It is commonly said of business that if you’re not growing you’re dying. And whether you are trying to prevent competitors from muscling in on your market territory, establishing a foothold in a new sector or aiming to leave your big-name competitors chewing on your dust, this growth needs to be significant. However there’s a hurdle; the same one you probably came up against when you first started out. Funding. A healthy growth spurt usually requires a powerful capital injection, the kind that you know from experience is anything but easy to access. And so, mulling over the dilemma while sitting in the drive-through, the answer is literally handed to you. Follow MacDonalds and franchise. It’s that simple.
A simple solution?
It’s true that franchising provides a way for you to grow your market share in a way that you simply couldn’t on your own steam. As Bendeta Gordon, CEO of franchise consultancy company, Franchize Directions, confirms: “It gives the franchisor a rapid expansion route, certainly faster than opening up your own chain of stores slowly over time.
The economies of scale allow you to achieve critical mass far more rapidly so you can carry the type of infrastructure that allows your business to progress.” She cites a range of advantages including collated marketing spend, enhanced brand value due to more touch points with the consumer and bulk buying benefits, among many others. And, as she explains, because franchises have a vested interest in the business they tend to work harder, give a better level of service and remain closer to your consumer than an ordinary employee might.
“Provided there is a good communication conduit between franchisor and franchisee, the right kind of information will get back to franchisors about what is happening in their market,” explains Gordon.
Is your business up to it?
Although this might sound simple enough, the fact is that franchising is not suited to everyone. “Not every business concept is franchisable and not every businessperson can be a franchisor. It’s vital that people thinking of franchising their business consider these two important facts,” she says.
From a business perspective, the size of your market needs to be substantial enough to be able to support a chain of stores. “How many units of operation could you feasibly set up that will generate the kind of turnover needed to fund a franchise operation and still make profits?” she asks.
Next, look to the type of product or service offering you want to franchise. While it’s great to have carved out a niche for yourself in the market, too small a niche will limit your ability to franchise. “The products and services that do well in franchising, like fast-foot outlets and supermarkets, are successful because their market is not too niche and they offer something that generates repetitive purchasing,” says Gordon. However, it doesn’t do to have too general an offering either. “Distinctive positioning is critical to the success of franchising.
The brand has to have legs and there should be something very clear about why a consumer should frequent that business,” she adds. While brand recognition may only come with expansion into more outlets, it’s very important that the brand at least has ‘legs’ and clearly communicates the personality of the business.
Finally, you need to be able to standardise and replicate a significant portion of the business format. “There are a lot of businesses, such as consultancy-type operations, where too many of the critical processes rely on the personal attributes and skills of the consultant, for whom this is simply not possible,” says Gordon.
The franchisor personality
But as she pointed out initially, the business model is not the only factor that determines whether you will be successful in franchising. “Winning or losing in franchising comes down to the people,” she says, adding that being a franchisor is an entirely different role to being a small business owner. It’s not something suited to all personalities or levels of experience.
“Firstly it requires a mature and experienced businessperson. People with very limited business experience struggle terribly as franchisors and this is because their lack of experience in managing people makes it difficult for them to develop the kind of mature knowledge-sharing culture that is centred on people development. This is vital to attracting and retaining franchisees of quality,” she explains. You need to be willing to share your business system with your franchisees, something that many entrepreneurs find incredibly difficult to do.
The position also requires strong leadership. “You will have to monitor, assist and consult with franchisees but it’s important to remember that franchising is not a democracy and, when it comes to poor performance, the franchisor must have the leadership strength to pull errant franchisees into line,” she says. This strength needs to be tempered. “Franchisees are typically highly emotional and you need to be able to manage this maturely!” says Gordon. Apart from management skills, strong marketing and sales ability and financial acumen are critical.
Ready to roll?
It may be that both you and your business are well-suited to franchising, but this still doesn’t make you ready. When you franchise is as important as what you franchise and your business needs to have established a good operational and financial track record before you even think about expanding.
“The pilot franchise store needs to be in operation for a minimum of a year but even that is very short and I would advise that two to three years would give you a better indication of viability,” says Gordon. Franchising after one year – particularly if that year has been a good one – is not a great idea. Your business needs to have gone through a couple of cycles – both fat and lean – before you can truly come to grips with the market and the potential challenges that the future may hold.
This time will also allow you to conduct the necessary research required for franchising. “And remember that you should not only know your target market inside out,” says Gordon, “but you also need to research competitors in your field to see if you are sufficiently differentiated and what the rate of market saturation is like.”
Because franchising will change the business fundamentally, you also need to draw up a business plan that details all aspects of its expansion. Remember that you will need to establish an entire infrastructure to support the franchise operation – and, unless you have more than one self-owned outlet, will have to fund it for between 18 months and three years before you start covering your costs.
“In your planning and your growth, depending on what your capital resources and the existing size of business, you may need to outsource certain things such as marketing, training or even financial operations. A sound business plan will help to highlight these issues,” says Gordon. From a financial point of view, bear in mind that you need to factor in IT systems, transport and storage of stock (depending on the type of operation), rent, shop-fittings, a strong marketing launch and travel requirements. You can’t rely solely on the initial franchise fees to cover the capital intensive early stages of set-up, so plan accordingly.
