Q. I want to venture into the franchise business can the bank finance me for the whole cost or must I have my own collateral (my own contribution)?
A. The bank will never finance you 100% for a franchise business, depending on the business, the bank will most likely require you to contribute a minimum of 50% own contribution (cash-unencumbered funds) toward the purchase or set up of the business and the bank will assess funding the balance. Read more on financing a franchise
Q. I’ve recently “left” my job after 30 years and looking for a career change. I was wondering how to become a franchisee?
A. Franchising will allow you to make a change of career as most franchises do not require you to have experience in a specific industry as they train you in all aspects of their business. Read more on how to become a franchisee
Q. Got a simple question for you, what is a franchise? Need to explain it in my college essay.
A. A franchise is an agreement between two parties, the franchisee and the franchisor. Read more on what is a franchise
Q. If I opened a Cinnabon franchise, would I be allowed to introduce new products to my shop? I’ve got a few ideas of products I think would go down well!
A. If McDonald’s franchisees were allowed to do what they wanted, where would the company be! Selling pizza? Hot dogs? This is why franchisees need to follow the franchisor’s systems and stick to their guidelines. Cinnabon will follow the same procedures. If you are someone who likes change and lots of ideas for a business, then franchising may not be for you. Read more on Cinnabon franchise
Q. I’m interested in a Debonairs franchise and noticed that they offer multi-unit franchise opportunities; does this mean that I need to buy more than one initially?
A. Many food franchises focus on multi-unit franchising where the franchisee buys and runs one franchise business initially but have to develop their business over time to include several stores. It is worth speaking with Debonairs to see what they require from a franchisee and what their growth expectations are. Read more on Debonairs franchise
Q. Where can I find out about attending a franchise expo?
A. Franchise exhibitions are excellent for getting free information and advice at seminars and meeting face-to-face with franchisors. The first franchise exhibition of 2012 takes place in May. Read more on franchise expos
Q. I am interested in a chicken franchise and wondered if kfc are still recruiting in South Africa? And if so, what does it take to become a kfc franchisee?
A. kfc are still recruiting in South Africa. As you can imagine, they get thousands of applications sent to them in a year and so to make sure that the only get the best franchisees for their company, they have strict minimum criteria. Read more on buying a kfc franchise
Q. I’m really interested in franchising but getting put off slightly about what could happen if I picked the wrong franchise. What should I be looking out for?
A. Unfortunately like anything, there are bad franchises as well as good franchises. Reading all of the information on our site and knowing what to look out for will help you to avoid bad franchises. You can never do too much research. This real life example should give you some additional pointers on how to avoid it all going wrong. Read more on how to spot a bad franchise.
Q. I’m interested in franchising and looking to attend a franchise expo next year. How do I prepare myself for going? I want to get the best out of attending.
A. You are right to want to prepare yourself for attending an exhibition. Going unprepared can be daunting as there are so many franchises exhibiting and lots of free information available. Read more on tips for visiting a franchise expo.
Q. I’ve heard that Chicken Licken is a good franchise, is it better than other chicken franchises out there?
A. We are not able to comment on a particular franchise but are able to give you some advice on how to go about researching a franchise such as Chicken Licken. Read more on buying a Chicken Licken franchise. Read more on buying a Chicken Licken franchise.
Q. What is included in a typical franchise package? What should I expect to receive from a franchisor?
A. Every franchise is different but we have listed some common aspects of a franchise package. Read more on a typical franchise package.
Q. I’m interested in a particular franchise that sounds a really exciting business, the only concern I have is that it is a new concept. Should I walk away because of this or if I do my research is a new franchise still a viable option? What should I look out for?
A. Every franchise is new at some stage, even McDonald’s! The risks are greater for new franchise concepts because they are unproven but if you do your research properly, you should be able to spot if you have stumbled across a gem or if it is one to walk away from. Read more on new franchises.
Q. Why is it necessary that I set up a formal business structure when buying a franchise?
A. There are many reasons why franchisors insist on franchisees setting up a formal business structure. Read more on formal business structures.
Q. If I buy a Subway franchise, do I need to work in it?
A. Many food franchises such as Subway are looking for someone to be hands-on in the business. This may mean initially working in the store. It may be that as the business develops, and you possible open more stores, then you will take more of a management role and oversee all your business operations. Read more on buying a Subway franchise.
Q. I’m really interested in franchising but scared that I could lose all my money. Are you able to let me know which is the best franchise to buy?
A. It is not a question of what is the best franchise to buy, but instead what it the best franchise for you. Read more on the best franchise to buy
Q. Is it true that to become a KFC franchisee I need to work in the store for a long period of time with no pay or guarantee?
A. Yes many big brand food franchises require prospective franchisees to train in their stores during the application process with no pay and no guarantee of becoming a franchisee. Read more on kfc application process
Q. Is it possible to access South African franchises while I am in Zimbabwe? If so, how do I go about it?
A. It’s possible but we would not recommend it. Investing in a franchise is not just about gaining access to a brand but should also provide you with extensive initial and ongoing support. Unless the franchisor has a brick-and-mortar presence in your country, it is unlikely that this can be provided. You could of course acquire a master licence for your country. Under this scenario, you would secure the rights for Zimbabwe, operate a pilot outlet to test the market, make any necessary changes to the brand then become the franchisor for Zimbabwe. This option requires a substantial initial investment because you would have to set up the infrastructure needed to support franchisees.
