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When Not To Franchise

Franchising involves risks as well as rewards. Here’s what you should know before franchising your business.

Mark Siebert

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While some of my franchising brethren may think this heresy, I feel compelled to say that franchising is not right for every successful business. In fact, franchising can be a very wrong strategy for certain businesses and certain business owners.

I am a strong advocate of franchising. When someone decides to franchise a business, perhaps the most important precept to understand is they’re starting an entirely new business – that of selling franchises and servicing franchisees. And, as with any new business venture, there are risks involved. So how do you assess those risks? And how can you best judge whether franchising is the right strategy to pursue?

The Downside of Franchising

Surprisingly to many, the biggest risk for companies that decide to franchise is not found in the investment that’s made in becoming a franchisor. A new franchisor can easily invest R400 000 or more in the development of business plans, legal documents, operations manuals and marketing materials – before the first rand is spent on franchise advertising. But that risk is largely quantifiable and readily recovered for the franchisor who can sell any franchises at all.

In fact, many people considering franchising for the first time will ask me, “How many franchises do I have to sell to make it worth my investment?” The answer can be as low as “one.” What many individuals don’t understand is that franchises are, in effect, virtual annuities – providing a stream of royalty revenue that may stretch 20 years or longer. If a franchisor can generate R80 000 to R300 000 a year or more in royalty revenues from a single franchise, even one franchise sale will pay the price of entry – assuming, of course, that no incremental staff is needed to service a single franchisee.

Franchisors looking for early-stage hyper-growth see many more substantial risks. This is because franchisors attempting to grow more quickly need to hire staff to sell and service franchisees. They need to spend money on franchise marketing. And they need to focus on the business of franchising – sometimes to the detriment of the core business they’ve established. When a franchisor gears up for faster growth, suddenly it becomes a balancing act between the resources devoted to franchising and the revenues it generates.

All of these balancing acts are manageable if you have a good plan, a sound concept and a qualified management team. But without a strong and replicable concept, you will certainly fail.
More often than not, franchisor failures are a direct result of failed franchisees. Failed franchisees require more in the way of support. They pay less – or nothing – in royalties. They stall (or stop) franchise sales efforts when they talk to prospective franchisees. They can destroy the franchisor’s brand by failing to live up to brand standards.

And they can be the source of litigation and bad publicity. In short, not only do failed franchisees threaten the franchise system, but they can also threaten the core business. Thus, the first decision to franchise must start with an honest assessment of the business itself.

Is Your Business Ready?

Many business owners think of franchising as some kind of ‘magic pill’ that’ll cure a business through the economies of scale that come from expansion. It’s not.

There are really three core criteria for franchiseability: You must be able to sell franchises, you must be able to duplicate the business, and you must be able to provide your franchisees with an appropriate return on the time and money they invest.

Let’s start with saleability. In scanning the franchise universe, one can readily find franchises that don’t appear to be attractive to potential franchisees. Not every franchise opportunity is glamorous, sexy and fun, but what every business must have is something that sets it apart from its competitors. To be ‘saleable,’ a business must have credibility in the eyes of its franchise prospects. That can come from strength of management, a track record of success, publicity or any of a number of places.

Beyond saleability, franchisors need to be able to duplicate their success in multiple markets, and some businesses don’t make good candidates. Food concepts that rely on a regional product, or retail concepts located in a one-of-a-kind location are difficult to franchise.

The acid test of franchising is return on investment (ROI). A franchised business must be profitable. More than that, it must allow enough profit after a royalty for the franchisees to earn an adequate return on their investment of time and money.

Profitability is always relative. It must be measured against investment to provide a meaningful number. In this way, the franchise investment can be measured against other investments of comparable risk.
If your business doesn’t meet these criteria, don’t franchise. Period.

As a franchise consultant since 1985, Mark Siebert founded the iFranchise Group, a franchise consulting firm, in 1999. During his career, Mark has personally assisted more than 30 Fortune 1000 companies and over 200 startup franchisors. He regularly conducts workshops and seminars on franchising around the world. For more than a decade, Mark also has been actively involved in assisting U.S. franchisors in expanding abroad. In 2001, he co-founded Franchise Investors Inc., an investment firm specializing in franchise companies. He's on the board of directors of the American Association of Franchisees and Dealers and the board of advisors to Connections for Community Ownership, which encourages minority business and job development through franchising.

