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Why franchise in SA

Finding a job isn’t easy, especially for those people who do not have formal skills and work experience. This article will show you how to take charge of your life and create a better, brighter future for yourself.

The current situation

The notion of a “job for life” is fast disappearing. Even skilled workers are often hired on a project basis. They get short-term contracts which end the moment the project is completed. But although jobs may be scarce, there is no need to be discouraged!

The great motivator Dr Norman Vincent Peale once wrote, “A problem is a concentrated opportunity. The only people that I have ever known to have no problems are in the cemetery. Everybody who succeeded in a big way in life has done so by breaking problems apart.”

Opportunities exist

Today, South Africa offers more opportunities than ever before. Just think of the 2010 Soccer World Cup, the Gautrain and other major infrastructure projects. They are happening, and you need not be in the construction industry to benefit. Long before the soccer fans arrive, workers and managers employed on these projects need to be housed, clothed, fed and entertained. What an opportunity, but to score big, you need to start your own business.

Sadly, few South Africans see starting a business as a career option. In 2005, an entrepreneurship survey conducted by the Global Entrepreneurship Monitor ranked South Africa 25th out of a total of 35 participating countries. In 2004, South Africa was in 20th position. Instead of going forward, we are falling further behind and this needs to change!

Take charge of your life!

If you start your own business and get it right, the sky is the limit. You decide how things should be done, and you benefit directly from your hard work. Best of all, you build up an asset that can be passed on to your children or sold to help you retire comfortably.

There has never been a better time to start a business than right now. Government goes out of its way to promote entrepreneurship and at least one major bank is doing its bit as well. Modern-day bankers look at the quality of the business plan and the ability of the entrepreneur to see the project through rather than at collateral.

This notwithstanding, starting a business remains a risky proposition and many small businesses fail. In most cases, their owners are technically competent and hard working. They lack financial skills and find it hard to comply with statutory obligations. They also don’t market their businesses properly. This is where franchising can help.

Franchising to the rescue

Although franchising is well established in South Africa and highly successful, it is not always well understood. Simply put, the person who has developed a franchise is called the franchisor. Those who own and operate branches under the franchisor’s brand are franchisees.

As a franchisee, you will find it much easier to get started. You benefit from the network’s brand name and have access to tested systems. You receive initial and ongoing support services, benefit from the network’s marketing drives and participate in bulk purchasing programmes.

As a franchisee, you are in business for yourself but not by yourself! However, all franchises are not the same. Also, becoming a franchisee is not right for everyone. Before you move in this direction, you need to understand how franchising works and what the possible pitfalls are. Only then are you ready to start investigating opportunities.

What makes a franchise an attractive option?

What is a franchise?

A franchise is a blueprint to business success. It is based on the fact that an entrepreneur has built up a business from scratch. He or she has worked hard to turn it into the best business of its kind in the area. The business is now doing well and the entrepreneur is ready to set up branches.

Instead of hiring managers to set up and operate the branches, the entrepreneur decides to set up a franchised network. As the franchisor, he or she offers others – their future franchisees – a chance to operate their own businesses under a common brand.

Why go the franchise route?

Franchisors like franchising because franchisees invest their own money and take responsibility for the management of the businesses they own. They are highly motivated and willing to work hard. This usually means that the business will be managed well. It also means that the franchisor can grow the business much faster than would otherwise be possible.

Franchisees like franchising because starting a business from scratch is a risky proposition. Independent operators need to register a company, find a site and fit it out. They must negotiate with suppliers and accomplish lots of other things they may have little experience in. Even hiring staff is full of pitfalls nowadays.

By contrast, a franchisee can draw on the franchisor’s experience. Access to better pricing is an extra bonus. Most importantly, the franchisee trades under an established brand. He or she also enjoys access to a big-company infrastructure.

Obligations of the parties

With rights come obligations, and in a well-structured franchise, this works both ways!

Franchisors must have a profitable business concept. Without it, there can be no franchise. They also need to select their future franchisees with care and teach them well. Help with site selection and the setting up of the business form part of a franchisor’s initial obligations.

On an ongoing basis, the franchisor will develop new products, promote the brand and negotiate bulk deals with suppliers. Beyond that, he or she will generally help franchisees to make their businesses more profitable. Why? Because the franchisor’s ongoing financial success depends on it.