Q. Do I need business experience if a want to invest in a franchise?
A. It depends on the industry sector and the franchisor company. In most instances, the franchisor will prefer the new franchisee to come into the business without preconceived ideas. It follows that experience in the same sector is generally not necessary. Rather, the network’s training programme will prepare you for the tasks ahead. Exceptions are businesses in sectors where formal qualifications are a prerequisite for operating the business, for example pharmacies or electrical repair companies.
Q. Our company operates successfully since 2001 and we have evolved into the largest operator in our field in the area we serve. We are now considering national expansion and want to know whether it is better to set up a network of branches or to franchise. Also, we don’t know much about franchising, what is involved?
A. After eight years in business, you are certainly ready to consider franchising as an option. The advantage of franchising is that franchisees invest their own money into the expansion of your brand and are therefore highly motivated to ensure the success of their businesses. Before you roll out a franchise, you need to establish beyond doubt whether the concept is franchiseable. If so, you need to set up the necessary infrastructure. We enclose a document that guides you through the initial investigation. It is especially important to ensure that franchising the business is financially viable for both parties after the costs of taking this step have been taken into account. We invite you to contact us again if you want to pursue this.
Q. We operate a service business and currently have three branches, all located in and around Pretoria and operating profitably. We frequently receive calls for our service from other centres but are unable to accept the work because of the logistics involved. Should we expand through franchising or should we sell independent business owners a licence to perform the service under our supervision?
A. To provide someone with a licence to perform your service is essentially the same as franchising the concept, with one extremely important difference. A licence will not give you the degree of control over the licensee’s contact which a franchise agreement provides. To grow the brand, you would want your business partners to operate under your name, perform the service and conduct the business exactly as prescribed by you. Only a properly drafted franchise agreement will give you the necessary power to reign in reckless operators whose actions may damage the brand.
Q. How do I get started in franchising? I have the ability to make a success of any venture but I do not have the necessary start-up capital.
A. What we have to tell you may sound harsh but at the end of the day, realism must prevail. You cannot start a business without funding, and a franchise is no exception. Banks including Banks are willing to provide loans to franchisees of credible franchise networks but only if the applicant is able to make a reasonable contribution from own resources. The actual amount varies depending on the borrower’s risk profile, the standing of the brand and the business’s cash flow projections but as a rough guide, a bank will lend 40-50% of the required total.
Q. I invested in a franchise about 10 months ago. The business is doing reasonably well but I cannot shake off the feeling that the franchisor makes more money from my labour than I do. The franchise agreement is for five years; is there any way of getting out of it before expiry?
A. When you enter into a franchise agreement, you do so for keeps. That’s why we advise readers to check out not only the opportunity itself but also their own motivation and willingness to stay the course. The only way you can break a franchise agreement prematurely is if the franchisor fails to fulfil its contractual obligations. If, for example, the franchise agreement stipulates that the franchisor will visit your branch at regular intervals to offer support but this does not happen, you would have a reason to demand performance. Should the franchisor fail to respond in an appropriate manner, you would have good cause to terminate the agreement. Keep in mind, however, that this is a serious step and one you should not take it lightly. To protect yourself from unintended consequences, we advise you to consult with an experienced attorney before you terminate the agreement.
Q. I am a marketing student and currently in my third and final year. I would like to become a franchisee after graduating. Do I qualify?
A. This depends on your level of maturity, practical business experience and, last but not least, your ability to fund the necessary investment. Franchisors will generally look for prospects with some practical business experience. Perhaps your best bet would be to seek employment in a unit of the franchise you plan to invest in, work there for a year or two then apply for a franchise. This would give you an opportunity to learn the business from scratch without risking your own capital and prepare you well for your future role.
Q. My franchisor refuses to distribute monthly operating results produced by other franchisees within the network. This makes it impossible for me to measure my own performance against network-wide benchmarks. I am very unhappy about this and want to know whether my request is unreasonable?
A. Not at all – being able to measure performance against similar operations is part of best practice in franchising. The only problem is that because franchising is unregulated, you have no way to force your franchisor to comply with your eminently reasonable request. We can only suggest that you get together with your fellow franchisees and present your demand jointly. Should this approach fail then there is nothing stopping you from creating an informal alliance with other franchisees and exchange figures on a regular basis. Unless your franchise agreement says otherwise, which is highly unlikely, the franchisor would have no right to stop you from doing this.
Q. What are the franchisor’s responsibilities vis-à-vis franchisees? I am asking this question because franchisors demand a lot from their franchisees but don’t seem to deliver much in return.
A. The answer to your question is contained in your franchise agreement. It should state what the respective rights and obligations of franchisor and franchisee are. A bona fide franchise is supposed to deliver a potentially profitable business concept, a trademark and extensive initial and ongoing support in all facets of operating the business. If this is not recorded in the franchise agreement, however, problems may arise. A short-sighted franchisor may neglect its duties, to the detriment of the network. Should this be the case, and your franchisor is a member of FASA, you could put your complaint to them and ask them to mediate.
Q. I recently purchased an established retail business that operates under franchise. I invested all my savings and exhausted all available credit to pay the purchase price. I now found out to my horror that in terms of the franchise agreement which I took over from the seller and signed, I am obliged to set up and operate a coffee shop as an extension to the existing business. I don’t have the cash to do that and, seeing that my predecessor hasn’t done it, how can the franchisor force me to do it if I don’t want to?
