You’ll find many routes to owning a small business and several intriguing paths to participating in a franchise business. It’s not ‘one size fits all’ – not even close. If you think of franchising in one dimension, you’ll limit your opportunities. There are so many ways to get into franchising beyond building and operating a new pizza restaurant. Keep your ears open for opportunities, and prepare to be flexible. With the right approach to franchising, you’ll quickly find yourself on the road to career satisfaction and financial success.
Here are the five most common ways you can participate in a franchise programme:
1. Go the Classic Route
This is how most people think of franchise opportunities: You buy a new franchise, find the location and build it yourself. It’s all new, and it’s all yours. You roll up your sleeves and plunge into your new business as an owner/operator.
This is the classic route because it is precisely how so many thousands of franchisees built their multi-unit empires, and it describes how much of the franchise world still operates. Newer (and hotter) franchise offerings usually provide the classic route to business ownership.
Among the advantages of this approach is the full new term of the franchise agreement, allowing you the maximum time you need over the term of the agreement to recoup your investment. You also have the opportunity to build your business from scratch. When you open the location, it’s brand new and ready for business; any mistakes made in the establishment of the business will be your own. You don’t inherit anyone else’s problems or hiring mistakes. You hire your entire team, and your direct involvement will make you the owner, manager, boss and unquestioned captain of the ship.
The best upside: The new concept could take off and become a smash success – and you got on the elevator at the lobby level.
There is always a downside, of course (business imitating life?). With the classic route, the biggest possible downside is the untried location. It can make or break a retail business, and you may have a substantial sum of money riding on that outcome. Second, your team is untried, so the training and opening support had better be solid. The start-up phase of the franchise at a new location will drain your cash until the operation’s growing revenue begins to carry the payroll, inventory and other expenses; so plan carefully, and never go into a start-up franchise undercapitalised.
2. Buy an Existing Franchise
The strongest advantage of buying an existing franchise business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year – and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers). You have an opportunity to discuss the business with the owner, interview key employees and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment’s uncertainty – and your own risk.
Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you’re successful, you’ll build a strong business out of a weak one, and reap the financial benefits.
Buying an existing franchise business means that you’re subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it’s possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture.
The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5% to 15%) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations. You might also negotiate with the franchisor on the transfer fee, especially if you’re buying a troubled franchise. A new, enthusiastic owner may be the answer to the franchisor’s prayers; the company may be more than willing to lower or eliminate the transfer fee altogether just to help you take over the ailing franchise.
Your major risk: hidden problems of the previous owner’s making. No one likes surprises in a new venture, and these hidden problems will cost you money you didn’t plan on spending. They range from unhappy supply vendors and dishonest employees to defective equipment-and they simply come with the territory. Add an ‘unexpected problems’ line to your opening budget, and plan for the unexpected.
3. Buy Master Franchise Rights
If you’re looking for a more aggressive role in the franchise system, you could check into becoming a master franchisee. The details of the master franchisee concept differ from one system to the next, but the basics are the same: A master franchisee is appointed to serve as a local or regional representative of the franchisor, providing training and field support, and is compensated for those services, often by receiving a percentage of the royalty revenue generated in the assigned territory. The master franchisee may also have recruiting responsibilities, generating commissions on franchise sales made from his or her efforts.
The appointment as a master franchisee is usually extended to existing franchise owners who prove successful in their operations and are interested in expanding their involvement in the system. If you enjoy teaching and want to super-size the return on your franchise investment, inquire about master franchise programmes.
A master franchise is often confused with a sub-franchising programme, but there’s one important distinction: A sub-franchisor offers and sells franchises directly, for its own account; and, of course, a master franchisee does not sell franchises directly. A master franchisee typically generates leads, meets with and qualifies prospective franchisees, and sends them on to the franchisor for closing.
A master franchisee is the utility infielder of franchising. Success is measured by the ability to manage, teach and recruit, while continuing to operate your own franchise business
4. Absentee Ownership and Conversion Franchises
For the right kind of business, with the right employees running that business, it is entirely possible – though rare – to own a franchise business and not be directly involved in its management. Rare, because it is hard enough to own and operate a successful small business even when you’re on the floor every day.
