- How to Franchise – Step by Step Guide/
Am I suited to going into business for myself?
The debate about whether you need to be an entrepreneur to become a franchisee or not, has raged in academic circles for some time now. Does a new Franchise need an Entrepreneur to make it successful, or has franchising become less needy of entrepreneurial spirit? Read more…
Setting up a business is a risk although franchising should minimise it you must be aware that things can go wrong and whatever you invest could be in danger and if you borrow money you may well be left with debts to repay.
You therefore need to be very comfortable with how much you invest of your own money and how much you borrow.
Although buying a franchise in South Africa is not an easy way to owning your own business, in some cases it is a lot easier than starting from scratch. For a start you can see your potential business in operation before you invest a penny.
You will be starting your business using someone else’s know-how and expertise gained over the years of running a mirror image business and on top of it you don’t have to worry about developing the system.
It’s a question of matching the skills and type of experience required to run a franchise with what you like doing, and are good at.
In many cases it’s worth remembering that franchising can allow you to work in an industry where you’ve had no previous experience. So broadly it’s the type of work that you need to identify.
Once you have found the type of work that suits you best, you can then select the franchise type that suits you.
What type of experience do you have? – Identify the skills you have developed over the years in order to ensure the franchise opportunity you choose fits your skills and experiences.
Have you managed staff? – Many franchisees are geared to a franchise employing many staff with managed skills.
Have you been involved in administration? – Many franchise systems involve extensive administration work therefore it would be beneficial to have some experience in this area.
What would you like to do and what are your strengths?
What do you enjoy the most?
Once you’ve decided on a particular franchise type, you can now narrow down the list of opportunities within that type by finance. The resultant list will show all opportunities within the categories you’ve selected. There will be several franchise opportunities in different industries for you to consider. You then can select the industry you prefer to work in.
This process will enable you to arrive at a shortlist of South African opportunities that you can start applying for.
If you are buying a franchise buisness, you are going to be working, selling and promoting the product or service for a long period of time. You can’t change or develop the product or service, so make sure that the franchise has long term appeal and its market is not threatened in any way.
It is important that the franchisor can demonstrate a clear understanding of the future market for the product or service and that you both clearly understand the following:
It is a big step from deciding to start a franchise to actually opening your doors for business. For many, one of the biggest hurdles is approaching the bank for finance.
Banks have learnt that it can be safer to lend to franchisees of well-structured ethical franchise systems. The track record of the franchisor is most important.
For an established franchise, most of the major banks will lend up to 70% of the start up costs, for new franchises the figure will probably around 50%. Banks will normally expect the franchisee to contribute at least 30% of the highlighted ingoing cost of the franchise. This contribution should be unborrowed. With this in mind:
As part of your business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure that you understand the figures, what are they based on, how much do you need to turnover in order to break even?
Your franchisor will normally help with setting out details of start up funds required and help with the preparation of cash flow forecasts.
In order to become a franchisee you will have to enter into a legal agreement with the franchisor, known as the franchise agreement.
A franchise agreement should achieve three fundamental objectives:
FIRST – given the absence of specific franchise legislation, it should contractually bind the franchisor and the franchisee and accurately reflect the terms agreed upon.
SECOND – It should seek to protect for the benefit both of the franchisor and the franchisee and the franchisors intellectual property.
THIRD – It should clearly set out the rules to be observed by the parties.
As there is no specific legislation or regulation for franchising, the franchise agreement becomes all-important in determining the rights and obligations of the franchisor and the franchisee and the relationship between them. In this respect the franchise agreement can be said to form the ‘engine room’ of the whole transaction. If difficulties should arise between the franchisor and the franchisee they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement.
You should visit existing franchisees to learn from their experiences and to find out their opinions on the services provided by the franchisor. Good franchisors will always allow you free access to any franchisees in their network and, in most cases, existing franchisees will be happy to talk things over with you.
Some of the questions you should ask are:
The franchise transaction is complex and the franchise agreement must respect that complexity. To the franchisee, the franchise contract represents an investment. Your business depends upon it to the extent that the business may disappear should it terminate.
Once you and your franchise solicitor are comfortable with the terms in the franchise agreement you will arrange to sign the franchise agreement and make payment as required in the agreement.