A. Your problem proves two things we keep stressing over and over: Firstly, you should never deplete your cash reserves, rather opt for a lower investment, or extended credit terms. Secondly, read the franchise agreement and have its contents explained to you by an attorney with experience in franchising. Sadly, these two pieces of advice don’t solve your problem. We can only advice you to visit your franchisor, explain the situation and request time to build up financial reserves before investing in the coffee shop. The franchisor is unlikely to refuse because it is generally not in the network’s interest to force a franchisee into bankruptcy.
Q. I love being in business for myself and I think I am good at it. Unfortunately, my first venture went sour. I have learnt from the experience and am not about to repeat the mistakes I made. That’s why I would like to acquire a franchise. The stumbling block is the black mark my business failure has left on my credit record. I would like to put this behind me and start over. What do I have to do?
A. We agree with you that everyone deserves a second chance but we know from experience that you will find it difficult to raise funds. Even without the blemish against your credit record, banks would be reluctant to lend you money unless you are able to make a reasonable financial contribution and can offer collateral for the loan you require. In a way, starting as part of a franchise makes things easier because to a certain extent you are buoyed by the reputation of the brand but responsible franchisors are unlikely to accept you as a franchisee unless you have some cash of your own. The way we see it, you will have to proceed in a step-by-step fashion. To repair your credit record, you have to be financially responsible in future. You will also have to work hard, possibly holding down two jobs for a while, and save as much as you can. Persevere for two or three years and there’s a good chance that “all will be forgiven”. We could not do better than to quote from Eric Parker’s Road Map to Business Success (published by Frontrunner Publishing, Johannesburg and available from bookstores countrywide). When assessing a loan application, bankers look for the 5 Cs: Character, Conditions, Capacity, Capital and Collateral. Work towards putting these in place and you should not encounter too many problems realising your dream.
Q. I read that in the USA, acknowledged as the leader in this field, franchising is in the doldrums. With most trends eventually reaching our shores, will South Africa follow suit?
A. You fell victim to inaccurate or outright irresponsible reporting. While it is true that the economy in the USA has slowed down quite considerably, franchising continues to grow. This is not to say that franchised businesses escape the downturn entirely but because of the standing of their brands and the support they receive from their franchisors, franchisees are generally better able to weather the storm. Watch out for the next edition of this newsletter, it will carry some information about the state of franchising in the USA that will make your mouth water.
Q. I invested in a franchise in September 2006. The franchisor selected the area and assured me that I would do extremely well. I went ahead with the deal but now find that there is no demand for the product we offer and the franchisor doesn’t seem to care. What can I do?
A. We realise that the last thing you need in your current situation is a lecture but we have to say that you seem to have failed to investigate the opportunity properly. Being trusting is admirable but you should at least have established whether the product you are selling has a market in the area, and whether the franchisor provides a reasonable level of support to franchisees before you committed yourself. Turning to the future, you are saying that the franchisor doesn’t seem to care. This is unacceptable! As a franchisee, you are entitled to approach the franchisor again and demand assistance. For greater impact, you may want to link up with other disgruntled franchisees within the network. Should no results be forthcoming, and assuming that your franchisor is a member of the Franchise Association of Southern Africa (FASA), you could approach FASA and ask them to mediate. If all else fails, you could go the legal route. Your franchise agreement should set out the rights and obligations of both parties. It is likely to list the franchisor’s obligations – if he reneges on those, you may have a valid reason to terminate the franchise agreement. Do not go this route without seeking competent professional advice first. This can be expensive and you may want to consider sharing costs with fellow-franchisees.
Q. I am about to sign a franchise agreement. My problem is this: I have just enough money to fund the transaction, but really only just! Is it wise to invest all my cash or should I rather take out a loan and keep a nest egg, just in case?
A. You should definitely keep a nest egg! Even though a franchise will typically reach break-even sooner than an independent business with no track record, it still takes time. Your franchisor will have given you projections, but you need to remember that these are assumptions only. With the best will in the world, nobody can guarantee that your business will perform exactly in line with projections. One more tip: If your business is a cash business, for example a fast food outlet where most people pay cash for their purchases, cash flow should pick up fairly quickly. If so, you could invest part of your capital with your bank and use the investment as surety for an overdraft. On the face of it, it may sound daft to deposit money at a relatively low interest rate, then borrow against it at a higher interest rate but consider this. You would draw on your overdraft only during valleys in your cash flow, perhaps just for a few days each month. However, your investment will earn interest on an ongoing basis, leaving you with a net gain.
Q. I want to go into franchising but do not know how and where to start. For example, do I have to register a company and/or secure a site for my business before I approach franchisors?
A. Certainly not! The first thing you should do is find out how franchising works, and whether the structure imposed by a franchise suits your personality. If so, visit www.whichfranchise.co.za. This site lists a wide variety of franchise offers; select a few in fields you have a passion for, contact the franchisors concerned and take it from there. When the time is right, the franchisor’s representative will assist you with the formation of a legal structure and with site selection. However, it will be a good idea to contact a bank early-on. Their trained consultants won’t just offer you finance, they understand franchising and can be a valuable source of information long before you need the cash.
Q. Can you direct me to a place where they can create a well-structured business plan for me?
A. Many companies offer such a service – at a fee! but we are not convinced that this is the best way to go about it. Your business plan is your map towards business success.
