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Franchisee Advice

How Do I Raise Finance for My Franchise?

A growing number of people consider investing in a franchise to be an attractive option; attendance figures recorded at franchise exhibitions are ample proof of that.

Mark Rose

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Unfortunately, when it comes to securing funding, many would-be franchisees come unstuck but this need not be the case. Franchise funding is available to applicants who present a compelling business case and, most importantly, select the right bank. This article explains.

Basic considerations

People who are unsuccessful in their attempts to raise loans tend to blame the banker for their misfortune but this is neither helpful nor fair. Banks are in the business of lending out money – unless they grant loans, they won’t stay in business for very long. However, they also have an obligation vis-à-vis their depositors and shareholders to ensure that these loans will be repaid with interest, in full and on time. The requirements of the National Credit Act are another reason why bankers are forced to tread carefully.

Bankers find it difficult to assess the risks linked to funding a new business venture because there is no track record. This is where prospective franchisees of recognised brands score. The brand’s track record makes the new business’s success chances more predictable, but only in the eyes of bankers who truly understand franchising.

The all-important own contribution

To become a franchisee, you need to accept the sector’s rules. One of them is that you cannot realise your dream of owning a franchise without investing some money of your own. There are several good reasons for this, with the following standing out.

  • Accumulating capital requires discipline. Having done so demonstrates to the banker that the potential borrower knows how to deal with money responsibly. This is one of the reasons why bankers will want to know the origin of available funds. For example, lottery winnings are not necessarily proof of financial discipline. And “soft loans” – money advanced by family and friends to assist the aspiring franchisee – would have to be underpinned by a watertight loan agreement that protects the rights of the bank and the business, in that order.
  • Taking a new business to the point where it generates a positive cash flow takes time. A franchise may achieve positive cash flow sooner than would otherwise be the case but it will take time nonetheless. In the meantime, loans need to be repaid. Should the business be funded with borrowed money only, the amount repayable each month could cripple the business’s cash flow and jeopardise its survival.
  • Unless the owner’s own money is at stake, his/her commitment to making the business successful will be suspect. The moment the going gets tough, he/she might be tempted to pack up and leave. The Americans call this “having skin in the game”.
  • The banker is not the only one who will insist on a cash contribution. Responsible franchisors know from experience that a shortage of money can derail the best business during the all-important start-up period.

How much own cash do you need?

The total investment required to start a franchise varies widely; it depends on the industry sector and the size of the business. As a rule, a prospective franchisee is expected to contribute between 30-50% of the total investment but this is not cast in stone. Variables that will be taken into account include the applicant’s financial track record, business experience and the quality of security on offer. Other critical factors are the standing of the franchisor’s brand, the sector’s overall health, the quality of the available site and the business’s perceived ability to generate a positive cash flow almost from day one.

The combination of an approved franchisor and a qualifying applicant could lower the dual hurdles of own contribution and surety requirements quite considerably. Loan guarantees backed by Khula can also be arranged.

In this context, we need to remember that the term “franchise” is not a magic wand, not all franchises are created equal. For this reason, Nedbank’s National Franchise Unit has created a database of approved franchisors who adhere to the highest professional standards in all respects. They operate thriving businesses underpinned by solid systems and processes and their legal documentation conforms to the requirements of the Consumer Protection Act (CPA). Most importantly, they have the necessary infrastructure to offer franchisees extensive initial and ongoing support. Prospective franchisees will be well advised to give preference to these franchisors.

Preparing a winning loan application

The quality of the loan application plays an important role in the lending decision. The banker will want to see the applicant apply for the correct type of funding in the correct amount and have a clear idea how the loan, if granted, will be repaid. The next article in this series will deal with this topic in detail.

Should you wish to find out more about Nedbank’s loan products in the interim, speak to the Business Manager at the Area Office nearest to you; contact details can be found on www.nedbank.co.za or visit your nearest Nedbank branch.

Written by Mark Rose of Nedbank and Eric Parker of Franchising Plus.
Copyright rests with the authors.

Mark Rose is the Head of New Business Development at Nedbank Business Banking. He holds a Masters in Business Administration (MBA) from the Oxford Brooks University, as well as various business qualifications from the Gordon Institute of Business Science (GIBS), the University of Stellenbosch Graduate School of Business, and the University of South Africa Graduate School of Business. Nedbank’s New Business Development unit develops customised industry specialised offerings to the medium sized business market, including Franchising, Agriculture, Professional – including Financial and Legal Practices, and the Medical Fraternity. This unit has also developed a unique Enterprise Development proposition. For specialist advice and more information on the Nedbank Franchising proposition visit the website or send an email to franchising@nedbank.co.za

Franchisee Advice

5 S-Words Make Your Store Site Pay For Itself

Richard Mukheibir, CEO of Cash Converters recently addressed delegates at the FASA (Franchise Association of SA) conference on the topic of choosing the best location for their business. He spoke about the 5-S technique to assist business owners with deciding which premises is best suited for their business.

