Q: What are some of the most important criteria a bank looks at when a franchisee applies for funding to purchase a franchise?
We see the role of the bank, franchisor and franchisee as a ‘tripartite alliance’. Therefore, we work with the franchisor and prospective franchisee to identify and manage all factors that could prove to be an obstacle to securing funding for the business, and more importantly that could impede long-term profitability and sustainability.
Standard Bank takes a holistic in-depth look at various factors that help determine whether the business venture will be successful. For instance we will consider whether the applicant is a first-time franchisee or looking to buy a second store, or is already a highly established franchisee who requires an additional store. This gives an indication of the franchisee’s understanding of the proposed franchising model and their own track record, which indicates the potential for them to make a success of the acquisition. Another important factor to consider would be the level of financial contribution that the prospective franchisee would be making to the business. A good credit record and a sound business plan are both essential when a prospective franchisee is raising funding.
Q: To what extent does the track record of the franchisor play a role in the funding application?
The quality of the brand is everything when it comes to funding franchises. The mere mention of the brand translates into its track record and the quality of management. The quality of the brand does impact on how the transaction would be structured and priced.
Q: How important is it to have a clear credit history?
A clean credit history is critical when applying for any credit. It tells the prospective financier that the applicant has a good track record and that tells the financier something about the applicant’s integrity. Furthermore, this also indicates that the applicant has sound financial management skills, and takes his responsibility to repay debt seriously.
Q: How important is it for a franchisee to invest some of their own money into the franchise?
The level of contribution by the franchisee is a sound indication of the owner’s commitment. Unencumbered funds help with cash flow projections and reduce gearing levels for the business. It also provides comfort to the financier and the franchisor in respect of creating a reasonable margin of safety, which is essential to have in case a business experiences financial pressures.
Q: Does a multi-unit franchise owner stand a better chance of securing funding than a first timer?
A multi-unit franchise owner certainly brings more experience to the table, so to speak. A typical multiple franchise owner has a sound track record, already has operating systems in place, has a management team with the requisite track record and understanding of how to run the business. They also have a much stronger relationship with the franchisor and have become much more capable of reading and responding to the market over time. This stronger financial background and muscle will significantly improve their chances of succeeding.
This does not infer that first-time franchise owners have lesser chances of success. First-time franchisees must take advantage of the management, training, marketing and software support available to them as part of the franchise agreement and arrangement.
Q: How can a franchisee determine whether or not the franchise outlet they are interested in purchasing is a good investment?
Granted, there are no guarantees or assurances in business. However, a hopeful franchisee can increase the probability of success by doing thorough research into the brands he believes he has an appetite for, scrutinising their track record, and interrogating future plans. The more established brands are naturally more expensive to buy into, but their proven track record increases the franchisee’s chances of success. Brands that have been around for longer have proven sustainable and successful over and over again, even in a recessionary environment.
A franchisee could approach franchise associations, independent franchise specialists and financial institutions that have been involved in the franchise industry for an unbiased and independent review of the brands they are interested in.
Q: What happens if the franchise isn’t making enough money to cover the loan repayments?
We cooperate with the franchisor and franchisee in order to assist the business and agree on joint solutions in assisting the business to move forward. Typical intervention measures could include a moratorium on capital repayments, royalty breaks as well as debt refinancing and restructuring.
Q: How can a franchisee determine whether or not they can afford a franchise?
Again, the franchisee has to do proper and thorough homework about the nature of the franchise he is buying into. Do your homework thoroughly in selecting the franchise of choice and consider affordability. Work out if you have enough financial resources to pay the upfront and ongoing fees to sustain the business until it breaks even. Take into account management fees and interest rates of the loan. Get financial reports and projections from franchisees. Talk to other franchisees within the brand that you are considering. This will give you a realistic assessment of how much money you need. Do not be afraid to ask questions relating to the profitable viability of the franchise.
The potential franchisee should data mine all the monthly commitments that would need to come into play — royalties, wages and running costs. Understand the appetite for risk.
Q: What are some of the most lucrative franchising sectors in South Africa?
It is very difficult to comment on what is and what is not lucrative. Standard Bank foresees much activity in five key sectors, namely, fuel, retail (mainly food), restaurants, fast-food and telecommunications, in no particular order in 2011.
Q: Is there a way to determine the profitability of a franchise?
A business plan is a crucial starting point in gauging the profitability of a franchise. Various franchisees have set models for making profitability projections. Site and location come into play. It is largely about engaging with the franchisor and finding out what goes into running a profitable franchise outlet, which will vary among all the different franchise systems out there. Simply put though, all projections need to indicate a profitable enterprise.
If one is buying an existing business, the business needs to be profitable at the time of purchase. Alternatively, the buyer needs to have a strategy of how he will increase revenue or decrease costs.
Q: What should a franchisee do first? Secure financing for a franchise or continue with the application process with the franchisor?
Once the franchisee has decided which franchise system he is interested in buying into, and has short-listed possible brands, he should apply to those brands. A potential franchisee may apply with the franchisor and the bank concurrently. However, approval from the financial institution and from the franchisor is always subject to the other. l
Q:What are some of the things that could harm an applicant’s chances of receiving funding?
Among the factors that could impact negatively on an application for finance include an evident lack of understanding of the fundamental principles of franchising and the particular brand they are buying into, and not being able to make an upfront owner-contribution into the business. The bank looks at all the components of the operation in consultation with the franchisor and prospective franchisee. If there are ‘red flags’ Standard Bank would engage with both parties to determine how any risk or impediment to business success could be managed or eliminated.
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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