- When you want to use the business plan to raise money, it must reflect your aspirations and your passion should shine through.
- Once in business, you need it to get suppliers and staff on board.
- On an ongoing basis, you need to track the progress of your business.
Use input from your accountant by all means but, rather than paying someone else to draw up a run-of-the-mill plan, buy a good book on the subject, study it carefully and do the job yourself. This will assist you greatly when it comes to discussing the plan with funders, suppliers or key staff.
Q. I work as a project manager for a large parastatal and currently earn about R50 000 per month, plus perks. I have R200 000 in cash to invest and want to know whether starting a franchise would secure me a higher income.
A. No business is without risk and an investment of R200 000 would enable you to start a relatively small business. With sufficient hard work, you will eventually earn more than what you earn now, and you will also create a capital asset. Realistically speaking, however, this will take several years. Given your level of earnings, and if increasing your income in the short term is your only motivation, you may be better advised to stay an employee for the time being. If you build up some more capital over time, you will eventually gain access to a larger operation with higher income potential.
Q. I would like to know whether it is financially rewarding to open a KFC franchise? How much would I have to invest and how much could I expect to earn at the end of the third month after joining? Also, would the franchisor expect me to stand behind the counter all day or could I leave day-to-day operations to a manager?
A. For starters, your question is academic because KFC no longer offer franchises to the general public. The reasons for this are explained in an article which we have placed into the Grapevine section of our website – click here. This should not trouble you too much, however, because the opportunities section of www.whichfranchise.co.za is choc-a-bloc with qualified franchise opportunities, including some excellent chicken concepts. We have to tell you, however, that your expectations appear to be a little unrealistic. Starting a business of any kind carries an element of risk, and businesses that operate profitably in their first year are the exception rather than the rule. During the first few months, sales are low but operating expenses are more or less fixed. The resulting losses need to be recouped after break-even has been reached and this will usually take you to the end of the first year. Of course, as the owner of the business, you can write your own salary cheque. You need to keep in mind, though, that the money you pay yourself must come out of profits you need to generate first. Lastly, you ask whether you can entrust the operation of the business to a manager. The main reason why a company opts to become a franchisor is that they want owner-managers at every store. Of course, if the franchise operates for extended hours and seven days a week, you won’t be expected to be present all the time but you need to assume overall managerial control.
Q. I was interested in operating a franchise from a specific town and was still busy trying to arrange the necessary funding when the franchisor told me that another party was interested in the territory. To secure my rights, I paid a deposit of R150 000 and signed a pre-agreement which stated clearly that should I be unable to secure a suitable site and/or obtain funding for the balance of the investment, the deal would be cancelled and the deposit refunded. I failed on both counts but the franchisor refused to repay the deposit, placing the onus on me to find a prospect for the territory. I was unable to do that and have now found out to my dismay that the franchisor company has been put in liquidation. Please help me to get my money back.
A. It seems to us that you have fallen victim to the oldest con in the book. By telling you that someone else was interested, the “franchisor” prompted you to part with your money. We used inverted commas advisedly because a bona fide franchisor would never act in this way. Taking a deposit before a disclosure document has been issued and a cooling-off period has lapsed is strictly against the guidelines for ethical franchising issued by the Franchise Association of Southern Africa. This means that your “franchisor” has not acted ethically. From what you are saying, it appears to us that you may have legal recourse but court proceedings are lengthy and expensive. Embarking on such a process may mean throwing good money after bad and we cannot advise you to do that. However, you are the injured party and only you can make this decision. We realise fully that this is cold comfort for you but even the most rudimentary investigation of the opportunity prior to paying over the money would have sent alarm bells ringing. Should you find it in your heart to learn from this experience and make a fresh start at some time in the future, we urge you to contact us early on and we’ll go out of our way to guide you through the pitfalls.
Q. I want to set up a franchise in a new mall which is just being built. I have an idea what I want to do but I haven’t spoken to anyone about it. Should I approach franchisors first, or is it better to secure a site before approaching franchisors?
A. You need to finalise a deal with a franchisor first. Only then can you start looking for a suitable site. Not only will the franchisor assist you with site selection, they will have to approve the site. This is in your interest because franchisors are experienced in these matters and know which sites are right for their brands.
Q. I would like to become a franchisee but my level of education is very limited. Are franchisors looking for people with a tertiary education or what?
A. Operating a business is not rocket science; experience has shown that in most cases, the level of an applicant’s education is irrelevant. What’s required is a combination of good common sense, some understanding of basic business principles and a willingness to work extremely hard. The franchisor can provide you with the training you need.
Q. Does a franchisee receive a monthly salary like all other employees in the business, or how does one make money in this game?
A. You have obviously misunderstood the role of a franchisee. The franchisee is the owner of the business that operates under franchise. He/she can decide how much money they want to draw out of their own business but they have to earn it first. Being in business for yourself means that effort is not rewarded, only results count.
Q. I entered into a franchise agreement two years ago. It is supposed to run for five years, with a renewal clause in my favour. I have no wish to renew at the end of the initial period, in fact I do no longer want to belong to this particular franchise. I like the industry, though, and wish to carry on under my own steam. The franchise agreement does not permit me to do that – what are my options for getting around this?
