A franchise is a license that grants a party (the franchisee) the right to access a business’s (the franchisor) proprietary knowledge, processes, and trademarks. This arrangement allows the franchisee to sell products or provide services under the franchisor’s established brand name. In return, the franchisee typically pays the franchisor an initial startup fee and ongoing licensing fees.
Franchising occurs when a business seeks to expand its market share or geographical reach, thereby increasing its profitability. Acquiring a franchise provides access to the business or brand name, the system of doing business, the operations manual, marketing materials, trademarks, software, and all other proprietary materials essential for operating under a proven business model.
This comprehensive access equips the franchisee to deliver consistent products or services while leveraging the strength of the franchisor’s established brand. The advantages of acquiring a franchise include the opportunity to start a business with a well-established and nationally recognized brand. This significantly reduces advertising and marketing expenses. Additionally, franchisees benefit from the support of the franchisor, who offers business advice, training, and advertising resources to help ensure success.
Parties in a Franchise Business
Again, a franchise is a business arrangement where the franchisor allows the franchisee to operate a business using their brand, trademarks, products, and operational model in exchange for fees or royalties. In a franchise business, there are usually two primary parties, each with distinct roles and responsibilities.
The parties include:
1. The Franchisor
The franchisor is the original owner or developer of the business concept, brand, and operating system. The roles and responsibilities of a franchisor include the following:
- The franchisor retains ownership of the brand, trademarks, logos, and proprietary systems.
- They grant the franchisee the right to operate the business under the established brand and guidelines.
- They provide support which includes training, marketing strategies, operational guidelines, and ongoing business advice.
- The franchisor monitors and ensures that the franchisee adheres to the brand’s standards and operational procedures.
- They charge franchisees for the right to use the brand (franchise fees) and may also collect ongoing royalties or advertising contributions.
2. The Franchisee
The franchisee is an independent business owner who pays for the rights to operate under the franchisor’s brand and system. The roles and responsibilities of a franchisee include the following:
- The franchisee provides the capital to set up the business, including paying franchise fees, equipment costs, and other operational expenses.
- They are responsible for managing the day-to-day running of the franchise location(s), including hiring staff, managing operations, and ensuring customer satisfaction.
- They must comply with the franchisor’s operational guidelines, standards, and policies as outlined in the franchise agreement.
- The franchisee pays initial franchise fees, ongoing royalties, and contributions to marketing funds as specified in the agreement.
- While the franchisor may provide national or regional advertising, the franchisee is often responsible for local marketing efforts.
Understanding the roles of each party is essential for establishing a successful franchise relationship that benefits all stakeholders involved.
Procedure for Starting a Franchise Business in Nigeria
Starting a franchise business in Nigeria can be a lucrative way to expand a brand or business. Below is a guide to help you navigate the process of setting up a franchise in Nigeria:
1. Research the Franchise Market
Before starting a franchise business, we advise that you identify industries in which franchises are successful in Nigeria. Popular sectors include food and beverage, petroleum, retail, education, health, fitness, and automotive services.
You can also look for existing franchise brands that are expanding in Nigeria or international brands interested in entering the Nigerian market.
2. Have a Business Plan
After choosing the franchise you want to invest in, the next step is to create a comprehensive business plan for your venture. A business plan helps you estimate the startup costs, identify potential funding sources, determine the necessary equipment, outline staffing needs, and gather other relevant details. It also serves as a persuasive proposal for potential investors or financiers who may support your business.
A well-crafted business plan usually includes an executive summary, a detailed business overview, a market analysis, an assessment of competition, financial projections, and a specific funding request. It also provides an in-depth introduction to your company, outlining its mission, vision, history, product or service offerings, and legal and operational details.
3. Obtain the Required Permits and Licenses
To start a business or franchise in Nigeria, it is important to comply with various legal and regulatory requirements. First, the business must be registered with the Corporate Affairs Commission (CAC) under the Companies and Allied Matters Act, 2020, which mandates that all businesses operating in Nigeria be formally registered.
Under the Immigration Act 2015 and the NIPC Act, foreign business owners are required to register with the Nigeria Investment Promotion Commission (NIPC) and obtain a business permit. If employing expatriates, the company must also secure an Expatriate Quota.
For franchises, the franchise agreement must be registered with the National Office for Technology Acquisition and Promotion (NOTAP). This registration is mandatory under the NOTAP Act for agreements involving the transfer of technology, such as trademarks, patented inventions, technical expertise, engineering services, machinery, operational support, or staff training. It is also crucial to ensure compliance with the Federal Competition and Consumer Protection Act (FCCPA), which prohibits provisions that establish minimum resale prices for goods.
4. Tax Considerations
Additionally, companies intending to operate a franchise in Nigeria must adhere to Nigerian tax regulations, register for tax, and acquire a Tax Identification Number (TIN). Both the franchisor and franchisee are liable for various taxes, such as Value Added Tax (VAT), Corporate Income Tax, and Withholding Tax on royalties.
It is crucial to structure franchise agreements to maximize tax efficiency for both parties. Failing to secure the required permits or licenses may lead to fines and penalties imposed by the relevant government authorities.
5. Obtain Funding
Securing capital is crucial for the success of your business, especially when starting a franchise in Nigeria. Adequate funding ensures that your operations run smoothly and the business remains sustainable. As a business owner, you can explore several options for raising funds, such as using personal savings, seeking grants from government programs, or applying for loans through banks, provided you have a solid business plan and proper registration.
Additionally, you may attract investors by showing the profitability and growth potential of your franchise or gain financial support from family and friends who believe in your vision. Venture capital is also an option for businesses with significant growth potential.
6. Select a Location
You must carry out a demographics analysis to identify areas where your target market lives, works, or shops. Consider traffic patterns, accessibility, and proximity to competitors. Many franchisors have specific site requirements, such as store size, layout, and location. Ensure the site complies with your guidelines.
7. Sign a Franchise Agreement
Franchising is essentially a contractual relationship, and as such, the terms of the franchise agreement are governed by Nigerian Contract Law. A legally binding contract must exist between you and the franchisee that outlines the terms, conditions, rights, and responsibilities of both parties.
Ensure that the agreement is clear on the franchise fees (initial and ongoing), obligations, territory rights, duration of the agreement, conditions for renewal or termination, and support provided by the franchisor, which may include training, marketing, etc.
Conclusion
Franchising is becoming an increasingly popular business model in Nigeria which provides entrepreneurs with a way to grow their brand quickly without the substantial capital investment usually needed for expansion. This model enables faster market penetration while distributing operational responsibilities to franchisees.
However, franchising in Nigeria presents unique legal challenges. For one, the franchise industry can be competitive, and other brands may already be operating in your chosen location. Also, economic downturns, changes in consumer preferences, and inflation can affect your sales and profitability. Therefore, understanding local customs and consumer behaviors is key to maintaining customer loyalty and satisfaction.
To ensure compliance with Nigerian laws, it is important to consult a corporate and commercial legal expert to ensure that your franchise business complies with local regulations. At Resolution Law Firm, they can help you register your franchise business and conduct periodic audits to maintain adherence to both legal and operational standards. Schedule a consultation with them today for more insights on starting a franchise business.