What type of business lends itself to absentee ownership? First, it must be a business that doesn’t have valuable inventory. I once had a senior executive of a muffler franchisor tell me his shops couldn’t be run by employee managers because too much of the inventory would leave at the end of the work day. Only an owner on the premises is sufficiently motivated to prevent that from happening.
Second, the business must have sufficient margins to be profitable after the expense of having a reliable manager. So many franchise businesses have razor-thin margins that limit the owner to a modest salary. So the key question then becomes: What drops to the bottom line for the owner?
Service businesses with training programmes that can support an employee manager may meet these qualifications. It would be a mistake to assume that any franchise can prosper with an uninvolved owner, but with the right programme and a handpicked management team, it can work.
5. Buy Into a Conversion Franchise
A conversion franchise allows an existing independent business to affiliate with a national brand. Affiliation programmes have been launched by a variety of professional service providers, such as handymen, home-repair programmes and hotel chains.
Conversion franchise programmes offer an attractive balance of brand identification and buying power. If you’re operating an independent business and long for the competitive advantages of being tied in to a national reservations system or receiving local leads generated by a national or regional advertising campaign, you may want to consider joining a franchise affiliation programme in your business category.
Can you use your current business name, or do you have to completely identify with the franchisor’s brand? That depends entirely on the system.
Often, the fees paid for an affiliation programme are considerably lower than those of traditional franchise systems, reflecting the fact that the franchisee is an experienced business owner and needs less training and less support than someone new to the business.
Franchising doesn’t exist in a single investing dimension; it has developed in ways that allow virtually any level of investor in any business situation to participate. The lesson is clear: Keep looking until you find an investment that’s well-structured for your interests and needs, and you’ll probably find it in the franchise arena.
Is franchise ownership in your DNA?
Franchising isn’t for everyone. Read on to see if you have eight key characteristics to survive in a franchise.
Many people believe franchise ownership is for the true entrepreneur – the type A personality with the confidence to blaze new trails in the business world. The truth is actually quite different.
Franchising is about following a proven system to replicate the success of the original unit that the franchise is based on. Entrepreneurs often create innovative new businesses, but it’s the Steady Eddie types that tend to produce most of the success in franchises.
Great franchisees tend to be those who are strong at networking and meeting new people. They understand that establishing themselves in the community, by joining civic groups and other organisations, will give their business more visibility. They enjoy managing people and will work to retain valuable employees.
A successful franchisee is focused on producing results. They have a clear understanding that activity is not the same as accomplishment. They have great respect for the importance of monitoring milestones and benchmarks as they move forward to achieve objectives.
Motivator and Cheerleader
Being able to motivate oneself and one’s employees is a key personality trait shared by successful franchisees. A franchisee can’t sit back and wait for the business to come to him; he has to make it happen.
Calm and Confident Leader
Especially in these trying economic times, a key characteristic of a successful franchisee is to be the rock that everyone around him can count on. A leader recognises what’s happening in the market but doesn’t panic or run around screaming that the sky is falling.
A successful franchisee has a positive and forward-looking attitude. He focuses on opportunities and solutions rather than problems. He addresses any negative issues by solving them without worrying about establishing blame.
People who want to minimise their risk will choose a strong franchise system with a proven track record. They’ll take advantage of all of the training offered and learn as much as they can from the franchisor staff and other franchisees. If you like to blaze your own trails while running with scissors, a franchise just isn’t going to be right for you.
A successful franchisee has his eye on the prize, which is the long-term result he desires to accomplish through business ownership. He’ll be imagining his future income and lifestyle while doing what it takes to keep the business growing.
You can’t hold a good franchisee down for long. He bounces back quickly because he knows that even during challenging times, he’ll ensure that things get better. He can trust in the franchise system to work effectively over time and that lets him keep any setbacks in perspective.
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.
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