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Franchisee Advice

Be On Good Terms with Your Franchisor

Here’s what you, as franchisee, should expect from your relationship with the franchisor.

Mark Siebert

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It’s not a marriage

  • What is the main challenge facing any new franchisee?
  • Is it the rental of a business space?
  • Is it managing the daily running costs?
  • Is it finding the right staff members?
  • Or perhaps the difficulty of dealing with established competitors?

No, it’s none of these. Sure, these are all important issues that need to be addressed, but there is an even bigger challenge: Managing the relationship with one’s franchisor, according to the 2014 Franchise Association of South Africa (FASA) Franchisee Survey.

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Of all the franchisees questioned during the survey, 28% cited the relationship with the franchisor as being the main challenge.

This makes it, by quite some margin, the biggest issue facing new franchisees (second place is a tie at 13% between managing staff and paying franchise fees).

The main problem is that franchisees (and even many franchisors) define the nature of the relationship incorrectly.

Far too often, it is described as a marriage, but it isn’t that at all. It is actually more of a parental relationship than anything else.

Why it’s not a marriage

We’ve often heard people compare the franchisor-franchisee relationship to that of a marriage.

They will talk about the ‘honeymoon’ period and how the franchisor and franchisee are in ‘partnership’ together for a common purpose. And while this analogy may have some merit, a marriage is exactly what the franchise relationship should not be.

When we think of marriage, we think of a joint-venture relationship. In a joint venture, there are partners. Because of the relatively equal footing of the ‘partners’, the typical joint venture starts out with a negotiation – and is often a series of ongoing negotiations.

Like a marriage, there are the ‘who does the dishes’ issues, and then there are the more serious issues, such as money. Because each joint venture is unique, every one of these issues is usually subject to negotiation.

Because a joint-venture partner is usually compensated based on how much money goes to the bottom line, one concern that most ‘marriages’ have is how the accounting gets done.

On a one-off basis, this is fairly easy to monitor. But on a massive scale, it is almost impossible. And when your joint venture spouse cheats on you, it can become a battle among equals in divorce court.

In fact, that is one of the big differences we find between franchising and joint ventures.

Unlike partnerships, franchising is much more like a parent-child relationship. The franchisee, like the child, will go through a variety of growth phases.

When children first come on the scene, they are very dependent on their parents, relying on them for the education and training that will allow them to survive in this world. And as they grow older, they become less dependent, and parents begin to allow them some latitude.

As they get older still, they will begin to test the boundaries of their relationship, pushing a little around the edges, trying to change or influence the system that parents have set for them, and perhaps breaking some of the rules.

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But the child is still a dependent. It is simply a question of how forcefully the parent chooses to put their foot down.

The good parent

business-contract

The franchisor needs to start by establishing the boundaries of the relationship. It is important for the franchisee to understand that the franchisor’s first role as ‘guardian’ is to guard the system and the brand so all franchisees can thrive.

Thus, one of the most important roles of the franchisor is that of disciplinarian. To do that, it needs to clearly communicate the rules and the intention to enforce them right from the start.

At the same time, it is important for the franchisor to understand that discipline can no longer be meted out exactly as it was before franchising took place. If franchisors try to give a franchisee the ‘it’s my way or the highway’ speech that worked so well before, they’ll quickly find themselves with alienated franchisees — the first step on the road to real trouble.

Franchisees are business owners, and as such, require franchisors to communicate with them in a professional manner. Being firm with franchisees, as opposed to managers, also means providing them with an explanation for various ‘requests’.

Most franchisees have a key desire for their opinions to be heard. A franchisor should thus avoid making decisions in a vacuum and providing direction to franchisees without a clear explanation of why the direction is being given.

Communication is key

The secret to a good relationship between franchisor and franchisee starts with communication. And that means more than the occasional newsletter and a visit from the field representative.

In today’s technology-centred society, it is all too tempting to rely on the Internet for all communication. But in a franchise context, that would be a big mistake. All too often, we have seen well-intentioned emails ignite a firestorm when they are misinterpreted.

Relationships are built through dialogue, so it’s important that dialogue be encouraged in every aspect of the relationship. Good franchisors are careful to create multiple venues where constructive dialogue can occur.

Annual conventions, regional meetings and advertising councils all provide opportunities for two-way communication.

The accessibility of senior staff is also vital. There are senior executives of some fast-growing franchisors who would not go home for the night until they had personally returned every franchisee’s call.

To be effective, the communication needs to be more than frequent. It needs to be honest. While there are some things franchisors may choose not to share with their franchisees, the key to a long-term sustained relationship is trust. And trust starts with openness and honesty. Get caught in a lie once, and you have destroyed that trust forever.

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Lastly, to be effective, franchisors have to genuinely care about the success of their franchisees. Good franchisee relationships start with a franchisor that is, first and foremost, committed to franchisee success.