A. When you join a franchise, it’s for keeps! That is precisely the reason why we – and every other ethical source in franchising – advise potential franchisees to investigate the opportunity carefully before they sign the franchise agreement. You are not saying why you want to jump ship, but unless your franchisor is in breach of the agreement, your chances of having it set aside are slim to non-existent. Why not tell the franchisor how you feel and request assistance with selling the business? You could then move to another area and start afresh, this time under your own banner. The restraint clause is unlikely to preclude you from operating a similar business as long as you do not rely on the goodwill and systems of the franchisor.
Q. I came across a franchise opportunity that appealed to me. The franchisor told me that several people are interested in the territory I wanted to trade; if I wanted to secure the rights, I would have to make a deposit of R50 000 to show that I am serious. I was assured, albeit verbally, that should I change my mind, I would receive the deposit back – no questions asked.
I paid over the money in good faith but after receiving a copy of the franchise agreement, I no longer wish to proceed. Now the franchisor tells me that I can obtain a refund only if I bring another investor along. If I am unable to do this, I would have to wait until such a person shows up. According to the franchisor, this could take years. How can I get my money back?
A. It sounds like you have fallen for one of the oldest tricks in the book. If interest in the franchise, and your chosen territory, was so strong at the time you were asked to pay the deposit, why is the franchisor suddenly concerned about finding a replacement? If the franchisor is a member of the Franchise Association of Southern Africa (FASA) you have some recourse. According to FASA’s Code of Ethics, which is binding on its members, the franchisor must give you a disclosure document and a copy of the franchise agreement at least 14 days before any money changes hands. From what you are saying, it does not sound like this was the case, so you could ask FASA to intervene on your behalf. As matters stand, however, FASA has no statutory powers, meaning that their influence over errant franchisors, especially if they are non-members, is limited at best. If the franchisor is not a member, you may have to go the legal route but this can be costly and time-consuming.
Q. How much money do I have to have to enter into a franchise agreement with (brand name supplied)? I ask this because the company’s listing on your website states that the total investment is R450 000 while other sources put it closer to R500 000. Who should I believe?
A. The best answer we can give you is: “It depends!” This is not a cop-out – let us explain. Investment figures given on our website are a rouge guide intended to indicate the investment bracket. The actual cost of setting up the business will depend on several variables which can be determined only once a location has been found. Variables include the size of the unit (which would influence the cost of shopfittings and equipment) and the number of staff you will employ, which affects the amount of working capital you need to set aside. Your best bet is to contact the franchisor concerned and find out first hand what is involved.
Q: What are my rights as a franchisee when a franchise is de-franchised?
A: Your franchise agreement should deal with this eventuality. We have no access to this document, and you don’t give the reasons for being de-franchised, or how you feel about it. This means that we can only respond in very general terms. Should you feel that the franchisor has acted unfairly, you could approach the Franchise Association of Southern Africa (FASA) and ask for mediation. You could also go to court but this could become a lengthy and expensive process. Also, its outcome is never certain and even if you win, you may find it difficult to continue as part of the network. Assuming that you want to stay in the same business as an independent operator, you will have to give up everything that links you to the network. This may include your list of customers (which you would have built up while a franchisee) and even the premises you trade from. The good news is that restraints of trade are difficult to enforce, especially if you are a tradesman and want to continue working in your trade. Before you decide on a course of action, however, we recommend that you consult with an attorney with expertise in franchise matters.
Q: I am a third year student at a university but love business. I see an opportunity at my university to open a restaurant, say a pizza restaurant. The problem is that students return to their homes during vacations and they are my target market. However, the university is surrounded by local people. How should I approach the franchisor, and how sure can I be that the business will be sustainable? I am passionate about this business. Thanks!
A: It’s nice to hear from a young person who is passionate about business. You have obviously given the matter a lot of thought and your conclusions are basically sound. Your next step should be to approach a few franchisors – contact details on www.whichfranchise.co.za – and tell them about your plans. Talk to the facilities manager at your university first. Perhaps they would agree to a lower rental because you offer students convenient access to branded food. You can expect the franchisor to investigate you and your proposed site before taking the matter further. Once the project assumes shape, you will probably need funding. Prepare a business plan and contact the small business consultant at your nearestbank. After assessing the merits of your project, he or she will probably put you in touch with the bank’s Franchising department. This division is staffed by franchise specialists who can offer useful information as well as various funding options.
Q: I want to be a franchisee and have written to the franchisor of a brand I love. Now I worry how I will cope if they turn me down. Do you think I should spread the risk by approaching several franchisors?
A: Becoming a franchisee should not be a passive process whereby you express interest and hope to be accepted. Talk to several franchisors and evaluate the opportunities they offer before settling on the one that suits you best. Unless you do that, you will never know whether you have made the right choice.
Q: I would like to know how much cash I need to invest in a franchise and how much I can expect to earn a month, say over the next three years?
A: Costs of setting up a franchise vary tremendously. They are influenced by the type and size of business you are interested in, the reputation of the brand (which could affect the amount payable as upfront fee) and working capital requirements. Many of the listings on our website give an indication of investment levels. To answer the second part of your question is equally difficult. Franchises do not come with guarantees, your earnings depend on the viability of the business of your choice and the amount of effort you put into its operation. Speak to several franchisors, once negotiations with one progress beyond the initial information stage, you should receive a disclosure document which will provide among other things detailed financial information. Most of the banks require and unencumbered cash requirement of between 30% and 40% of the total investment required.