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Freedom As A Franchise Owner With Less Risk

Franchising could therefore provide freedom to new business owners as a business opportunity, with the following reduced risks.

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Over the past two decades South Africa saw an influx of international firms selling franchises, as well as an increase in local ones. The franchise sector provides ideal opportunities for small to medium enterprises and is an effective vehicle for growth. Its importance to the economy is significant, contributing an estimated 13,3% to the country’s gross domestic product. There are more than 800 franchised systems operating countrywide, with over 40 528 franchised businesses employing more than 343 000 people.

Franchises, such as Mugg & Bean and Nandos, are among many South African firms operating around the world. Today, at least 90% of franchises in the country are local firms.

The franchise industry is a money-spinner and those prepared to work hard can benefit. There are many success stories of how people left the corporate world to seek freedom in running their own franchises.

A consideration for gaining freedom could be a standalone business. However, one has to be mindful that businesses are experiencing challenges due to the tough economic conditions in the country and the world. It is also becoming more expensive to do business as a result of increased lending rates, electricity costs, staffing and rental.

Related: Should You Purchase An Existing Franchise?

happy-franchise-owner

Franchising could therefore provide freedom to new business owners as a business opportunity, with the following reduced risks:

  • Due to the brand’s support structures, it is possible for business owners to open a store without the risk of failure experienced with independent business owners.
  • Franchisees have the advantage of a turnkey operation without having to blindly set up a store and secure suppliers, which makes franchising a sleek and fast way to set up a business.
  • With a good support structure and management team, franchisees are able to customise their working hours according to peak and crucial trading times.
  • With the backing of a recognised and responsible brand, franchisees’ expansion plans are escalated and the probability of becoming a multi-unit business owner improves.
  • As business owners, franchisees are ultimately still responsible for and in control of their bottomline. The more efficiently and effectively a store is managed, the more profitable the business will be.
  • Franchisees have more control over their competitor landscape than licensee holders and independent business owners. Most franchise concepts guarantee a certain radius of trading territory, which gives franchisees the advantage of no new competitor entrants within the brand.

Nedbank Business Banking has the following tips on how one can tap into franchising opportunities:

  • Identify a franchise within your area of expertise.
  • Raise the capital through own or loan funds – at least 50% personal savings are required to start up the business.
  • Understand the business and do market research.
  • Draw up a business plan – without one, no financial institution will understand your vision.
  • Maintain a good credit history – check the status of your profile through the various agencies as this impacts rental agreements, financial applications and credit for the business.
  • Obtain financing options from the franchisor.
  • Get an accountant and a lawyer – financial and legal expertise is necessary, especially with new regulations.
  • Understand the implications of the Franchise Industry Code of Conduct.

Related: Owning A Franchise – Good Idea Or Bad Idea?

For further information on franchise funding send an email to franchising@nedbank.co.za.

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(Watch) Franchises Help Create Jobs

The franchise sector has not been immune to the challenges of the current economic climate. However, it has demonstrated resilience and continues to play a key role in contributing to the economy and creating jobs.

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Mark Rose, Head of New Business Development, on Nedbank Franchising

Recent statistics from the Franchise Association of South Africa reveal that the industry has grown to over 750 franchise systems, with nearly 35 000 franchise outlets, contributing an estimated 11,6% to South Africa’s gross domestic product (GDP) through an estimated R493 billion in turnover in 2016. The franchise sector has helped create more than 350 000 jobs.

See money differently

Nedbank’s new brand proposition encourages clients to ‘see money differently’. We have a broad spectrum of finance products available to clients who wish to become involved in franchising. This includes access to working capital facilities, asset-based finance loans, debtors finance and term loans to enable entrepreneurs to fulfil their dreams.

There are obvious benefits to purchasing a franchise rather than starting an entirely new business, since being linked to an existing brand established in the marketplace can make the financing process easier. We offer funding for all franchise models. However, preference is given to brands that demonstrate ethical behaviour, have operational structures in place and, most importantly, are able to offer their franchisees support, especially in difficult times.

