According to The South African Franchise Market survey released by FASA (2014), the times taken for new franchises to break even are:
- Up to six months 43%
- Seven to twelve months 28%
- More than a year 17%.
It is important to understand why it is necessary to have sufficient unencumbered funds so that the business isn’t geared too high and you don’t end up drowning before you reach break-even.
We recommend: Checklist for Interviewing Existing Franchisees
Sufficient working capital while your business reaches break-even is also critical to start-up success. The 11 sectors listed below reflect the working capital required by franchisors when buying a franchise.
- B2B –R400 487
- Automotive –R363 250
- Fast food and restaurants –R224 250
- Construction and related –R201 250
- Retailing –R186 083
- Building, office and home services –R152 957
- Health, beauty and fitness –R152 000
- Real estate –R100 000
- Childcare, education and training –R96 750
- Leisure and entertainment –R65 250
- Personal services –R54 032
Understand different routes for finance
On the road to owning your own franchise, one of the biggest looming obstacles to making it happen is finance. If you think it will be easier than financing a start-up simply because it’s a franchise with a proven concept, you’re in for a surprise. So how do you drum up the dosh?
Once you’ve been approved by the franchisor, ask them for a list of preferred lenders and details of lender expectations. If the franchisor has been around for some time, chances are they’ve developed relationships with certain finance institutions.
While industry experience and ability to run a business play a large part in successful finance, lenders tend to loosen the purse strings more readily for an applicant who has been given the green light from a reputable franchisor.
Some franchisors are also able to provide some of the finance themselves or through partnerships with lenders. Taste Holdings, for example, has partnered with Nedbank and Brimstone Investment to create a funding model that helps prospective Fish &Chip Co franchisees and Zebro’s franchisees to gain finance.
If you’re going to approach a bank for finance there are a few things you’ll need to consider before you do. Banks like hard numbers. As always, solid business plans with strong financials and a great credit history are essential to success.
Industry experience or a related history is also a big plus, but perhaps most importantly, the lender is going to be focused on how strong the organisation is and what kind of support it can give its franchisees.
Provide a detailed explanation of how you plan to save money on equipment and supply arrangements, your research on buying versus leasing, your plan for hiring and managing employees, for finding real estate and so on. It will show the lender you’re thinking about this.
Top tip: If the franchisor hasn’t been in business for long, be prepared to sell the lenders on it with strong numbers.
Tapping retirement funds
Some consider it risky to tap retirement assets for a new business venture, but others see it as a natural fit. The question you need to ask is whether you’re willing to take the risk and build equity in something you’re managing rather than leaving it up to others.
If you choose to go that route, it has the advantage of not having any debt to repay.
As for the risks, it may not be that different from the risks associated with loans that call for personal assets as collateral, provided you’re young enough to shake it off and get saving again.
If you’re reaching retirement though, assess your decision carefully. With enough careful planning and due diligence, you can mitigate the dangers, but any business venture is a risk.
We recommend: Look at the Complete Picture Before Investing
Cracking the nest egg
Even if you take out a loan, you can still use your personal savings as a down payment or a cushion until the profits get rolling.
Bear in mind that most franchises require a minimum 50% unencumbered capital, so the more money you have saved up, the more can go towards working capital or emergency funds.
The other F-word
We’re talking about friends, family and fools. But just because you’re on familiar terms doesn’t mean you can skip the important business plan process, expect to borrow money with no financial reward for the lenders, or run the risk of ruining relationships if your venture flops.
Conquer Your Franchise Fears
Looking to finally open up a business and quit the nine-to-five life? Here are five fears you’ll have to conquer.
Owning a business is treacherous ground. You’ll face great risks, from the inception of your business through the growth stage, and even as you stabilise and gain momentum.If you’re going to be successful as a business owner, you need to be prepared for those risks, and address your fears proactively.
While each entrepreneur and business is unique, there are five common fears that almost every business owner will need to face before starting a business:
1. Running out of money
Capital is one of the biggest concerns most entrepreneurs have, and with good reason.
Starting a business requires a lot of money, which usually comes directly from the entrepreneur’s savings, or the pockets of independent investors.
If you can’t secure a reliable revenue stream by the time that initial start-up capital runs out, the business is in jeopardy of being lost for good.
Disappointing investors is one thing, but losing your life savings is another.
Related: The Danger Of Being Franchisee No. 1
2. Not being good enough
The fear of not being good enough can be debilitating for new entrepreneurs. Remember a simple concept that applies to all businesses: Launching with a minimum viable product. Your product doesn’t have to be perfect when it first launches, and it doesn’t have to be the best.
It just has to be acceptable. From there, you’ll have plenty of room to make improvements to it over time. No product ever starts out perfect — some of the greatest businesses in the world probably started with a product of a similar quality to yours.
As a business owner in an established operating model, you too can be a minimum viable product. You don’t have to make all the right decisions, and you don’t need to be a perfect leader. You just have to be passable until you have the time and experience to improve yourself.
The fear of failure gets the better of all of us occasionally. There are small failures, such as a botched email marketing campaign, and massive failures, such as your company going under.