Franchisees are expected to provide the capital needed to establish the business. To succeed, they must have the right personality and background. Above all, they must be willing to operate as part of a team. After all, the secret of franchising’s success lies in the exact duplication of a proven concept. It follows that although the franchisee owns the business, he or she must adhere to certain rules. This minimises the franchisee’s business risk but not everyone is happy to do that.

Financial aspects

A franchisee’s financial obligations fall into two distinct groupings, namely initial and ongoing.

Initial financial obligations include the upfront fee, business set-up costs and the provision of operating capital. Projections need to include the franchisee’s living expenses.

Ongoing financial obligations include the payment of a management services fee and contributions to the network’s marketing fund. These obligations are over and above normal financial obligations, like paying salaries, rentals and suppliers’ bills.

Am I really cut out for entrepreneurship?

It sounds great to say “I am an entrepreneur” but what does it take to become one? Of course, you need to understand the technical aspects of the business and be willing to work hard, but this is not enough. Many entrepreneurs are good at their job and hard workers, yet their businesses barely make the rent. Why is this?

As a business owner, you have to take on extra responsibilities. Let’s say you are a carpenter and you want to start a carpentry business. Being the best carpenter in the district will not make the business successful. As the boss, you need to prepare quotes, purchase raw materials, plan production, supervise staff, look after the administration side of the business and deal with statutory compliance issues.

Most importantly, you need to watch your cash flow. Many entrepreneurs get themselves into trouble not because sales are low but because they run out of cash. You need to be aware of what needs to be done on a daily, weekly, monthly and annual basis to make sure that the business operates efficiently.

It is up to you to decide which tasks you want to handle personally, and which you want to delegate. But while you can delegate some of the work, as the owner of the business you can never abdicate responsibility. Therefore, a solid grasp of basic business management skills, especially in the areas of planning, finance and human resources, is important.

Having passion for the business is important. Without it, operating the business will soon become a grind. But if you have passion for what you do, you will never have to work another day in your life!

One more thing: If you have family, make sure they are behind you 100%. Even if they don’t work in the business, they need to understand what you plan to do and support you, or else your life will be very difficult. If you think about these things in advance and sort them out before you move ahead, starting a business will be the most exciting thing you have ever done. And the rewards can be great, both financially and in terms of job satisfaction. Franchising has created many multi-millionaires, perhaps you are the next one in line?

Becoming a franchisee

If you join a franchise, the basics remain the same. As the boss, you are responsible for the overall success of the business. The big difference is that you operate under a known brand and use tried and tested systems and procedures. And because you receive initial training and ongoing support from the franchisor, you will make fewer mistakes.

Best of all, your customers recognise the brand and will trust you from day one to deliver quality goods or services. You also benefit from the network’s advertising campaigns and have access to bulk purchasing arrangements. In effect, you have access to big-company resources but any profits you make are yours to keep.

So what’s the catch? Frankly, there isn’t one, unless of course being a franchisee doesn’t suit your personality. Franchising works; in South Africa alone there are about 25 000 franchisees who bear witness to this. Most of them are happy with their business decision. They know and accept that as franchisees, they have to comply with the network’s rules and regulations. So, if you are a person who wants to do everything your own way, you won’t be happy as a franchisee.

To be successful as a franchisee, you must be team player, hungry for success and excellence-driven. If this is you then checking out franchising could be the best move you could ever make.

What are the financial and legal implications?

Why pay franchise fees?

Henry Ford said: “Learn all you can from others. The school of experience takes so long that its graduates are too old to go to work.”

This is the essence of franchising. You learn the tricks of the trade from the franchisor. The franchisor has developed the concept, done market research, tested everything and now offers you an opportunity to operate your own business under the network’s brand. The franchisor even provides initial and ongoing support as well as access to a large company infrastructure. Although there are no guarantees, franchise fees are an investment in the success of your business.

When you consider investing in a franchise, you can expect to come across the following financial obligations.

Initial investment

Upfront fee - This is a lump sum payable at the beginning of the franchise relationship. It provides you with access to the franchisee’s brand, know-how and initial support. Examples are initial training, help with setting up the business and getting it ready for trading.
Set-up costs - Many newcomers fail to understand that the upfront fee is a joining fee and does not pay for the setting up of the business. Depending on the nature of the business, you will have to pay for equipment, fittings, vehicles and opening stock.
Working capital - You need to fund operational costs and your own living expenses until the business’s cash flow becomes adequate.

Ongoing financial obligations

In exchange for providing ongoing support, franchisors are entitled to a fee. This fee is known as management services fee. It is usually calculated as a percentage of the franchisee’s net sales and payable monthly. Because the fee is linked to the franchisee’s sales, it motivates the franchisor to offer support of the highest standard.

Most franchisors also charge an advertising or marketing levy. This levy is paid into the network’s marketing fund and pays for product advertising. Because franchisees’ contributions are pooled, brand building initiatives become more effective.

Raising finance

Because the success of a franchised business is easier predict than that of an independent operator, banks are happy to finance viable franchise deals. Most of the normal banking criteria continue to apply, however, and we will deal with this in a future article.

Legal implications

The agreement between the franchisor and the franchisee is known as the franchise agreement. It tends to be a substantial document that reflects the rights and obligations of both parties. To ensure control over the brand remains with the franchisor, the franchise agreement will be weighted in the franchisor’s favour. This is necessary and you have to live with it or a franchise is not for you.

A typical franchise agreement remains in force for between five and ten years. It usually contains a clause in favour of the franchisee to extend the agreement for a similar period. Granting this extension will be linked to the fulfilment of certain conditions, for example that you undertake a revamp of the store.

Although a franchise agreement is usually not negotiable, you need to understand it fully before you sign it. Ask the franchisor representative to explain every clause then consult with an attorney who has experience in this field. The attorney will alert you to unusually onerous conditions.

Which franchise is the best to invest in?

People often ask us, ”Which franchise is the best?” There is no straightforward answer to this question. A franchise is like a marriage. Individuals have different needs and aspirations, and a profile of an ideal marriage partner that would make everyone happy does not exist.

When asked what industry sector they are interested in, most prospective franchisees say: ”I don’t care what I have to do as long as I can make lots of money doing it.” This sounds great in theory, but in practice it seldom works. Operating a small business requires absolute dedication and plenty of hard work. Unless you have a passion for what you do, you are unlikely to stay on track.

This is confirmed by a study carried out in the United Kingdom some time ago. The researchers tracked the fortunes of a number of new entrepreneurs. At the outset, the entrepreneurs were asked to answer a series of multiple-choice questions, including: ”What motivated you to start a business?” Respondents could choose between “making lots of money” and “passion for the business”. Two years down the line, the vast majority of those who had been motivated by “making lots of money” had failed. Those who were motivated by passion were generally doing very well financially. Passion is infectious; it made them excel and making money almost became a by-product.

Fortunately, franchising covers many different industry sectors. Your chances of finding the right opportunity are great, but this requires realism and patience.

Why realism? - Because there is no point to chasing after an unattainable dream. Focus on opportunities that suit your interests, abilities and personal preferences. You must also be able to support the investment.
Why patience? - Because finding the ideal match will take time and effort. Keeping with the marriage theme, you will have to go on a lot of “blind dates” before you find the ideal partner.

How do I locate suitable opportunities?

That’s the easy part because they are literally all around you.

Many of the businesses you deal with daily are franchises. Talk to some of the franchisees and you may find an opportunity that interests you.
Search the Internet; www.whichfranchise.co.za is an excellent starting point. It is the most comprehensive database of franchise opportunities available and provides contact details.
Newspapers and magazines that focus on the small business sector usually carry franchise adverts. But be careful not to be taken in by unrealistic promises. As a rule, stay clear of adverts that promise excessive returns within a short time and in exchange for very little effort. This cannot be done!
Visit the International Franchise Exposition (IFE). It is presented annually, usually at the beginning of May.

How do I make the initial selection?

Don’t waste your time contacting hundreds of franchisors. It makes more sense to select a manageable number of opportunities that really interest you and request information packs.

Monitor the responses you receive. If a franchisor is slow to reply, or the information you receive is skimpy and/or less than professionally presented, remove the company from your list.
After studying the information you receive, rank opportunities in the order in which they interest you and contact the first franchisor.

How do I approach the franchisor?

Preparations

Let us assume that, after receiving several franchisors’ information packs and studying them carefully, you have identified one opportunity that just feels right. Let us further assume that after completing the franchisor’s questionnaire, you receive a call from the franchise manager inviting you to a discussion at head office.

