. It would be good to include an indemnity clause to protect the franchisor against liability or claim against malpractice coming from franchisee.  

  1. Duration/renewal/termination of agreement: 

Here the duration of the agreement should be described as well as the procedures for renewing or terminating agreement.  

  1. Financial arrangements: 

The financial agreements between both parties should be clearly outlined, including membership fees, grant funds management, financial reporting, subsidies etc.  

 

PROs and CONs 

There are of course pros and cons to this strategy and the right conditions need to be in place in order for it to yield positive results – both on the franchisor and the franchisee side.  

 

What are the potential benefits of the strategy? 

  • Increase and accelerate social impact 

  • By adopting this strategy, you are enabling local ownership of a business as well as job creation. This is more aligned to ethical and sustainable development goals.  

  • Central overhead services reduce costs / efforts for enterprises in different communities. 

  • Creating operational economies of scale through the replication and expansion of the business model 

  • Since suppliers will often not deal with new businesses (if their account isn't big enough for example) through the adoption of the social enterprise strategy, you are helping social impact ideas with high potential receive the support they need.  

  • Increasing brand awareness  

 

Things to consider before becoming a social franchise  

 

  • Before venturing yourself into social franchising it is crucial that you company has systematised its business model. This will allow the franchising agreement to work better and will make the overall experience for both parties a lot smoother.  

  • Make sure you have done your homework before committing and that you are confident that the new franchisee will be successful and uphold your company’s reputation 

  • Choose whether you would like to replicate your whole business model or just certain elements of it 

  • Have you checked that you have the right resources and capacities in place to expand through franchising, whether it is at a small or bigger scale?  

  • Decide whether the franchisee is (or could be) aligned to your company culture and interests  

  • What is the franchisee’s unique value proposition? Have you made sure that there is a demand for your service in the new market you are targeting through the franchisee? 

  • Understand the legal context you are working in: Depending on the country you are targeting as well as the one you are operating in, a lack of a legal framework for franchising can create tensions and put your company at risk  

Case Study 1

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There are many examples of successful Social Franchises around the world and there is a growing tendency to replicate successful business models or the business modus operandi in the charity sector through a franchising agreement. The London-based children’s health education charity Coram Life Education (CLE) is an excellent example of a well-established charity that has sought to extend its social impact by adopting a social franchising model. It has over 24 franchisees (most of them small charities) that reach around 800,000 children every year and teach them healthy eating habits and educate them on the health impact of drugs and alcohol. Potential franchisees will propose a business model to the CLE board and if accepted, a franchise agreement is made, in which the franchisee receives a template of CLE’s memorandum and articles of association as well as support on quality monitoring and fundraising. 

Library References

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