Failure will set you back no matter what, but you can’t let the fear of failure stop you from making a decision. Failure is only the end of the road if you let it be. Otherwise, it’s just a temporary stopping point in a long path to a final destination.
More important, failures are learning opportunities. Every failure you experience yields a lesson you can incorporate into your business or your life.
Related: How Risky Is That Franchise?
4. Being overwhelmed
The decision to be a business owner isn’t made because it’s easy. It’s made because it’s a challenge with many rewards along the way.
If you’re getting into entrepreneurship because it seems like an easy way to get rich quick, someone has lied to you. Entrepreneurship is riddled with obstacles, stress and hard work.
But the upside of ownership is control. Yes, you will inevitably feel overwhelmed at times, but it’s all completely within your power to change. If you’re dealing with too many financial problems, you can hire a financial advisor. If you aren’t getting the results you want out of your developer, you can let him/her go and seek new help.
You will experience a greater workload than you’ve ever faced before, but remember that you’ll be in full control of your destiny.
5. The unknown
The unknown is indescribable and impossible to prepare for. When you first get started with a business plan, a bit of money and maybe a partner or a mentor by your side, you’ll have no idea what to expect in your first year. For many, it’s a thrilling thought, but it’s also terrifying.
Related: Franchise Or Start-Up?
Owning a business isn’t a job. It becomes a lifestyle. You’re choosing to be in this role because you’re a risk-taker, you’re passionate, you work hard and you believe in your idea. Those four qualities are more than enough to conquer any obstacle that gets in your way — even the unknown ones. So put those fears to rest and believe in yourself.
Business ownership isn’t for the fearless. It’s for the individuals who are prepared enough and strong enough to learn from their fears and work past them. Instead of avoiding your fears, embrace them, and use them as a motivation to learn more about your business and prevent disaster.
“Should I Look Into An Established Or Emerging Franchise?” – 3 Factors To Consider
Choosing a winning franchise is crucial for your first big business investment. You need to weigh up the benefits and drawbacks of sticking to a recognised name or investing in a trendy newcomer.
If you had to choose between opening up a McDonald’s or a RocoMama’s, what would your choice be based on? One’s global, while the other is local, yes – but one’s also been around longer and would therefore be your safest and more profitable option, right? Not necessarily.
Franchising experts suggest you consider several franchise opportunities before deciding on the one that’s right for you. The challenge is to decide on one that’s of interest to you and makes investment sense.
“While joining a franchise with an established track record can be beneficial,” SME Toolkit South Africa reports.
“An emerging franchise gives you the chance to get in on the ground floor of what could be a highly profitable growth opportunity.”
Here are a few other considerations to make before taking the plunge:
1What’s in a name?
Everyone knows the ‘golden arches’, the grinning face of Colonel Sanders or the black and red rooster. “When it comes to choosing between different sizes of franchise systems, one of the most important factors can be brand recognition,” notes Jeff Goldstein of Goldstein Law Firm.
“The ability to instantly benefit from a known brand is a key benefit for many new franchisees, because the business will generally be stronger with a larger, more-established franchise system.”
But if you’re looking to build a brand as opposed to joining it, a smaller franchise could be your match, says Terry Powell, whose company, The Entrepreneur’s Source, helps individuals find the right franchise concept for themselves.
“Early franchisees get to be part of the development and have their ideas listened to, while established brands just want you to follow the programme,” says Powell.
2How much help is offered?
Training sessions, extensive manuals and national marketing campaigns are part and parcel of joining a big franchise. Understandably, this could appeal to the newbie in you, but wouldn’t you rather receive more attention as an early-stage franchisee – “Where your success or failure may have a much greater impact on the franchise system as a whole,” Goldstein says.
If it sounds like too much pressure, perhaps intensive training would suit you best. If however, you’re more independent and have a little more business acumen, you could contribute a lot more to the franchise than you can imagine.
3Show me the money
New franchises will typically have lower joining, royalty and marketing fees. But you also need to consider the emerging franchise’s financials before looking at your own.
“As with any investment, there are liabilities to being an early adopter,” says Brent Dowling, COO at franchise consulting company, RainTree.
“Without a track record of success in different markets, there is the risk that the brand just isn’t as replicable as predicted,” says Dowling.
Also remember that it may take a while for emerging brands to reach what Powell calls “the stage of critical mass”, when growth begins to happen more rapidly and exponentially.
So, are you in it for a quick buck or the long haul? The answer to that question could help you choose your very first and best franchise investment.
To Franchise Or Not To Franchise? Which Will Be Right For You
Before taking the leap of handing over operations to several store owners, consider this.
Whenever I meet with an entrepreneur interested in franchising I ask, “Where do you want to be in five years?” Perhaps unsurprisingly, most entrepreneurs have never given any thought to the question before. But to determine which growth strategy is best, I need to understand three things: Their personal goals of ownership, the assets (both human and capital) they can devote to achieving those goals and the time frame within which they hope to accomplish them.
Armed with that knowledge, the strategy you will choose is often just a matter of plugging in the numbers.
