Are you planning to franchise your business in South Africa? Many owners of successful (and even some of not so successful) businesses ask themselves a series of questions along the following lines:

• Is the business "franchiseable"? If the answer appears to be “yes”, they ask:
  • what are the advantages of taking this step?
  • what are the disadvantages of taking this step?
• What does the typical franchise package consist of?
• Is assistance by professionals essential?

Let us look at these issues one by one.

Is the business "franchiseable"?

Franchising your business can be a very successful way of expanding your business, provided that you have a business to begin with. Many of today's well-known brands have used franchising to accelerate the growth of their existing businesses, building national or even world brands in the process. However, franchising should never be seen as a testing ground for a brand new (and unproven) business idea but as a means of expanding an already successful business.

Not all businesses are suitable for expansion through franchising but over time, most business concepts can be turned into franchiseable entities. This requires the presence of the following characteristics:

• Credibility

The concept needs to be proven:

• The company must have a good track record and an experienced management team.
• The brand should be memorable, registered and capable of being expanded into different parts of the country, eventually perhaps even into other countries. (Given South Africa’s diverse cultures and many official languages, the wording contained in a brand could be offensive to some sections of the population. This needs to be checked out early on.)
• Ideally, the company should have enjoyed some good local press and/or other forms of public acclaim.
• Profitability

To franchise a business is not, and can never be, a means of funding a new business, or rescuing a business that is in trouble. For a business to be franchiseable, it needs to offer more than mere potential. It needs to have a proven record of success and generate adequate gross margins to allow franchisees to make money after they have paid their franchise fees.

• Aspect of uniqueness

The business to be franchised needs to have a unique selling point that will allow it to differentiate its products or services from those of its competitors. This sustainable competitive advantage would allow it to compete successfully in its markets nationally, with possible potential to eventually expand internationally.

• Robust demand pattern

The mere fact that a business located at an upmarket shopping centre is selling big ticket items to a well-heeled clientele does not necessarily mean that it can be franchised successfully. The franchisor needs to ensure that demand exists in different areas, and that the product has staying power. Fads do not form a sound base for franchising.

• Highly developed set of skills

The business needs to have a set of systems, procedures, expertise, skills and know-how that optimises every operational step.

• To ensure consistency of delivery throughout the network and brand integrity, and to
• enhance franchisees’ ability to maximise profitability, this know-how needs to be carefully documented. This will facilitate skills transfer, more often than not to individuals with no prior experience in the industry sector.

This, in a nutshell, is the purpose of the operations and procedures manual.

• Portability of skills

In itself, the availability of a carefully developed set of skills is insufficient. It must be possible to train prospective franchisees lacking experience in the sector within a reasonable period. This is important because to permit new franchisees to operate a business under the network’s brand before they are adequately trained would be a recipe for disaster.

Practical considerations dictate that franchisees cannot afford to spend long periods in training. Most franchisors recognise this and aim to train their franchisees within three months or less. However, there are exceptions. This needs to be considered when working out the total cost of the franchise the prospect incurs (which needs to include the lack of income during training.)

• Support infrastructure must be in place

The franchisor must provide intensive initial and ongoing support to franchisees. This requires manpower, facilities, a veritable set of skills and absolute dedication to the creation of win/win outcomes.

• The franchise opportunity must be affordable

There is no point creating an outstanding opportunity if the target audience cannot afford the investment.

• Franchising is a numbers game, meaning that unless at least 25 to 50 units can be set up over a period, the network is unlikely to succeed.
• Investors with deep pockets are rarely willing to work behind the counter of the store. This means that the unit will be manager-operated, with all the problems this move entails. This route is not recommended.

What are the disadvantages?

• The initial costs involved

You need to be realistic in assessing the cost of establishing a franchised network against the time it will take for you to see a return on your investment. Ask yourself:

• can I afford it?
• do I have the foresight and patience to wait for returns?
• A certain degree of loss of control

Usually, when you own it, you control it! In franchising, this credo applies to a certain extent, but there are limits.

• The franchisee owns the business unit and will expect to have a say in the way it operates. It is here that the operations and procedures manual comes into play. As long as the franchisee adheres to the systems as set out in the manual, it will be almost as if you were to manage the franchise centrally.
• The franchisor needs to remember that each franchisee is a business owner in his or her own right and respect that. A franchisee cannot simply be fired, however, it is the franchisor’s responsibility to monitor the franchisee’s activities closely, identify areas of poor performance and insist that they are rectified.
• Close cooperation between franchisor and franchisees, supported by an excellent communications infrastructure, are essential.
• Franchisees need to operate in the interest of the brand, and meet monthly targets. Failure of just one franchisee can impact negatively on the network as a whole.
• The franchisor needs to protect the network from past franchisees who may try to replicate the concept for their own benefit, thereby taking business away from other members of the network.
• Franchisee selection

New franchisors may be tempted to recruit franchisees on the basis of them being able to come up with the investment. This is understandable, but it can have disastrous consequences for the network. Admitting the wrong people can damage the foundations of the network and eventually lead to its failure. The franchisor needs to develop a franchisee profile and invest time and money in recruiting the right people.

• Managing growth

Having a large franchise network can be a nice position to be in, but the franchisor needs to put the necessary infrastructure in place to adequately serve the needs of the network’s franchisees. It is better for the division responsible for franchisee support to be over-staffed at times, as this makes it possible to react to any problems that may arise from old and new franchisees. Unless franchisees receive the necessary support, they may find it difficult to achieve their aims and the brand’s reputation could suffer. This requires a culture change. Quite simply, a successful franchise organisation needs to be support-oriented.