Richard Mukheibir

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The combination of continuing trading uncertainty in South Africa and the new financial year for many businesses can add up to carefully reviewing costs – including leases on premises. Choosing a site to set up or relocate your business can be just as stressful as deciding where to buy a house – and just as fundamental to its health, finances and sustainability, says Richard Mukheibir, CEO of Cash Converters.

This is not the time to snap up the property with the cheapest rental as that might turn out to be something you regret in the long run. Nor is it the time to be dazzled by the swankiest premises you can find. The potential for bragging rights could turn out to be poor value for money.

“This is a time for your head to rule your heart regardless of the industry you trade in.” he says.

The real-estate mantra of “location, location, location” works just as effectively in commercial as it does in private property but you will often be looking for rather different factors. Mukheibir shares his 5-S technique to help you begin narrowing down the areas where you will consider locating your business – first at the macro level, focus in further to the meso level, then look more closely at the micro level before you start weighing up specific sites.

1. Strategy

Remind yourself of the medium and long-term strategies you have developed for your business. Keep your understanding of your business’s customers, purpose and growth prospects top of mind when you are selecting the areas where you will start looking for sites.

Related: Effective Ways To Bring Customers To Your Door

2. Scope

Within those areas, redline any sections where you feel the competition from other businesses will detract from your potential to grow your market. Greenline areas where there are good synergies between the people who live or work there and the demographic that you have identified as your target market.

3. Synergy

Make sure there is clearly a good pool of potential customers for you – size definitely matters when it comes to ensuring that there are plenty of customers available to you. Look specifically for facilities that cater for the kind of customers you want to attract. Sports stores benefit from being close to schools and tertiary colleges, for example.

4. Sight

Although many businesses now have an online element, most still benefit from attracting customers to walk through the door. For your premises to be a good fit for your business, you should be located in plain sight and ensure that your ability to market yourself locally through signage and lamp-post posters is not restricted by local bylaws.

Related: FASA Establishes Industry Specific Food Franchise Forum

5. Security

You will attract and retain good customers and staff if they feel they’re secure in the area. This perception includes factors such as easy, safe parking and a welcoming environment.

“Making a success of your business is not just about the product or your branding,” says Mukheibir. “It can be as fundamental as finding a site that ends up paying for itself. To do this, it must offer you a well-calculated gap in the market where the strong demand for the product or service that your business offers ensures sales and profit. If you have considered all these steps carefully, you will never worry about making rent and wages payment again.”

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Franchisee Advice

6 Things You Need To Know About Profit And Cashflow

Why your business needs both and how to check.

Richard Mukheibir

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In the heat of the action as you build your business or launch a new line, it’s easy to hope some aspects will take care of themselves. It’s especially tempting to fall into that trap with your accounts if you don’t like dealing with figures.

Despite having a B. Comm degree, I’m happy to admit that I don’t really like accounts. I much prefer strategies, management and business development. Fortunately, my co-founder and our Chief Financial Officer Peter Forshaw tirelessly keeps us on track financially – and his message to our franchisees is always that in your own business, you must understand enough of the financial basics to know whether your business is swimming or sinking…

It’s so important that we include this as part of our franchisee training. To get you started, here’s what Engela van Loggerenberg, our Group Financial Manager, tells new franchisees:

  1. Cashflow and profit aren’t the same: You can’t track one and assume the other shows the same pattern. There is no natural correlation between the two – your cashflow can be positive and you can be making a loss or your cashflow can be negative but you’re making a profit.
  2. Cash keeps you going: It’s vital to have money available in your business so you need to be generating enough cash to pay operating expenses. Otherwise you could be making a profit but not be able to pay staff wages. If so, you will either have to put in some of your own money or take a loan to keep your cash flowing and your business afloat.
  3. Time for a checkup: Both cashflow and profit are important to a business – but you can’t do anything without cash which is why you have to manage your cashflow carefully. Check your profit monthly but your cashflow daily. This will alert you to problems in the making so you can head them off. You will see if your clients are overdue in paying their accounts with you, for example. If they fall behind, this could in turn squeeze your ability to pay your operating expenses, which is why cashflow monitoring is such an important tool to keep your business afloat.
  4. Different perspectives: Remember when you look at your figures that profit figures are a result of what has already happened and are usually reported with a time lag of a month. Cashflow is a snapshot of what is happening in your business now and will have an impact on profit figures in the months to come.
  5. Know what you’re looking for: What you need to know are your net, not gross, figures. For net cashflow that is your incoming cash less your outgoing cash for the period. So if you are receiving more than you are spending, you will be left with money in the bank to meet future expenses. Similarly, your total sales less direct costs make up your gross profit. Deduct all your operating expenses from the gross profit to calculate whether your business is making a net profit.
  6. Make the most of your cash: Take pressure off yourself by keeping spare cash for future expenses such as VAT and taxes in a good interest-bearing account such as a money market, call or investment account. Then set up reminders ahead of time to arrange to withdraw the sum required.

