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.
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.
Develop Digital Marketing Competency In 3 Simple Steps
Conquering the digital revolution needn’t be daunting. Polish up your tech skills and watch your digital marketing prowess increase throughout your franchise.
As a franchisor, digital marketing may be proving to be a challenge due to the unique structuring of the business.
“The very nature of franchises is ‘structured’, however, when it comes to marketing, that structure often lacks,” says Marcela De Vivo, Founder and CEO of Gryffin Media.
Franchisors and franchisees often struggle to reach common ground when looking to achieve different marketing goals. While the franchisor needs to control the brand in its entirety, the franchisee wants to market their business using particular strategies suited to their location.
Research has found that smartphones are the biggest influencers of 82% of users when they make their in-store purchase decisions while. It’s for this reason that the importance of digital marketing for franchises has increased.
Here’s how to harness its power of influence, amplify foot traffic and solidify brand loyalty:
1. Recruit digital natives and early adopters
As much as you’re the leader of your franchise network, there are franchisees in your chain you could learn from. The global increase in millennial franchise owners means it is highly likely that you’ll be able to identify early digital adopters within your franchise network.
“The best people to learn from are those who have been in your shoes before,” says Matt Forman of the Franchise Centre at Griffith University.
“Encourage and support their efforts and use them as case studies to demonstrate to the rest of your franchisees the value of digital marketing, and how to do it right.”
2. Invest in training your team
“Each digital competency level requires more education and resources in order to integrate digital marketing with your physical stores,” says Forman. For this reason, regularly investing in continuous training for your team so as to ensure they keep abreast of any new and emerging trends.
Proactivity and adapting to the constantly evolving digital landscape led KFC to open a LinkedIn account for its founder and mascot Colonel Sanders. KFC’s out of the box tactic is a fresh approach to what has long been considered a B2B platform, under-utilised as a B2C platform.
3. Apply custom targeting techniques
The discovery of new and small businesses is being fuelled by Google searches, social media and online reviews, making these platforms a goldmine of invaluable tools.
Leveraging certain custom targeting techniques like easily searchable keywords and exposure on other reputable and high-traffic websites, gives your franchise’s digital marketing efforts a boost. This results in an effective campaign, favourable reviews and meaningful and lasting interactions with consumers “whether it’s a reply to a Facebook comment or a retweet,” says Entrepreneur’s Emily Conklin.
How To Hire Skilled Workers For Your Franchise
Your staff run your business – you just have to show them how. This is why employing the best people for the job is essential.
According to the Franchise Association of South Africa (FASA) 2017 Franchisor Survey, one of the main challenges facing franchisees is finding the right staff.
“Staffing your franchise can be one of the most challenging parts of running a successful business. Without a great team of employees, you cannot run your business effectively,” says Saxon Marsden-Huggins, founder of WebRover.
These three tips could help you find the best employees for your franchise outlet:
1. Don’t hire in haste
While you may be rearing to go and keen to fill gaps to speed up profitability, research your candidates thoroughly.
As the job applications keep flowing into your inbox, keep in mind that not all of them qualify for the positions available – it may even be a small percent who are actually viable candidates. This is why your hiring process should include:
- Taking the time to thoroughly screen CVs to develop a short list
- Creating a carefully crafted list of interview questions
- Setting aside adequate time for thorough interviews
- Getting to know the candidates through a second round of interviews to confirm your choice.
Giving the hiring process dedication and attention will ensure you get the cream of the crop, contributing to the long-term success of your franchise.
2. Demonstrate support in the workplace
While you can instil the necessary skills into new recruits, it’s difficult to train for culture. This is why choosing the right employees from the beginning will make the rest of your franchise management system will run more smoothly.
“The manner by which you run the franchise will influence employee perceptions of the brand as well,” says Hireology’s Erin Borgerson. “Your staff must become ambassadors of your franchise system to attract the target consumer market.”
The best way to do this is encouraging staff to give you their honest feedback. Your commitment to creating and upholding a positive culture will result in increased loyalty from your current staff and a superior pool of applicants.
3. Offer appealing incentives
When advancement opportunities are clearly communicated, staff is keen to hear how they can get there, as they have career goals of their own. Encouraging this ambition will draw good employees to your franchise.
“Helping employees understand the steps to advancement helps them to view their current job as an important part of a career with an upward path, not just a pay cheque for this week,” say financial reporting technology experts at Qvinci.
Performance bonuses and employee benefits incentivise staff’s efforts, therefore increasing their income alongside the profit of the business. “This serves to make employees a part of the business and not merely people ‘who work there’,” they explain.
3 Ways Communication Helps You Run Your Franchise Better
Managing your business as an independent owner may have been challenging at the beginning, but – as you’ve come to realise – the successful operation of a franchise network requires an extended set of skills.
“When it comes to a multi-location business such as a franchise, effective communication is vital,” says Dani Peleva, Managing Director at online marketing agency Local Fame. “So what happens when you’re struggling to connect with the franchise network you have in place?”
It may be time to upgrade your franchise management skills, because the success of your franchise network has a direct correlation to how you integrate feedback systems into your management processes.
Have a clear comprehension of the challenges your franchise encounters, keep an open chain of communication between yourself, franchisees and managers, and maintain regular interactions between everyone in the network. These are some of the most crucial aspects of successful franchise management:
1. Understand the challenges you face
A thorough understanding of your business requires dedication to regular and consistent groundwork for first-hand experience on how the day-to-day operations of the business are conducted.
“Seeing and talking to the people that make your business will help you understand the challenges that franchisees face and the systems they need to drive higher profitability and growth,” says Rosie Niblock, Marketing and Communications Manager at Proactive Marketing.
“That way you can work more effectively to make improvements to franchise management systems logically and within the financial grasp of all franchisees.”
2. Get personal through regular visits
You never want your franchises to feel neglected. It’ll demoralise them and possibly drop sales, profits and their ability to keep the business running as you intended. Maintaining regular contact and sharing as much information as possible – when you can – fosters strong relations with your franchisees.
Empowerment through information and communication makes a difference in the business and helps franchisees make decisions in favour of the business and to make sure that they all pull in the same direction in terms of customer satisfaction, says Alan van der Westhuizen, executive manager of new business sales at Fournews, a 20-year-old franchise holding company for News Café, Krispy Kreme, Moyo, