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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

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

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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

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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

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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.

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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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