When Fred DeLuca and Peter Buck started Subway, they set an audacious goal. They wanted 34 restaurants in 10 years. What’s more, they allowed this plan to drive their strategy and decision-making. When, after eight years, they were at only 16 stores, they knew they needed to do something different to reach their goal, so they turned to a new strategy: franchising.
Over the years, Subway set new goals. When a goal became unlikely to be met, the company made another change in strategy.
There’s an important message here: start your planning with the end in mind.
If your goal is to eventually sell your franchise, don’t ask yourself what you think it will be worth. Instead, plan for it to be worth what you want to fetch. Here’s how to get started by ‘reverse engineering’ your goal.
Estimate the earnings needed to secure your desired sale price
Once you know how much you want to sell for and by when, you are ready to start looking at valuation questions. Generally, the most common method of ascribing value to a company is through a ‘price/earnings ratio.’ The P/E ratio for any particular business will generally be a function of several factors such as your rate of growth, developments in your industry and how well the company is run. But an examination of the selling prices (and P/E ratios) of comparable companies can give you a good starting point. By dividing your desired selling price by this presumed P/E ratio, you can approximate the level of earnings that you may need to reach your objectives.
Estimate the number of franchises needed to reach your earnings goal
You will need to build a growth plan and financial model that will get you to that level of earnings. Start by approximating the number of franchises you will need to sell to get to an appropriate revenue level. This can be done by estimating the amount of royalty and product sales revenue that you’d need to generate from each franchisee.
Figure out a royalty rate
Determining the royalty can be tricky. Your royalty will need to be set at a level that will allow your franchisees to make an adequate return while providing you with the ability to provide support and generate a profit. A 1% error on the royalty can literally cost you millions. Determining the royalty will require benchmarking, analysis and financial modelling – but it is the most important financial decision you will make as a franchisor.
Map out your growth plan
The number of franchises you need to sell should dictate your growth plan. You are likely to want to ‘ramp up’ your franchises over time to optimise cash flow and valuation. You can use industry averages to figure the amount of franchise advertising you will need to spend in any given year. You can use standard staffing ratios (adjusted for your specific business) and pay scales to determine when you need to hire certain people, how much you will pay them, and even how much office space you will need at any given time. This data can be incorporated into a cash flow model that will outline how much money you will need to spend to meet these goals.
Sure, things rarely work out perfectly on the first go-round. Your analysis may tell you that you do not have enough money to meet your objectives in the time you have allotted. You may need to go back to the drawing board.
You can, of course, reduce your goal and start the exercise over. Or you can lengthen the amount of time that you will devote to reaching that goal. Alternatively, you can look to change your strategy.
All too often, entrepreneurs allow inertia to drive their success and direction. But if you want to get somewhere in particular, start with a goal, and then reduce it to specific action steps.
While it can be an arduous process, your result will be a step-by-step roadmap to success on your terms.
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.
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.
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.
For further information on franchise funding send an email to email@example.com.
(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.
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.
What we offer
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).
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 firstname.lastname@example.org.
Great Service At Entry Level
Sometimes in our country you find great customer service at the lowest rung on our economy.
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.
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.
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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