Business owners often tell me they want to grow as fast as possible without sacrificing quality. But that’s just an ownership philosophy. In order to use goals as a foundation for your decision-making, they must be concrete, measurable and tied to a specific time frame.
Consider the long-term over temporary glory
I encourage my clients to start by asking ‘lifestyle’ questions:
- Do you want to still be working in the business in five years?
- Do you want to sell the business?
- Are you looking to pass this company onto your heirs?
- If you are looking to cash out, how much money is ‘enough’ — not only for the time and effort you will have devoted to developing the business, but for you to move on with the next phase of your life?
- If you want to hold on to your business, how much would you like to be earning at a certain point in the future?
When you ask yourself how much you want for your business when you sell, it is important that you do not ask how much you think it will be worth.
Valuation should not enter this process until later. Instead, ask yourself where you want to be personally. Do you want to retire? If so, do you want to be living on your private island collecting shells? Or would you be happy on a golf course somewhere? Or do you want to open a new business and move on?
Once you have painted the picture in your mind of where you want to be, you should ask yourself how much money it will take for you to achieve that goal.
Money makes the franchise go round
Next, let’s talk capital. Franchising is a low-cost means of expansion, but it isn’t a no-cost means. If you go into a business undercapitalised, you run the risk of taking a nine-foot leap across a ten-foot ditch. In addition to the costs of developing appropriate strategies, manuals, marketing materials and legal documents, you will have costs associated with franchise marketing and franchise sales.
If you don’t have the capital needed to properly support your franchisees, you increase your risk of franchisee failure, difficult franchisee relationships and litigation.
In franchising, there are three ways to capitalise on your initial development efforts:
- You can have the capital (or access to the capital through lenders or investors) when you begin franchising.
- The cash flow from your company-owned operations to fund your entry into franchising can be used.
- Try financing your franchise efforts out of your initial fees and/or product sales — although that’s considered a ‘worst practice’ in franchising, because it often encourages franchise sales to unqualified candidates.
One of the most critical things to remember when making the decision to franchise is that you are creating a new business — not simply an extension of your existing business. Regardless of the business you first founded, you need to understand that franchising is the business of selling and servicing franchisees. And your first and most important priority in that business must be to make your franchisees successful.
Related: 3 Secrets To Franchising Success
There’s an old piece of wisdom floating around the franchising world, and it goes like this: You can’t franchise unless you have at least two operating units. As you explore franchising, some people may tell you that. But they’re wrong.
The entrepreneur who spent a year opening his second location would have two operating locations and could now offer franchises with the expectations of a 2,2% close rate.
In contrast, the entrepreneur who spent a year franchising with a lower, 2% close rate would have one corporate location but perhaps 10 franchise locations — allowing her an even higher close rate, more publicity and a faster jump on competitors.
Two (or more) is better than one location
Once an entrepreneur decides to franchise, they sometimes wonder if they can open more company-owned units. The answer: Yes, absolutely. And depending on the company, that may be a valuable strategy.
The vast majority of franchisors use both company-owned and franchise strategies in combination. Some franchisors will choose to own and operate the best locations or markets while franchising secondary and tertiary markets.
Others will choose to develop a company-owned presence in their core marketplace and franchise in more distant markets. And some treat company growth and franchise growth opportunistically and end up with many markets that have both franchise and company-owned locations.
Regardless of the strategy taken to integrate these two growth models, for many companies, the combination of franchising and company-owned growth provides the best of both worlds. From a purely financial standpoint, it’s almost impossible to beat.
The excess cash produced by your successful franchise operations can fuel increased franchise growth, but at a certain point, the cash used for franchise lead generation will outstrip your opportunities to spend it wisely on franchise marketing. Reinvesting in corporate locations can improve your cash flow and build your balance sheet.
Before taking the leap…
If a franchise keeps its expenses in check, it can be profitable and recapture its initial investment by selling a single franchise. Its only incremental expense will be the sweat equity it invests in the franchise programme.
If you are still seriously thinking of franchising, think hard about what it means for your business, and for you. It’s a big decision.
Ask yourself the following seven questions right now:
- Is my business franchisable?
- Do I need to franchise to achieve my personal goals?
- What is happening in my marketplace?
- Will I be committed to the success of my franchisees?
- Do I have adequate resources?
- Do I have the intestinal fortitude to do franchising right — even if it means not selling a franchise to someone I believe will fail or will not meet brand standards?
- Do I have the fire in the belly to make this happen?
The ultimate answer to whether or when you should franchise cannot be found in any magazine, nor can it be provided by a consultant, an accountant or an attorney.
It doesn’t matter if the market is ready, or if the concept is ready. The answer to this big question can be found only within yourself. So it’s time to ask: Are you ready?
Present vs future business goals
Next, determine where your business is now:
- How well-defined is the concept?
- How much money is it making, and what is its current value?
- What are its financial and human resources?
- How strong is the management team?
- Is it ready for expansion?
Once you have answers to these two variables, you can measure the distance between your current reality and the goals you have set. That distance, combined with an understanding of your goals, capabilities and time frame, will dictate your strategy.