This is the correct approach; as we shall see, expansion through a network of motivated owner-operators speeds up the process and reduces risk. But while franchising has the potential to turbo-charge growth, it brings with it its own set of risks. This article explains what it takes to franchise your business successfully.
Realistic assessment of franchise potential
Franchising is a very flexible concept. It can be adapted to the needs of many different industry sectors and product groups but this does not mean that every business can – or should – be franchised. I have identified 12 Critical Success Factors and reproduce them below, albeit in a condensed format.
- Does the business operate in a large and growing market?
- Is the growth in the market likely to be sustainable?
- Are margins attainable by franchisees sufficient to pay franchise fees and still stay competitive and profitable?
- Can the product or service demand a price premium?
- Does the franchisor have access to sufficient development capital?
- Does the potential exist to establish a memorable brand?
- Is there a substantial barrier to entry?
- Will the franchise development costs allow adequate returns for the franchisor?
- Is it possible to grow a franchise culture in the company?
- Does the concept have staying power?
- Is it relatively easy to train new franchisees?
- Are adequate systems and procedures in place?
As soon as these questions can be answered satisfactorily you are ready to franchise your business. This begs the question: why should you bother? I answer it in the next paragraph.
Advantages of franchising your business
When a business is ready for expansion, the establishment of branches is the most widely considered option. Unfortunately, this requires a huge capital outlay and trading results achieved through manager-operated branches are rarely satisfactory. By expanding your business via the franchise model, you have dedicated owner-operators put up the necessary capital and take full operational responsibility.
This speeds up expansion and helps to gain market share much quicker than may otherwise be possible. The resulting economies of scale will accelerate growth even more. By the same token, to roll out a franchise without having the necessary infrastructure in place can quite easily turn into an unmitigated disaster; it can even destroy the brand.
The first step is the setting of the strategic direction. This requires the drafting of a Franchise Plan, essentially a business plan for the franchise operation.
Next, piloting must take place. This is absolutely necessary; if the business is new, it should extend over a period of 12-18 months while established businesses can complete the process within 4-6 months. Feedback obtained from piloting will help optimise the product range and perfect processes, systems and procedures. It will also facilitate the development of the franchisee profile.
The creation of the franchise package follows. It consists of the operations manual, the franchise agreement and the disclosure document. A detailed country development plan and franchise marketing materials must also be developed.
During this phase of the project, assistance by experienced franchise practitioners is invaluable. An experienced consultant will guide you through the entire process and provide the necessary documentation. Good consultants don’t come cheap – budget for between R400-500 000 – but involving one ensures that the package will stand up to scrutiny, not only in the market place but also against possible challenges under the Competition Act and the Consumer Protection Act.
At this critical juncture, patience is required. Accepting unsuitable individuals as franchisees just because they can support the required investment is the most common mistake new franchisors make. The other mistake is growing too fast too soon. It is much better to start slowly by attracting the right individuals and guiding them towards success. As soon as 2-3 franchisees are beginning to make money, the pace of expansion can – and in fact should – be stepped up drastically. This will help to achieve economies of scale and make the franchise operation profitable.
Reaping the rewards
Provided that sound foundations have been laid in the beginning, there is absolutely no reason why a franchise network shouldn’t be ready for international expansion within 5-7 years after start-up. Depending on the distances involved, international expansion can take the form of direct franchising or master licence arrangements. In addition to our neighbouring countries, where South African brands are highly respected, the rest of Africa and indeed the entire English-speaking world beckon. Are you up to it?
“Written by Eric Parker (Franchising Plus) in association with Nedbank”
Copyright of this article rests with the authors
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.
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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