Remember that any system is only as good as the person operating it. So if like me, figures aren’t your thing, make sure that you have someone at your side who can manage them for you.

Read next: 4 Factors To Consider Before Converting Your Independent Business Into A Franchise

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Franchisee Advice

3 Ways To Ensure Your Loyalty Programme is Working Hard For You

Plastic cards are making way for app-based loyalty programmes. Is your franchise keeping up with the digitally savvy consumer?

Diana Albertyn

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The average consumer today is a member of at least five of the 100-plus loyalty programmes in South Africa, according to a 2017 study by Nielsen. As the loyalty playing field becomes more cluttered and competitive, what are you doing to ensure each one of your franchisees are catering to customer needs when it comes to loyalty?

Mobility. It’s not the newest buzzword, but it is useful for attracting customers who don’t want to lose loyalty points because their card is lost or not with them. Ailsa Wingfield, Nielsen’s Head of Emerging Markets: Thought Leadership, says that as adoption of non-traditional payment methods increases, loyalty programmes also need to introduce payment type flexibility.

“Mobile payment platforms will increasingly deliver an opportunity for loyalty-programme engagement with consumers, providing a convenient and personalised way for programme members and retailers to engage with one another all along the path to purchase.” – Ailsa Wingfield Nielsen Head of Emerging Markets Thought Leadership.

Related: 11 Ways To Double Your Customers In 4 Weeks

Have you considered what role tech could play in your current loyalty programme? Here are three ways to apply digital enhancements that appeal to present and potential customers: 

1. Offer differentiation through more options

Research has concluded that the loyalty programmes devised by retailers and franchises are not innovative enough to capture the attention of the youth – Millennials and Gen Z. it’s time to diversify your rewards offering. But how?

If your customer base is predominantly younger, being omni-present is key, according to the Truth Loyalty Whitepaper: “An omni-channel approach will not only meet the demands of the younger customer, it will also allow your business to combine intelligence on shopping, search and web behaviour history to assist you in identifying when to offer an in-store promotion, extend a seasonal offer or make a product recommendation through the appropriate channels.”

Implementing a digital loyalty campaign is also a smart way to reduce costs. Coffee shop franchise Mugg & Bean’s Generous Rewards App and partnership with Vitality Active Rewards, means members can earn cash-back rewards to spend on their favourites. Just downloading the app earns you a R25 voucher.

2. Use your tools to engage more

A crucial mistake most franchisors make is not communicating consistently with their loyalty programme members once they’ve signed up and increased numbers. They spend a lot of time recruiting customers to join, but expect them to prompt cashiers for points’ balances and produce their cards independently in their various locations.

“You have gained permission to talk to your customers and created the opportunity to collect enormous amounts of valuable data. Use this to your advantage by creating meaningful and relevant engagement initiatives and communications across your customers’ lifecycle,” advises Truth, a boutique consultancy business specialising in customer centricity and loyalty programme strategy and design.

When enhancing your engagement strategy, Accenture advises that you keep the following in mind:

  • 54% of South African consumers are loyal to brands that actively engage them to help design or co-create products or services.
  • 57% are loyal to organisations that present them with new experiences, products or services.
  • 47% are loyal to brands that engage them in ‘multi-sensory’ experiences, using new technologies such as virtual reality or augmented reality.

Related: 3 Ways To Stop Taking Your Most Loyal Customers For Granted

3. Keep the experience simple

Review your loyalty programme. Honestly. Then ask yourself if you’ve made your programme too complicated for the layman. If your answer is ‘no’ or even ‘maybe’, how can your target consumer ever reap the full rewards of this programme if they don’t understand the rewards on offer and how to redeem them?

Changing rules too often is the first complication to go. No matter which one of your stores they choose to shop at, the redemption and earning process should be simple enough to keep members interested and engaged in the programme. Make sure you keep your programme simple and transparent.

“Clicks made a simple but fundamental change to its redemption process – paper-vouchers were replaced with virtual points that can be redeemed as cash-back when you swipe your card at the till. While Clicks and Dis-Chem are among only a handful of brands that do this, it’s a sure-fire mechanism for increasing redemption,” said Amanda Cromhout, founder and CEO of Truth.

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