As a bank for business, Nedbank’s finance application approval rate is higher for franchises than for independent business, as we rely on the inherent benefits of a franchise system.

Related: Should You Purchase An Existing Franchise?

What we offer

nedbank-offers

Nedbank has customised packages for franchises that cover lending, transactional banking and value-adding and investment solutions.

Pre-negotiated pricing also provides the respective brands with upfront pricing on transactional banking services.

These are delivered through our local regional offices, which are supported by a centralised credit unit to ensure quick turnaround times on decisions.

Finance solutions for franchises include:

  • New-store financing
  • Financing for resale transactions
  • Financing for multistore transactions
  • Finance packages for alternative energy efficient solutions/projects
  • Financing for revamps or refurbishment.

What we look for in a potential franchisee

As a bank our assessment of potential franchisees is based primarily on the viability of the business: affordability must be evident, location of the business must be sound, the franchisee must have sufficient experience and a healthy credit record, and the franchisor must provide a support mechanism.

Nedbank will assess the application in line with these requirements. The franchisee is generally required to invest 50% in unencumbered funds in the franchise. The finance gearing for the purchase of multiple stores is negotiable, depending on debt levels and performance of your existing outlet(s).

Related: Owning A Franchise – Good Idea Or Bad Idea?

To ensure the success of franchisees Nedbank offers additional support in the form of transactional products and services, such as card acquiring services, merchant facilities and electronic banking, which have been designed to add value to franchisees, giving them the edge to succeed in a competitive environment.

Innovation for clients

Nedbank has also introduced a solution for franchisees who have to secure a fuel or rental guarantee, allowing franchisees to secure a guarantee without having to provide the bank with cash cover.

We also offer a variety of products, such as Market Edge, a first-in-market data analytics tool that enables clients to gain insights into their customers’ behaviour and to develop strategies for their business on a multilayered, real-time and user-friendly dashboard.

GAP Access is another innovative product that enables the bank to provide Nedbank merchants with access to working capital, advanced against their point-of-sale (POS) terminal turnover. Repayments are made daily as a small percentage of card turnover, while cashflow is tracked and the merchant is net-settled.

Related: 3 Secrets To Franchising Success

Nedbank Business Banking

Our tailored solutions take franchisees’ current and future goals into consideration, and aim to assist franchises in attaining the competitive edge needed to succeed. A dedicated business banker gives franchise owners the opportunity to have an experienced financial expert as a partner in their business.

For more information on franchising email us at franchising@nedbank.co.za.

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Franchise Your Business

Great Service At Entry Level

Sometimes in our country you find great customer service at the lowest rung on our economy.

Basil O’Hagan

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I’m speaking about the informal sector and below – people who barely even have jobs, but who deal with the public every day.

These are the car guards, the ladies selling loose cigarettes at kip-kip stands and spaza shops, the gents with the black bags at the robots, the window washers… Some see these people as a nuisance, but often they do provide a service. The best among them are a pleasure to deal with.

I know a man named Sabelo, whom I’ve been dealing with for almost a decade at a set of robots near my house. He’s never been less than friendly, polite and helpful. We do regular business, with him taking some of my car litter off my hands and me paying him a few rands each time.

Related: See You At The Top: A Guide To Winning At Customer Service

Ironically, some of the biggest multinationals in the game don’t even show the same level of human sincerity and customer service as a humble robot guy.

I recently visited the coffee shop at a cellular service provider. There I had a horrendous service experience. There was no welcome, no smile, no menu, no TV. I was kept waiting for more than an hour as staff shouted across the restaurant at each other. In the end, they couldn’t provide a receipt slip for my meal. I couldn’t wait to get out of there.

The best part of the whole experience was the parking attendant. He was enthusiastic, smiling and helpful, and created a great first impression when I arrived. He should be working at reception and representing the brand, instead of the current staff, who couldn’t care less.

The learning, for me, is that people who work at the street level are often well-versed in personal interaction, in making connections and naturals at customer service.

management advice

Related: 9 Top Customer Service Turnoffs That Are Chasing Away Your Sales

Service Tip: Offering someone a job is a lost art, in these days of job applications, CVs and employment agencies. But there is talent lurking everywhere. Keep an eye out for it, and don’t be shy to offer someone an opportunity.

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