• Handling conflict

Conflicts between franchisees and the franchisor are the biggest negative in franchising. On occasion, this leads to legal proceedings, although this would be the worst-case scenario. When franchisees are making money, they are usually happy, if not, they blame the franchisor. They will make allegations along the lines of over-promising but under-delivering, lack of support, inadequate training, territorial problems, misrepresentation and even fraud. Even if these allegations are unjustified, once they have been made, trust tends to go out the window. Frequent communication, enthusiastic practical support, thorough market research and a comprehensive operations and procedures manual can help to prevent problems of this nature from arising.

What does the typical franchise package consist of?

The franchise package is the sum total of the intellectual property and practical assistance the franchisor provides to franchisees. It can be categorised as follows:

• Access to the franchisor’s intellectual property

This includes the right to use the network’s brand, logo and corporate image as well as access to operational know-how. The latter is usually documented in the network’s operations and procedures manual.

• Assistance during the pre-opening phase

Depending on the nature of the business, the franchisor is expected to assist franchisees in the following ways:

• Drafting of a business plan and help with obtaining finance.
• Site selection advice and assistance with lease negotiations.
• Specifications for the fitting-out of the unit.
• Access to preferential sources of supply.
• Initial training of the franchisee, plus possibly key staff, in all facets of operating the business successfully.
• Advice regarding the composition and quantity of initial trading stock.
• Help with the recruitment and training of staff.
• Supply of a comprehensive system for the administration and control of the business, plus training in its use.
• Extensive ongoing operational support
• Access to a troubleshooting hotline.
• Regular visits by competent franchisor personnel.
• Access to local, regional and national meetings arranged by the franchisor and designed to drive the business forward.
• Access to group purchasing schemes.
• Spin-off from network-wide marketing drives and support with local marketing initiatives.
• Market research and product development.
• Development and testing of new products, systems and equipment.
• Assistance with staff recruitment, motivation and control.
• Guidance in terms of statutory obligations.
• Franchisee motivation and control
• Assistance with goal setting and periodic updating of the business plan.
• Regular review of business performance, linked to confidential feedback on deviations from group norms – advice regarding possible improvements.
• Periodic auditing of franchisee’s operation.
• One-on-one counselling sessions.
• Motivational meetings.
• Franchisee awards.
• Lifestyle enhancement issues.

Is assistance by professionals essential?

Generally, the answer must be a resounding ”yes”. Seeking input from qualified outsiders will bring an extra perspective to the business to be franchised and help the prospective franchisor understand the intricacies of this step. Initially, the consultant will help the franchisor to decide whether franchising is right for the business and its culture. If so, he or she will advise on developing the franchise package. Several professions can become involved, most often a franchise consultant, an accountant and a lawyer.

Franchise consultant

Generally, the services offered by franchise consultants include:

• Help with the feasibility study.
• Help with the franchise plan, essentially a document not unlike a business plan but with the focus firmly on the development of the franchise.
• Guidance for the creation of a professionally compiled franchise package (in this order):
  • the drafting of the operations and procedures manual
  • the drafting of the disclosure document
  • the creation of a brief to enable a qualified attorney to prepare the franchise agreement
• Advice on access to funding sources, both to fund the franchisor’s operation and to create a funding mechanism for future franchisees.

Prospective franchisors should look for a meeting of minds between the consultant and the company. Ideally, the consultant should be:

• a member of FASA and prepared to conduct the work in accordance with FASA’s Code of Ethics and Business Practices
• prepared to offer the franchisor an initial short assessment without cost or obligation
• able to provide references from previous clients, preferably within the same or a similar sector
• willing to give an estimate of costs involved, linked to performance criteria including progress markers and points of disengagement.

To ask a franchise consultant a question, click here

Franchising Plus is one such innovative consultancy, continuously developing new products for the sector and actively researching trends in franchising.

Franchising Plus has over 40 years' combined experience in the franchising sector and experience in the launching of franchised brands. Clients gain credibility with financial institutions and potential franchisees if using the firm’s services. Franchising Plus is committed to follow through and will assist with implementation of projects. The firm has a high visibility in the franchising sector through our publications and FASA board membership

Accountant

Perhaps the franchisor’s own accountant is able to help with creating the financials needed to plan the franchise – up to a point:

• Unless the accountant has proven expertise in franchising, he/she should limit his/her involvement to supplying financial information pertaining to the core unit, then hand over to a professional with franchise expertise. Alternatively, the consultant will be able to assist.
• The important point is that as part of this exercise, projections showing what franchisees’ financial performance will be like over time, and whether they can afford to pay franchise fees and still make a profit, needs to be compiled.
• These projections need to take the prospective franchisor’s projected costs of providing franchisee support into account. Unless the franchisor can make money from franchising, the business is not franchiseable. (An exception would be a business where the franchisor is the supplier of a key product. However, relying on this alone could create problems with the Competition Board).

Click here to access a competent advisor

For a summary of the steps involved in creating a franchise network, click here.

Attorneys

The franchisor and every prospective franchisee must take competent legal advice. Contrary to what some inexperienced prospective franchisors might think, an effective franchise agreement cannot be compiled in-house, and no, copying another network’s franchise agreement won’t do either. Precisely because South Africa does not have a body of laws that governs franchising, it is vital that the attorney you consult has experience in these matters. Click here to get in touch with a competent attorney.