Sure, it’s a thrilling proposition to get in on the ground floor of what is hopefully a superstar concept. And it might be particularly lucrative if start-up costs (compared with those of long-established franchises) are low.
But of course, the downside is that some new franchises don’t survive the journey and are buried in unmarked graves along the way.
Before buying into a young or unproven system, it’s important to weigh the pros and cons. There are typically three types of businesses in this category, including established companies that have finally decided to franchise. The common denominator is that each is asking you to invest when there are few, if any, proven results from other franchisees who have gone before you.
Here’s a look at the most common types of new franchise opportunities – and the questions you should ask before signing up:
1. The mature company that is new to franchising
In this situation, the company typically has many years of experience and has opened a number of company-owned units. The people at the top know the business inside out and have worked out the bugs in the operating methods. The only transition the company needs to make is learning how to work effectively with franchisees rather than employees (and yes – there is a big difference between the two). This is typically the least risky young franchise to invest in, though it can still be a challenge to deal with growing pains.
Questions to ask:
- How do your training programmes for new franchisees differ from the previous training programmes for new employees?
- What support systems do you have in place for franchisees, such as manuals, DVDs or online intranets?
- Are you willing to treat franchisees as business owners?
2. The experienced franchise company that is changing its traditional operating model to something new
Let’s face it, most companies don’t change their business model unless they are in trouble. We’re seeing a lot of this in today’s market, especially with retail and discretionary-service operations, as the continuing recession hammers franchisees’ results. Though the company may have a big name in the marketplace and substantial operating experience, there is little assurance that the ‘new’ operating model will be a success until a group of new franchisees have put it to the test. You really need to consider the risk carefully, because an unproven model is just that.
Questions to ask:
- What research and testing supports the proposition that this new model will work better than the old one?
- How many units of the previous model have failed in the past two years?
- How many do you expect to lose in the next two years?
- What changes have been made to your marketing programmes to support the new model, and how will you allocate marketing support and money in the future between the new and old models?
3. The fairly young company that’s new to franchising
You’ve got to admire the bravado of entrepreneurs who have the confidence to start a company and then begin franchising with little or no practical experience. That’s how most of the big franchise companies got started – Ray Kroc of McDonald’s or Fred DeLuca of Subway are just two examples. That said, this is by far the riskiest venture to invest in. For every one success story, there are dozens of others that did not succeed.
As a new franchisee in a young system, you’ll have to suffer not only through your own learning curve, but the franchisor’s as well.
In fact, you may wish to find a different franchise with a proven track record or else to wait a year or two to see if the young company can create a reliable success pattern with other new franchisees. If you decide to take the risk anyway, the rewards for being a pioneer – namely, better economic terms and intimate relationships with top executives – can be great if the business succeeds.
Questions to ask:
- Do the company executives have previous experience growing a franchise company, or are they working with advisors who do?
- Does the company have sufficient cash reserves to weather any storms during its initial ramp-up period?
- How many training and support people does the company have and what is their background and experience?
- What kind of discounts on fees and other expenses are you offering to the initial group of pioneer franchisees?
What to consider before you invest.
There’s little doubt that the right franchising opportunity can be profitable and satisfying for the right entrepreneur, and the franchise industry appears eager to welcome and guide new owners.
Franchise ownership isn’t for everyone, however, nor is every opportunity a gold mine.
Here are four factors to think about before you make a decision:
- Do your homework on the franchise, including its expansion plans.
- Make sure the company provides support in the form of training, construction and marketing.
- Pay careful attention to the Franchise Disclosure Document. Carefully review the earnings claim (which franchisors don’t have to provide, although this lack of disclosure might raise questions) and the disclosure of the number of units, closures, and current and former franchisee names and contact info.
- Heed the plethora of fees and costs associated with the business, and pay attention to anything that might warn about hidden costs. Owners should determine, for example, whether vendor rebates are allowing franchisors to profit from supplies or equipment that the franchisee purchases. This is particularly important for new franchises – make sure franchisor costs are not being passed on to you.
5 Tips For Franchise Agreements
Below are 5 tips to ensure that your franchise agreement complies with the CPA.
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.
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.
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.
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.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.”
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.
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.