Congratulations, you have passed the first hurdle! Franchisors – those worth dealing with, at any rate – are naturally choosy when it comes to the selection of their franchisees. Many applications are discarded after the initial questionnaire has been received. It follows that you have made a favourable first impression. At this stage, the onus is on you to keep it that way.

That’s right! During the first meeting, you need to sell yourself to the franchisor.

This means that you should find out as much as you can about the franchisor company, its standing in the target market and its potential. You should also establish in your own mind why you think that you are the right person to help expand the brand.

If this sounds almost like preparing for a job interview, you are not too far off the mark. No need to worry, though: your turn to check out the franchisor will come sooner than you think.

During the interview

We are not suggesting for a moment that you should be subservient during the interview. Both you and the franchisor are evaluating a potential business partner. Coming across as being too timid could work against you just as much as being perceived as an arrogant know-it-all. Just be yourself, and answer questions openly and truthfully. Use gaps in the conversation to explain your vision for the business and to outline your relevant strengths.

As the interview progresses, you can shift gear slightly and begin to ask probing questions about the business opportunity. You can find guidelines for the formulation of these questions on various websites, including www.whichfranchise.co.za.

Follow-up

At the end of the meeting, ask for permission to visit some of the network’s established franchisees. Observing them in action, and asking them pertinent questions, will help you decide whether you want to investigate this opportunity further. If everything pans out as expected, ask the franchisor for a copy of the network’s disclosure document. This will provide you (and your professional advisors) with the information you need to make an informed decision. At this point, expect to be asked to sign a confidentiality undertaking. Sign it, provided that it does not require anything except that you respect the confidentiality of the information you are about to receive.

This is also the right time to ask permission to work in one of the franchisor’s own stores for a few days, perhaps during weekends. It will give you and the franchisor an opportunity to check each other out. It will also reassure you that this is really what you want to do for a very long time to come.

Well done, you have identified your dream opportunity! As far as you are concerned, this is it, and the franchisor’s team appears to feel the same way. However, one small problem remains: you don’t have enough money to pull it off. No need to worry, that’s what banks are for.

However, not all banks are created equal; some are more receptive to requests for franchise-funding than others. The way you present your funding request is also important. You will read more about this in the next article.

Will I be able to secure finance?

The right approach

The first thing you need to know about raising finance is that financiers are looking for a professional approach. Begging for money will not get you anywhere. Funders want to know that:

1. Your project is realistic. You cannot expect to raise funding for a R3 million enterprise if you can only invest R10 000.

2. You have a plan for your business, complete with realistic financial projections.

3. You have what it takes to bring this plan to fruition.

We cannot give guidelines on how to draft a business plan. Some banks, including Absa, provide templates and your franchisor’s accountant will no doubt offer to help. It is important, however, that you stay involved. If the banker you approach can see that you understand the franchise proposition and its financial implications, he or she will be far more comfortable to lend you the money.

Forms of finance

Finance comes in different forms:

Equity funding, which is money supplied by the business’s owners.
Short term loans, which are usually provided in the form of an overdraft. Credit offered by suppliers is also a form of short-term finance.
Medium-term loans, usually granted for periods of up to 5 years.
Long-term loans, granted for up to 20 years or more.

As a prospective franchisee, you will probably need to secure a medium-term loan to finance the purchase of equipment, shopfittings and vehicles, as well as an overdraft to fund working capital needs.

The banker will look at your overall funding needs. He or she will typically expect you to contribute a minimum of 30% of the funding, with good reason. By having built up some savings, you show that you know how to handle money responsibly. Your contribution also ensures your commitment to the business. Another factor is that if a business is funded 100% from loan capital, repayments will strangle cash flow – often with disastrous results.

One way around this is to take on a partner who can invest money in the business. The problem is that unless you and your partner get on well and have complementary skills, the partnership could quickly become a burden.

Another alternative is to obtain a “soft loan”. This is an amount that members of your family or friends put together to set you up in business. It’s called a “soft loan” because there is no fixed repayment period and no obligation to pay interest at regular intervals. Those who lend you the money must understand that, should the business fail, they may not have a valid claim and could lose their full investment.