Q: I am interested in a specific franchise. How can I find out whether the opportunity is worthwhile?
A: The first thing you need to do is to find out all there is to know about franchising. Our website – www.whichfranchise.co.za – contains some guidelines and a useful test. Select a franchise opportunity that appeals to you. Once you have passed the initial phase, the franchisor should give you a disclosure document that will provide much of the information you need. The disclosure document will also contain a list of all franchisees in the network. By talking to a reasonable number of them, you will get a good feel for the business. Next, ask to work in a company-owned store for a few days. Forward-looking franchisors will welcome this. Lastly, before you sign a franchise agreement, get professional advice. At the very minimum, consult an attorney with experience in franchise matters. You should also speak to the small business consultant at your Absa branch; he or she will refer you to a franchise specialist. One more thing: membership of FASA, although not compulsory, is usually an indication of a network’s professionalism.
Q: For years now, I had a dream of going into business for myself and a franchise seemed to be the most attractive option. However, I will have to borrow some of the money needed to set up an operation. Does the implementation of the new National Credit Act snuff out my dream?
A: It is early days yet but the way we understand it, the National Credit Act affects primarily consumer lending. Franchisee funding has always been assessed with an eye on the prospect’s ability to repay the loan, with interest, on time. The new Act does not change that, and you should approach a small business advisor at your local bank for referral to their Franchising department.
Q: I want to own a KFC restaurant. What is the procedure?
A: The fact that there are over 400 franchise opportunities available in South Africa, this question pops up with greater frequency than any other. Unfortunately, we have to disappoint you: KFC do not offer franchises to the general public. This stance has given rise to all sorts of conspiracy theories but the reality is quite simple. Many years ago, KFC has taken a strategic decision to grow their footprint through area developers. These area developers had to convince KFC that they have the ability (and the financial resources) to operate a regional structure that would encompass the operation of a minimum of about six restaurants plus the necessary infrastructure to manage the regional network, train staff etc. Given the density of KFC’s existing South African network, no new opportunities arise.
Q: I have made a down-payment of R100 000 to secure the rights to a franchise. I had a verbal arrangement with a potential “sleeping partner” who would provide the balance of the funds required, about R400 000. This person has now withdrawn and I need to raise the money urgently, failing which I stand to lose my deposit.
A: We could tell you that you acted unwise by putting down a substantial deposit before you had the balance of the funds tied up in writing, but this would not be particularly helpful. Given the situation you are in, you should discuss your situation with the franchisor. Perhaps they can put you in touch with a “sleeping partner” or offer you a joint venture arrangement. Alternatively, they might decide to release you from the agreement and refund your cash. If nothing positive transpires, we would advise you to seek competent legal advice. FASA’s Code of Ethics which is binding on its members is unambiguous on this matter. It reads, in part, as follows: “A franchisor shall select and accept those franchisees who, upon reasonable investigation, appear to possess the basic skills, education, personal qualities and financial resources adequate to perform and fulfil the needs and requirements of the franchise.” One could argue that the franchisor did not investigate your financial situation properly before accepting the down payment. Unfortunately, these guidelines are binding on FASA members only and it is uncertain whether a Court of Law would enforce them.
Q: I want to become the franchisee of a petrol company and the total investment is R1 400 000. I have R40 000 cash. How can I raise the balance?
A: This is going to be a difficult one. Ordinarily, a franchisee is expected to supply between 25-40% of the total investment from own resources. Your capital is below 4%. The only way we can see this come to fruition is that you create a syndicate – family, friends, stokvel – and raise the money in this way. If you can pull this off, we would advise you to have a contract drawn up buy an attorney that stipulates for how long the money is committed, and what rights the members of the syndicate have. Unless you do that, you could find (a) that everyone wants to tell you how to run the business and (b) one or more of your investors want their money back before the business can afford it. We further suggest that you discuss your project with the small business advisor at your local brank. He or she will probably put you in touch with their Franchising department. Its officers know and understand the sector and will give you valuable guidance long before discussing funding.
Q: Is it correct or legally permissible for a franchisor to reject an application for a franchise without furnishing reasons for the decision?
A: The answer is “yes”. One of the most important obligations a franchisor has is to select individuals as franchisees who appear to possess the skills needed to succeed in the business. Access to adequate funding is another essential prerequisite. And then there is the all-important chemistry between franchisor and franchisees – see article above. To ensure the growth of their networks, franchisors need to bring additional franchisees into the system and have every incentive to do so. The decision to turn down an application is never taken lightly. However, to accept someone into the network who is unlikely to succeed in the business would be outright irresponsible. Franchisee failure causes disaster all-round, with the likelihood of the franchisee suffering significant financial losses extremely high. The brand could also be damaged, and relationships with other franchisees could be soured. Franchisors know from experience which kind of person fits their franchisee profile best and act accordingly. Scientific instruments can also be used for this purpose. Experience has shown, however, that, human nature being what it is, stating the reasons for turning down an application often lead to endless correspondence or worse. It is for this reason that most franchisors prefer to make their decision without giving reasons. They are within their right to do so and you have to accept that.
Q: What are the challenges a person faces when starting a business under franchise?
A: This question is far to wide-ranging to provide a meaningful answer within the framework of this Q&A section. We recommend that you learn as much as you can about franchising by visiting www.whichfranchise.co.za. Once you have gained some understanding of the benefits and pitfalls of franchising, you are in a better position to formulate specific questions. At that point, we will be happy to answer them.