The help of an expert in franchising can prove invaluable, not only in identifying whether you and your business are suited and ready to franchise, but also in raising important issues that you may not have even considered. “So often, our assessment reveals that prospective franchisors have not answered some of the critical big questions and don’t have plans in place to deal with things that our experience in the industry reveals are potential risks,” says Gordon.
Setting up the franchise structure
Gordon says that developing the franchise package can take at least six to eight months. During this time you will need to put together a franchise management team. Support for the franchisees is a critical success factor. “There has to be a dedicated individual or team whose sole function is maintaining contact with the franchisees, making sure they are operating according to the required standards and systems, and helping them with any challenges and queries they may have,” says Gordon.
Most franchisees are new to the game and a great deal of your franchise’s success or failure will hang on the quality of the training modules you put together. “When it comes to training, there are two elements that you need to consider,” says Gordon.
The first is training in operations. Each franchise has its own unique operating systems and procedures and it’s vital that franchisees are completely familiar with and competent in the use of these. If central operational processes such as ordering of stock, compilation of monthly reports and budgets, accounting and point of sale procedures are not standardised, your ability to maintain control of quality and standards will be compromised across your entire franchise operation. Many new franchisors choose to conduct their own training and while this keeps your costs down it pays to bear in mind that just because you’re closest to and most familiar with the company’s operations doesn’t necessarily mean you’re the best or most qualified person to train franchisees in this area. The input of a professional trainer can prove invaluable and is worth considering at this point.
The second area of training that you need to consider is management training. As Bendeta Gordon points out, although most franchisors place a strong focus on operational training, many of them neglect to train their franchisees in business management. Bear in mind that although franchisees might have business acumen, many of them come to franchising as first-time entrepreneurs and can benefit enormously from comprehensive training in things like marketing, financials and labour relations. Neglecting to cover these areas can set up their franchises – and therefore ultimately your business – for failure. Because different individuals will have different skills levels it’s a good idea to get each of their management abilities assessed so that you can target your training programme to meet specific needs prior to commencement.
When you become a franchisor, your biggest and most important role is to offer franchisees whatever support they require in order to run successful and profitable operations. Mature franchisors recognise the value of comprehensive support systems and reap the benefits these bring. In addition to group-wide marketing activities, franchisees may require input on the kinds of initiatives they can put in place for local area marketing. You need to specify the type of accounting, point of sale and stock management systems that the franchisee should be using. And although their initial training might have brought them up to speed on how to operate these systems, ongoing training is vital to maintain standards, reinforce brand messages and implement new systems and procedures effectively.
“Franchisors should also have a system in place that allows them to benchmark the performance of all the stores and a facility to provide this feedback and information back to the franchisee,” says Gordon. Not only will this keep you informed about the progress of each franchisee, but it will also provide them with clear and specific expectations and goals.
4 Factors To Consider Before Converting Your Independent Business Into A Franchise
Are you an experienced independent business owner who is struggling to keep your business going? Perhaps you should consider joining a franchise network to rebrand your business and attract more customers.
Until about a year or so ago, your local pizzeria business remained the anchor of your community – but lately sales have dropped as your once loyal customers flock to the latest pizza franchises to hit South African shores. At first it may have seemed like a fad, but very few customers have returned and you’re dreading the inevitable.
Instead of closing shop, you could convert your business into a franchise to compete. “But why would you want to trade in your independence to belong to a franchise? What do you get in return? And how can you decide if the leap from independent to franchisee is right for you?” asks CEO of FranChoice Inc. Jeff Elgin.
Here are four reasons conversion may be just what your business needs to boost sales and show marked growth:
1. Acquire brand influence
Being associated with a recognised brand could yield significant marketing advantages. Aligning your business with a name that has national top of mind awareness gives you the benefit of the franchisor driving brand recognition and customer growth on your behalf.
“Brand recognition can boost traffic right away,” says Laurie Pollock, a senior franchise consultant at FranChoice. “Effective marketing techniques are of significant impact as this is often an area where small business owners struggle.” Your monthly marketing fee could fund a national marketing campaign that dwarfs your current flyers on specials board currently posted on the shop window.
2. Receive support from the franchisor
Right now, as an independent business owner, you are responsible for every detail of your business operations. From finding an efficient bookkeeping system, to cost analysis and sourcing quality suppliers for any new options your customers might be interested in.
If you join a franchise system, the resources to help you figure these things out will be available to you from your franchisor. “Franchisors keep abreast of the changes on behalf of their franchisees, so owners can focus on their customers,” says Pollock.
3. Benefit from increased purchasing power
As a franchisee, you should expect significant savings on inventory thanks to the franchisor’s bargaining power. Besides the benefit of being associated with a large system, franchisors are industry experts. This helps you – as experienced as you are as an independent business owner – capitalise on a combination of best practices and the latest technology, in addition to group buying power.
4. Adopt a proven (winning) concept
When you started your business all those years ago, it only had a 10% chance of being successful. Sustain your triumph thus far, by buying into a system tested and proven by other business owners in the franchise chain. The franchise’s current franchisees who have produced the highest possible level of success from the business are good testimonials while making your decision, but remember that:
“Before converting and becoming part of a franchise system, you may need to shift your thinking from ‘I’ve always done it this way’ to ‘I’m ready to learn a new way; I’m ready to do it your way,’” advises Pollock.
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 firstname.lastname@example.org.
(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 email@example.com.
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