That commitment, more than anything else, needs to permeate the franchisor organisation at every level.

If franchisees do not sense true commitment from franchisors, a relationship could quickly become adversarial. If, on the other hand, franchisees see franchisors breaking their backs to help them achieve their success, there is almost nothing they won’t do to assist.

As a franchise consultant since 1985, Mark Siebert founded the iFranchise Group, a franchise consulting firm, in 1999. During his career, Mark has personally assisted more than 30 Fortune 1000 companies and over 200 startup franchisors. He regularly conducts workshops and seminars on franchising around the world. For more than a decade, Mark also has been actively involved in assisting U.S. franchisors in expanding abroad. In 2001, he co-founded Franchise Investors Inc., an investment firm specializing in franchise companies. He's on the board of directors of the American Association of Franchisees and Dealers and the board of advisors to Connections for Community Ownership, which encourages minority business and job development through franchising.

Franchisee Advice

5 Tips For Franchise Agreements

Below are 5 tips to ensure that your franchise agreement complies with the CPA.

Justine Krige

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South Africa has some great homegrown franchises – Mugg and Bean, Steers, Debonairs and Nandos, to name a few.  South Africa is also no stranger to international franchise groups, such as McDonalds, KFC, Wimpy and SPAR, although there has been an increase in the number of international franchises investing in South Africa in recent years.

The Consumer Protection Act, No 68 of 2008 (“CPA“) is the first piece of legislation in South Africa that specifically regulates franchise agreements. The CPA prescribes certain minimum requirements for franchise agreements, as well as certain information that must be disclosed prior to a franchise agreement being signed.  It is important that all franchise agreements comply with the CPA as provisions in franchise agreements may be declared to be void for non-compliance.

Below are 5 tips to ensure that your franchise agreement complies with the CPA:

1. Make sure you meet the minimum requirements

The CPA prescribes “minimum requirements” for franchise agreements.  These requirements, which are set out in the Regulations to the CPA, set out mandatory terms (i.e. terms which must be included) and prohibited terms (i.e. terms which must not be included).  They also prescribe that franchise agreements must be drafted in simple and plain language so as to be easily understood.  Legal jargon must be avoided unless absolutely necessary.

Related: The Perils Of The Franchise Agreement

2. Include prescribed minimum information

The CPA prescribes minimum information that must be included in a franchise agreement.  Most of this minimum prescribed information is fairly general in nature and would be contained in the franchise agreement in the ordinary course (for example, name and description of the types of goods or services that the franchise relates to, the obligations of the franchisor and franchisee, and any territorial rights).

There are, however, certain more unusual requirements in relation to prescribed information, which information would not necessarily be contained in a franchise agreement in the ordinary course (for example, the qualifications of the franchisor’s directors, and details of the members/shareholders of the franchisor).  These more unusual requirements must be kept in mind when preparing a franchise agreement.

3. Prepare a disclosure document

The CPA requires the franchisor to provide certain minimum prescribed information to the franchisee in a disclosure document delivered to the franchisee prior to the signature of the franchise agreement (including a list of current franchisees, if any, and of outlets owned by the franchisor; the direct contact details of the existing franchisees; an organogram depicting the support system in place for franchisees; and an auditors certificate confirming that that the franchisor’s audited annual financial statements are in order).

This information is intended to provide the franchisee with enough information about the franchise, its financial viability and potential business success so as to enable the franchisee to make an informed decision as to whether or not he/she wishes to “acquire” the particular franchise.

4. Prepare a non-disclosure agreement

It is important to ensure the protection of confidential information which may be disclosed to the prospective franchisee during the preliminary stages of negotiating and concluding a franchise agreement.

This may include, for example, the growth of the franchisor’s turnover, and written projections in respect of levels of potential sales, income and profit. Although not a requirement under the CPA, it is advisable for a franchisor to ensure that a prospective franchisee executes an appropriate confidentiality agreement prior to being sent the disclosure document.

Related: What Constitutes a Fair and Balanced Franchise Agreement?

5. Beware the “cooling-off” period

It is important to bear in mind that a franchisee has an entitlement under the CPA to cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor.

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Franchisee Advice

6 Top Tips For Reading Management Accounts

There is a golden key that reveals the secret of whether your business will survive and thrive. It is keeping tabs on the figures that summarise the strength of your business – your monthly management accounts.

Richard Mukheibir

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There is a golden key that reveals the secret of whether your business will survive and thrive. It is not the brilliance of your business concept. It is not your talent for talking clients to sign on the dotted line. It is keeping tabs on the figures that summarise the strength of your business – your monthly management accounts.

