Microfranchise · Social Business

MicroFranchising — Another Income Generating Tool?

One interesting (at least to me) emerging idea for defeating poverty is to make it easier for a poor person to start a very small (micro) business.

Does microfinance have a limited market? Some of the critics of microfinance have argued that most humans (including the poor) don’t have what it takes to be an entrepreneur who can successfully start a business from scratch and then continue to grow it. The critics have pointed out how so many of the poor who take microcredit loans are starting copycat microbusinesses with low profit margins and therefore questionable sustainability. The advocates of microfinance recognize this as one of the results of a free market system where you have a bell curve of success — some are very successful, most are moderately successful and some fail. All this said, mechanisms, systems and approaches which increase the likelihood of success for a business entrepreneur are welcomed by all.

Kirk Magleby, a defeating poverty activist, has done substantial research into a way to “lower the bar” — making it easier — for the motivated poor to generate more income. He refers to this as MicroFranchising. Think about how the ubiquitous Subway franchises have sprouted up so quickly across North America … and then downsize this to the size of a stall or a very small storefront and you’ll get the idea of the “micro” version of franchising.

The reason that franchises can spread so rapidly is that the purchaser of the franchise is buying a well-proven system for setup and operating a business so they have to invent less themselves. They simply go to the training course, read the manual, pay the start-up fee, find their location and then setup the store/stall according to the manual. And, presto, they’re in business. Yes, they often have to buy products and supplies from the franchise owner (single source supplier) and they also pay them a percentage of your gross sales. But often this is a worthwhile trade as the franchisee has instant brand recognition, an operating business and many other risk factors are reduced as they follow the system and services provided by the franchise owner.

So, the idea is to “encourage” both national and international established corporations to more aggressively downsize their franchising model to enable a motivated poor person to run a microfranchise. If a franchise model is micro-sizable to a minimally educated poor entrepreneur, then the large companies should be expected to rapidly adopt this model as a lucrative new sales channel.

How would the poor person pay the upfront costs to setup the business, buying inventory, etc? Often the franchising company will over finance the setup and working capital as it is a highly profitably business for them beyond just the financing. The other most promising financing source is local microfinance institutions (MFIs.) MFIs should be very willing to finance these type of operations for their quality clients as these type of businesses have much less risk than financing a similar completely independent business. This is why I view microfranchising and microfinance to be highly complementary services.

Magleby identifies a vast number of potential microfranchising businesses including almost anything that is purchased by consumers and businesses. One example where microfranchising has been successful to date is for mobile (cell) phone franchising. Here is one Vodafone example in South Africa which Magleby references.

Further reading on Magleby’s ideas:

Please post comments on this idea and any other examples of microfranchise attempts — both positive and negative.

Update: Here’s a new blog on Microfranchising

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