Q: Where can I find a do-it-yourself ee-test on the web to determine if I would be a good candidate for a franchise opportunity?
A: You are in luck – a simple self-evaluation test is available on www.whichfranchise.co.za. Should you require a more in-depth evaluation, we would recommend that you undergo a professionally designed and interpreted test, for example the one offered by Franchising Plus CC. For contact details visit www.franchisingplus.co.za.
Q: At what stage am I entitled to receive a network’s disclosure document? I am asking this because the franchisor I am negotiating with wants me to sign the franchise agreement before he will give me a copy of the disclosure document. This does not sound right.
A: It certainly isn’t! When the Franchise Association of Southern Africa (FASA) introduced an obligation on its members to prepare a disclosure document, the intention was to give prospects an opportunity to check out the franchise offer before they commit themselves. FASA even stipulates that the disclosure document must be given to a qualified prospect at least 14 days before a franchise agreement may be signed, or the prospect pays over any money. This has not changed; in fact, requirements are bound to become stricter in future. This does not mean that the franchisor is forced to put his intellectual property at risk. FASA recognises that the disclosure document contains confidential and sensitive information. To protect franchisors’ legitimate interests, they are entitled to insist that you sign a Confidentiality Undertaking. This compels you to respect the confidentiality of the information the disclosure document contains, and not to use it or pass it on to anyone else. For further details go towww.fasa.co.za. Let’s be charitable for a moment and assume that the franchisor you negotiate with does not know about this. In our minds, this raises serious concerns because it would indicate that he or she has not done the necessary homework. Before you go any further, you should obtain a list of the network’s existing franchisees, usually part of the disclosure document. Visit a good number of them and find out how they are doing. It may prove to be an eye-opener. Should the franchisor refuse to facilitate your access to established franchisees, we would advise you to simply walk away from the deal.
Q: What do I receive for the money I pay to a franchisor? Is it only for the name, or is shop fitting included?
A: To begin with, you need to differentiate between initial fee and ongoing fees. The initial fee pays for access to the network’s intellectual property (brand, know-how, trade connections etc.) for the duration of the franchise agreement, plus initial training and assistance with the setting-up of the business. In suitable cases, this may include a “Grand Opening”. Shopfittings, equipment, stock and working capital are usually not included but are an additional responsibility of the franchisee. This should be explained in the network’s disclosure document, where it should be shown under the heading total investment. On an ongoing basis, you can expect to pay two types of fees, namely a management services fee and a contribution to the network’s marketing fund. The management services fee entitles you to receive extensive ongoing support as well as access to special deals set up by the franchisor. The marketing contribution will be used to fund national and/or regional marketing activities.
Q: What does the term “unencumbered capital” mean?
A: This is the amount of money you are able to invest from your own cash resources, before taking out a loan. Most franchisors will insist that a prospective franchisee has access to between 30-45% of the total investment in unencumbered capital. This signals self-discipline, ensures commitment and reduces the strain on the new business’s cash flow.
Q: I am keen to invest in a franchise of a brand that is an icon around the globe. After successfully going through the initial evaluation process, I have now been invited to meet with the company’s top brass. I have the feeling that the outcome of this meeting will decide whether I am “in” or “out”. How should I prepare?
A: You say yourself that you have cleared the initial hurdles, so you must be doing something right. Keep in mind that franchisors, even those with iconic brands, depend on the quality of their franchisees for their further growth. They want you to succeed, and they are sufficiently impressed by who you are that they want you to meet to top guys, so just be yourself. This notwithstanding, some preparations won’t go amiss. You had some insight into the prevailing corporate culture; use this to your advantage.
- Find out whatever there is to know about the company that you do not already know.
- Dress for the interview in line with the company’s existing style.
- Try to come across as friendly and outgoing, but not arrogant.
- Answer questions openly and truthfully.
- Use pauses in the conversation to obtain information about the company that is of legitimate interest to you but is not available in the public domain.
- Show that you are excited about the opportunity; be careful to stress that it’s not just about the money but that you would enjoy being a representative of the company’s brand and what it stands for.
Do this and you’ll be fine. Good luck!
Q: Does the loan advanced by a bank usually include the amount of money needed to operate the business until it is self-supporting, or is loan finance limited to the acquisition of equipment and shop fittings?
A: What you are talking about is “working capital”. The banker will not look at this in isolation, but considers it as part of the overall financial package. Working capital is usually funded through an overdraft facility, because your needs will vary throughout the month. You should draw up a business plan and make financial projections for the next 2-3 years. Armed with this information, you are ready to visit your nearest bank and discuss your needs with a small business advisor. He or she will probably put you in touch with their franchise division and they will take it from there. Keep in mind that no bank is likely to finance the entire transaction. Depending on circumstances, you will be required to come up with between 40-50 percent of the total before borrowings. There is a sound reason for this: loans need to be repaid, and if you borrow too much, the resulting pressure on cash flows may well cause the business to fail before you even had a chance to prove your mettle.
Q: During a visit to the UK some years back, I saw an interesting store selling frozen foods to householders. You buy the package of your choice, pop it into the microwave and within minutes, a proper cooked meal is ready to be served. I think that such a concept would do well here in Johannesburg, and will be grateful for a list of UK-based franchisors who offer such concepts.
