Connect with us

Franchisee Advice

Franchising Mistakes You Need To Avoid

Here are six common mistakes companies make when seeking to franchise their business.

Mark Siebert

Published

on

Hazard

I’ve seen hundreds of businesses succeed at franchising, but I’ve also seen a number fail. While the paths taken by the successful are many and varied, the paths to franchise failure are surprisingly predictable.

Failure, like success, does not happen without reason. It happens because people made the wrong choices. Unfortunately, the mistakes we make in business are often avoidable.

Related: Financial Facts you Need to Know About Franchises

Ready, Fire, Aim

Probably the single greatest mistake made by budding franchisors is a lack of planning. Too often, we find that new franchisors start out by asking their lawyers to draft their franchise legal documents without giving a thought to the importance of the business decisions that these documents contain.

Franchising is like business on steroids. Small mistakes get replicated over and over until they cause major failures.

A small mistake on a royalty – multiplied over 100 franchisees – can cost a franchisor tens of millions of rands. That is often the difference between success and failure.

There are dozens of these make-or-break decisions that an entrepreneur needs to make when structuring a franchise offer.

Me, Too

follow-the-leader

Closely related to the issue of planning is the ‘follow the leader’ mentality that often finds its way into the franchising process.

Many entrepreneurs will come to franchising after observing successful competitors, believing that success depends on duplicating their strategy. This could not be further from the truth.

Few of us are old enough to remember that when McDonald’s first arrived on the scene, it was promptly greeted by dozens of knock-off concepts that have long since disappeared. Why did Burger King succeed? It said, ‘Have it your way,’ and dared to be different.

Too often, we see franchisors whose business strategy seems to be to duplicate that of their largest and most successful competitor, only to find years later that the strategy failed miserably. The key to success can lie in differentiation.

But even if its competitor did a good job of planning – and there is no guarantee that it did – the new franchisor’s circumstances are different.

A different business model. Different management team. Different philosophy. Different market. Different investment requirement. Different training requirements. And if nothing else, different competitors.

Copying the industry leader’s strategy is not a strategy. It is often a recipe for disaster.

Do-It-(Wrong)-Yourself

New franchisors typically have one thing in common: They are already running a successful business. The entrepreneurs who founded these businesses are almost universally resourceful, self-confident, and accustomed to substituting hard work for growth capital.

Odds are good that they built their first business without relying on outside help, so why would franchising be any different?

The business of franchising requires the franchisor to have or acquire expertise in a number of areas in which they probably have limited experience. These, to name a few, may include strategic planning, organisational development, financial analysis, franchise legal documentation, operations documentation, training, franchise marketing and franchise sales.

Related: Understanding the Terms of Agreement

I often see new franchisors relying on their internal resources and a local lawyer who does not specialise in franchising, only to repeat mistakes that were easily avoidable. Trial-and-error is an expensive way to learn franchising.

Failure to Budget

Franchising can be a low cost means of achieving rapid growth for your business. But it is not a ‘no cost’ means of growth.

To start franchising, new franchisors usually need to budget time and resources for the development of strategic plans, operations manuals and marketing materials.

They need to anticipate legal fees associated with the development of their contracts, disclosure documents and registrations.

They are likely to have accounting, printing, travel and other associated expenses as well. And they will need to invest in franchise marketing and in building the franchise organisation.

For franchisors who only want to sell a franchise or two and just get their feet wet, the investment in franchising can be minimal. But for a franchisor with aggressive growth goals, these costs can be significant.

Can’t Say ‘No’

One of the biggest mistakes in franchising can happen soon after the franchisor initiates its franchise sales efforts.

After spending a few million rand on the development of a new franchise programme, franchisors generally come out of the gates ready to sell. And when a marginal candidate comes to the door waving a cheque for R400 000, the first instinct may be to recapture some of the capital invested in franchising.

But these first few franchise sales can end up being the ones they regret in the future. Nothing is more important to franchise success (and to a brand) than the quality of its franchisees.

The best franchisors start with high standards from the outset, knowing that these franchisees will be brand ambassadors for years to come.

Focus

Perhaps the most ironic mistake made by new franchisors is that they do not fully understand the single most important tenet of franchising: Make your franchisees successful, and you will succeed as a franchisor.

Young franchisors may focus on how fast they can grow the business, when they should be focusing on making their franchisees successful.

Related: Franchise Or Start-Up?

Successful franchisees pay more royalties, require less support, provide great public relations, buy more franchises for themselves and promote the brand to prospective franchisees. Failing franchisees cost more, pay less and make it harder to sell and grow.

The greatest strength of franchising — the ability to grow largely unconstrained by the constant demand for investment capital – can also be its greatest weakness.

Sell faster than your ability to support your franchisees, and you’re likely to fail as a franchisor. Focus on their success, and odds are good that success will follow.

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.

Advertisement
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Franchisee Advice

5 Tips For Franchise Agreements

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

Justine Krige

Published

on

franchise-agreement

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.

Continue Reading

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

Published

on

accounts-management

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

Continue Reading

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

Published

on

danie-nel-cash-crusaders

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.

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending