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.
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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