Sources of finance

Most franchise funding comes from commercial banks, but some banks are more inclined to grant funding for franchise start-ups than others. An example of a bank that maintains a dedicated department for franchise finance is Absa. If you want to discuss franchise funding with them, approach the small business advisor at your local Absa branch. He or she will assess you plan and, if it is viable, refer you to Absa Franchising.

Conclusion

The more you know about the franchise you want to invest in, and its financial aspects, the better your chances to obtain the loan. Your ability to offer surety remains an issue, but the value of the items you purchase can serve as part-collateral. Forward-looking bankers are less interested in an applicant’s ability to provide surety than in his or her potential to make a success of the business. Khula also offers loan guarantees, so there is no need to give up too easily.

What is life as a franchisee really like?

Starting a business is a big step, but as a franchisee you will find it easier. This is because you become part of an established network, operate under a known brand and gain access to group benefits. This article explains what you can expect from life as a franchisee.

Initial assistance

As soon as you have signed the franchise agreement, the franchisor’s support infrastructure will kick in.

The franchisor will help you with site selection and lease negotiations.
Your training is likely to consist of classroom sessions, followed by a period of hands-on training at one of the franchisor’s own stores. We advise you to make the best of this period by learning all there is to know about operations. And if you don’t understand something, ask for clarification. Remember that there is no such thing as a stupid question.
The franchisor’s project team will make sure that your store is ready for the grand opening. In consul-tation with you, and subject to need, the project team will:
At least one member of the project team will help you to prepare for the store opening, and this person is likely to stay with you until initial hitches have been sorted out.

Specify equipment, shopfittings and stock.
Monitor progress on site to ensure that everything conforms to tried and tested specifications.
Recruit your initial staff complement and train them to network standards.

We advise you to let the project team get on with the job – they have done it many times before and know what they are doing.

Ongoing assistance

It is the hallmark of a business format franchise that the franchisor’s involve-ment does not end once your business is up and running. Support continues; that’s what you pay ongoing fees for.

Ongoing franchisee support usually consists of same or all of the following:

Troubleshooting hotline. Should you encounter a technical problem, there is always someone on the other end of a telephone line to help you.
Joint purchasing and marketing initiatives. Unlike your independent competitors, you have access to bulk deals no matter how small your initial orders may be. It’s the same with advertising: by combining advertising contributions from all franchisees, your franchisor accumulates a sizable promotional fund.
On-site visits. You can look forward to periodic visits from a field service consultant (FSC). Some people see the FSC as the franchisor’s enforcer, but this is short-sighted.
Interaction with the franchisor and other franchisees. You have access to experts at head-office level, and can exchange ideas with fellow franchisees. This makes life significantly easier.
Crisis intervention. Serious problems can occur; for example, you could become ill. In this event, the network will appoint an interim manager to keep the business afloat until the situation has been resolved. It will cost you, but at least the business won’t have to close its doors.

It is true that the FSC exercises quality control, but this is in your own best interest. If your store looks grotty, or the service your team delivers is sub-standard, your business will suffer. The FSC draws your attention to things you may have overlooked, and you should be grateful for that.
The FSC will review your business’s performance with you. This, too, is in your interest, because the FSC can tell you where you deviate from the norm. This helps you to identify leaks and plug them before too much damage has been done.
The FSC will assist you in setting strategy and forward-planning. In real life, most owners of small businesses are far too busy to plan ahead. They wake up one morning and find to their dismay that they have lost touch with the realities of the marketplace. Your network has a system in place that prepares you for anything that lies ahead.

The need for conformity

It is in the nature of the franchise system that every member of a network must adhere to a strict set of rules. Does this mean that you have to act like a mindless zombie? Not at all!

If you discover a better way to do something, talk it over with your FSC. He or she will take your idea back to head office, where it will be tested. Subject to merit, it may be introduced throughout the net-work, and you will be recognised as the initiator of the idea. You may even become Franchisee of the Year.

Conclusion

As a franchisee, you are in business for yourself but not by yourself. To get the best out of the relationship, you need to participate enthusiastically in every programme the franchisor offers – for mutual benefit. This is what being a franchisee is about. Does this sound like you? Then start saving for the down payment! Joining the franchise of your choice could be the best investment you will ever make.

To find out more about franchising, visit www.whichfranchise.co.za. For information about franchise finance, email FNB on franchising@fnbcommercial.co.za or click here to visit the FNB website

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