Related: 6 Things You Need To Know About Profit And Cashflow

Many entrepreneurs are usually more interested in operations and find product development or sales much more enjoyable than catching up on accounts. I sympathise – I’m one of them! So if you feel the same way, my top tip is always to make sure that you partner with or employ someone who can oversee the finances for you.

But that does not mean you can let the figure boffins and the finances take care of themselves. To function properly in your business, you need to know the outcome of your sales and development strategies – and the story of that is told in your management accounts.

 If you never look at your management accounts, it is like blinding yourself in one eye. It means you risk being literally blindsided by a big surprise, whether it is heading for a significant loss or being confronted by an unexpected provisional tax payment.

Here is how Engela van Loggerenberg, our Group Financial Manager, puts management accounts in perspective for our new franchisees. She urges them to focus on six key areas:

  1. Priorities: Management accounts can help you pinpoint areas that you need to prioritise, whether to capitalise on growth or because they are not performing as well as you hoped.
  2. Strength: All businesses aim to grow their assets over time and the balance sheet in your management accounts will reflect whether and how you are achieving that.
  3. Control: A strong balance sheet is one that shows you have your business liabilities well controlled. The key marker here is your current liquidity ratio, which results from dividing your current assets by your current liabilities. To keep your business healthy, always aim to keep this ratio at least 2:1.
  4. Revenue: Ideally, you want to see your revenue grow month by month. Check your income statement both for the trend in actual revenue and also for actual against budgeted revenue to check how well your strategies are delivering results.
  5. Profitability: Of course, revenue is not the same as profitability. You need to know your gross profit – the basic figure of your sales less the cost of those goods – and net profit, which also deducts a range of other expenses including taxes. Track the percentage of these two profit figures as well as the actual cash amount they represent to keep a check on whether your costs are creeping up too high.
  6. Finance: Most businesses at some point want to finance their growth by borrowing from a bank. A set of well-regulated management accounts is a prerequisite to obtaining finance.

Your management accounts do not have to be particularly complicated to give you these vital pointers – and if you are figure-shy, the more straightforward the better.

The important thing, though, is that you do not allow yourself to be too scared to ask if there is something which is not clear to you. That is the way to keep control of this key to your business fortunes and to keep building your business from strength to strength.

Related: 7 Things Every Entrepreneur Should Know About Managing Cash In The Business

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Company Posts

A Three-Pronged Approach To Franchise Success

Danie Nel, head of business development for Cash Crusaders franchising, says the brand’s success over the past 22 years 
is attributed to the sentiment that “a profitable franchisee 
is a happy franchisee.”

Nedbank Franchising

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What is your current footprint?

220 Stores. We’re looking to increase that number by another 20 stores for the 2018 financial year, which will then bring us to a total of 240 stores. Depending on the economy, we’re looking to grow our footprint even more to around 300 to 350 stores nationwide in the near future.

What are some of your brand’s biggest achievements that other franchises can learn from?

Our ability to read the retail market and innovate to stay ahead of times. We have recently launched an online platform where customers can sell their goods or borrow money — all online. This was a first for online retailing. One other achievement that I would wish to highlight is the launch of our mobile phone range, Doogee, exclusive to Cash Crusaders. Personally, having the honour of opening our 200th store was a tremendous achievement.

Franchisor involvement has also played a big role in the success of the organisation. Our CEO Sean Stegmann and other senior managers are as much involved in the business as any other operations manager or operator.

There is simply no ‘ivory tower’ management in our business and it makes a huge difference.

Related: How Sorbet Franchisee Kate Holahan Is Nailing Success By Following Her Dream

What are some of the challenges you’ve encountered and how have you overcome these?

Some of our daily challenges include securing a premises at a favourable rental and securing a franchisee with sufficient unencumbered capital, who is credit- worthy. Once the store is open, cash flow management and stock procurement is key.

In addition to this, it’s a challenge to achieve profitability immediately and to meet franchisee expectations. It’s also vital to ensure superb customer service and to retain those customers in the current retail and economic climate. I would say that our single biggest challenge is to retain and to build our customer base.

What attracts franchisees to Cash Crusaders?

Our unique retail model that allows for multiple streams of income through one business. These three profit centres include: New goods (variety of imported quality goods), second-hand goods (which we buy directly from the public, either through customers coming directly to our stores, or via our house-buy system offered by some of our stores) and secured lending (a financial service where customers can borrow money against valuables, determined at store level, and the loan is repaid within 30 days — or the contract is renewed for another 30 days with interest and service fees charged).

Why is it important for successful franchises such as yours to have a strong banking partner and how does it benefit both the franchisor and the franchisee?

Gone are the days where you just got a deposit book or cheque book and a little business loan from your bank. Banking has become more sophisticated and the technology that the bank offers is as important as its service, making life for both the franchisee and the franchisor easier on a day-to-day basis.

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