A: We are sorry to have to tell you this but your plan may not be feasible. Assuming that in the UK, such a franchise does exist, it would be a physical impossibility to support a franchisee in South Africa from there. Even if one ignores all other aspects of franchisee support, the mere logistics of product delivery would constitute a major hurdle. The only way this could work would be that you set up an operation in South Africa that is a carbon copy of the UK outfit. You would have to source the frozen food, set up distribution points and operate a fleet of refrigerated trucks that do the deliveries. What this boils down to is that you would become the South African master licensee for such a concept. In effect, you would have to assume the role of franchisor in South Africa and take care of everything this entails. This requires a substantial infrastructure, and many millions of Rands in investment. Assuming that you are able to support this, would it make sense? After all, you would be competing with a number of food retailers with national distribution infrastructure. Even if they don’t offer the items you liked, should it appeal to the local market than it would be relatively easy for them to add them to their range. This adds the spectre of a fight for market share, and the need to spend many millions more on advertising. Visit the opportunities listings on our website, www.whichfranchise.co.za, find a few opportunities that appeal and get in touch with the respective franchisors. We are confident that you will find an opportunity that appeals to you.
Q: I am a marketing graduate but was unable to secure a job in this field. As a result, I am sitting at home for the past 18 months and I am rapidly losing hope. I have now decided to take control of my future and start a pizza franchise. The only thing holding me back is lack of finance; how can I address this?
A: It is extremely unlikely that anyone will advance you enough money to set up a pizza restaurant under franchise unless you are able to contribute a reasonable share from own resources. In any event, loans need to be repaid and if you borrow the full amount, monthly payments including interest would in all probability drain the cash flow of the new business. There is, however, another way. We recommend that you visit www.whichfranchise.co.za, print out a list of pizza franchises and contact the franchisors. Explain your situation to them and ask for an opportunity to work in one of their stores. You should be willing to accept an entry-level position to start with. By doing this, you achieve several things:
- You will get a feel for the business from the inside and can decide if this is really what you want to do.
- You learn the trade. Once you are through the learning curve, you will know how to wash dishes, make pizza, serve customers and cash up in the evening.
- The franchisor can observe you in action. While 100% funding for businesses is usually hard to come by, various models allow deserving applicants to acquire a share of a business out of profits. You would work in the business at a “living wage”, while a share of profits would go towards acquiring shares in your name. With dedication, you can secure full ownership of the business over time.
Access to such schemes is by invitation only, you cannot request it. We are not suggesting that it will be easy but we believe that it is a realistic option.
Q: I am disabled, wheelchair-bound, have R100 000 cash to invest and would very much like to operate a franchise in the fast food sector. Would Khula fund the rest of the investment?
A: Most fast food operations are capital-intensive, requiring an investment of R800 000 plus. Loans are available but most franchisors insist that their franchisees are able to contribute between 35-50% of the total. There are sound reasons for this: It takes several months to get a new business ready for trading, and then at least as long again to reach a cash-positive trading performance. This is the best-case scenario, but what if it takes longer than expected to achieve this? In the meantime, loan repayments will have started, therefore, excessive borrowings put strain on the business’ cash flow when it can least afford it. This could cause the business to fail before you had a sporting chance to prove your mettle as an entrepreneur. In suitable circumstances, Khula offers loan guarantees. This helps you get a loan from a bank if your business plan is sound and the only problem is lack of surety. It does not change the fact that you are responsible for repaying the money, with the attendant problems as outlined above. There is yet another concern. Fast food is a high-pressure business, with gruelling hours the rule rather than the exception. Any person entering this industry needs to assess whether they will be able to cope. Only you know the answer to this one. Perhaps you should rethink the situation and either go for a business opportunity that is less demanding, or link up with a business partner who is prepared to share the investment – and operational responsibility – with you. Once you have formulated your plans in your own mind, you may wish to discuss them with a small business advisor at your local bank. He or she will provide further guidance and/or put you in touch with the bank’s Franchise Desk.
Q: I’m considering buying a Vida e cafe in a small shopping centre. The cost is around R1 million. How long do you think it would take for me to make back my initial investment before I start making any profit? If the investment is R1 million, I know I need 50% unencumbered cash which is fine but I’m wondering if there are better things to do with a million Rand in turns of returns. If it runs at a loss for a few months and then I finally cover costs, I still need to make back my initial invement and repay the bank. It sounds as if i will only see any profit in 3-5 years time.
A: In the current market we estimate that a good franchise opportunity will give you a return on your investment (after drawing a market related salary) in 3-4 years. You would need to satisfy yourself that you are happy with the opportunity and confident you can make your investment back within the desired time period – perhaps chat to existing franchisees to ascertain what their experience has been like.
Q: I went for an initial interview with a major franchisor (name supplied); as a follow-up, they asked me to do an E-test (suitability test) which I passed. I was now asked to come for an interview with the company’s directors. What questions are they likely to throw at me? Also, what is the correct dress code for such an occasion? During the first interview, I felt hopelessly overdressed.
A: First and foremost, congratulations are in order. The company you are dealing with is highly reputable, and known to be selective in accepting franchisees. The mere fact that you have been called back for an interview with their senior people means that you are a very special person. To prepare for the interview, if you haven’t done so already, find out everything you can about the franchisor’s operation and the target market. Look on the Internet for publicity material on the company and the sector. If you have a specific location in mind that you want to propose operating from, do a viability study. On the day of the interview, arrive well on time.