Franchises are one way to start your own business. But is it easier to start a franchise than to start a business from scratch?
There are some well-known franchises in South Africa including those in the restaurant and fast good space such as Spur, KFC, McDonalds and more recently Burger King. While getting into a franchise can be expensive, it can be financially rewarding too.
Pieter Scholtz, master franchisor of ActionCOACH Southern Africa explains: “Investing in a franchise can be one of the most rewarding experiences for an entrepreneur, both on a personal and a professional level.”
Morné Cronjé, the CEO of FNB Franchising adds: “Franchising is a good market to be in if you’re going to go into business, but competition at the moment is very big. There are a number of international entries into the South African Franchising market such as Pizza Hut, Burger King, Dominos and Massmart.
“Everyone is playing for market share, which is becoming less and less. The consumer is becoming more price sensitive and the variety in the market means that people are spoilt for choice. If a franchisee is to succeed in the industry, it is important to know what your core business is and develop a strategy around that.”
Justmoney has compiled a list of important questions and guidelines that you should consider when choosing a franchise:
How do you pick a successful franchise?
Research: Do research on the franchise industry before getting into it. “[Franchisees] need to decide if this is the right move for them,” says Cronjé.
Jan de Beer, managing executive of The Fish & Chip Co. concurs. “You can never do your homework enough. It is important to not only read up on the business concept on their website, but also do a broader search and gauge what the perceptions around the company is.”
De Beer suggests using a website such as Hello Peter to gauge the public perception of the franchise.
Decide on a business sector: Select a business sector that you are interested in and passionate about. “Once you have narrowed down the most suitable industry, analyse the geographical area in which you want to operate and determine whether there is a market for that type of business.”
Speak to franchisees: Cronjé recommends that you try and spend at least one day with a franchisee, which will allow you to see how they operate, and ask questions.
Where should my business be located: “Unless the franchisor has identified a site, you will need to start looking for premises. But even if the franchisor offers you a site, you should still do an in-depth investigation. Try and locate your business within the community where you are known – it helps with networking.
Check out the site with respect to size and affordability, access to utilities and security, proximity to your target market, visibility and availability of parking. The location of competitors is another important consideration,” says Cronjé.
David Cobbold, new business manager at Wakaberry, adds: “The franchise should have a solid track record, good systems, and the ability to be consistently service the area in which you will be trading.”
What to look out for
Cronjé highlights that there are several things that you should look out for when considering buying into a franchise. These include:
• Funding,
• Judging the competition,
• The support you will get from the franchisor in terms of training and business support, and
• The potential for growth and the potential longevity of the business.
Vera Valasis, Franchise Association of South Africa (FASA) executive director adds: “There are several factors to consider when buying a franchise. The most important issue is that the potential franchisee must discuss the brand with the existing franchisees in terms of return on investment, keeping promises, communication, effective marketing, good site selection, training and the million dollar question – would you buy another franchise from this franchisor, [in other words] ‘Are you making money?’”
Anita du Toit, partner at Franchising Plus and developer of whichfranchise.co.za provides four tips regarding what you should look for when buying into a franchise:
1. Set the budget: “There is little point in looking at franchises that fall outside of your price bracket. Remember that banks typically expect you to contribute at least 40 – 50% of the initial capital required.”
2. Self-evaluation: “Some franchises require strong selling skills, while others require strong organisational ability. Think about what hours you want to work, what kinds of things you are good at and like to do and what experience you’ve had.”
3. Select your sector: “Have a look at all the different franchise categories and weigh up whether these interest you and fit well with your skills. Cross off industry sectors that are not recession resistant.”
4. Identify interesting franchises: “Pick your five favourite companies that have territories available in your area. Contact the companies and request basic franchise information. Review this information and then decide whether each company still meets your criteria.”
Skills
De Beer highlights that as a franchisee, you need to have a variety of skills that will allow you to be successful. “As the franchisee, this person needs to, first and foremost, be business minded and understand what is involved in managing a business successfully.”
He notes that the following skills are important for anyone wanting to buy into a franchise:
• Excellent leadership skills,
• Experience in managing staff,
• Skills in operating under stress,
• Experienced in managing finances and stock effectively,
• Driven by goals,
• Have a positive outlook,
• Have realistic expectations,
• Be encouraging to staff,
• Be passionate about service excellence, and
• Don’t be afraid of hard work.
Investing in a franchise
Once you have done all the research and decided on a franchise, the next step is to develop a business plan and to apply for funding.
According to Cronjé, the process of buying into a franchise typically takes up to six months if the business concept has already been well proven.
However, Valasis says: “[The process of buying into a franchise] is dependent on the industry and franchise brand, as well as the availability of funding and a suitable location or site. [It can take] anything from two to three months to four to five years.”
Cobbold provides a franchisor perceptive to the franchising process, explaining that there are several steps to purchasing and opening a branch of a franchise.
“The process looks something like this: Formal application process, screening of applicant, interview with applicant, proof of availability of funds by applicant, acceptance of the applicant, training of applicant, and then lastly the opening of store.”
The costs of buying into a franchise
The FASA explains: “Calculating the cost of setting up a business, especially a franchise business, goes beyond just having some capital to start – you need to factor in both initial and ongoing fees into account - everything from start-up capital to ongoing financing; from hidden costs to expansion funds. The financing of a franchise needs thorough research and careful planning and a clear understanding of the long-term financial requirements to making a success of the business.”
According to FASA, the fees within the total investment package of buying into a franchise include:
• The upfront or joining fee,
• The set up or establishment costs, and
• Working capital (the money needed to cover running costs before the business starts to make a profit).
Cronjé reveals: “If you’re looking at a new store, then the franchisor determines set up costs. In addition to that, the bank normally asks for a 50% owner’s contribution, which is the responsibility of the franchisee. This equals the investment amount.
“If you’re looking at taking on an existing store, then the selling price is determined by the value of the business and the franchisor needs to approve the sale of the business as well as approve the franchisee. Normally the investment amount depends on the serviceability of the business. In other words, the bank will ask the question: ‘What loan can the business afford?’”
In addition to these initial set up costs, there are also ongoing costs that the franchisee will be responsible for. The management services fee (the royalty fee), is a monthly fee paid to the franchisor. This can either be a fixed monthly amount, or a percentage of the franchisee’s profits.
Finally, the franchisee also has to contribute to the marketing services fund. This is a contribution to the national or regional marketing and advertising fund of the franchise.
Tips for investing in a franchise
Scholtz has a series of guidelines which he believes will assist people in purchasing the best franchise:
• Do something you love,
• Always buy where there is proven profit potential,
• Don’t be afraid to ask for help,
• Develop a business plan ,
• Don’t buy sight unseen,
• Get everything in writing,
• Anticipate the resell value, and
• Consult family and friends.
Kobus Engelbrecht, marketing head for Sanlam’s Business Market highlights that another issue to consider is insurance, particularly of key role players who have a financial impact on the business.
“The potential loss of a key person in a business constitutes a serious financial risk because they are the drivers behind the business’ success. Key person insurance is a simple and cost-effective solution that can be implemented to mitigate this risk. The business owns and pays the premiums of a policy on the life of the key person and should the key person die or become permanently disabled, the life insurer pays the proceeds of the policy to the business,” he explains.
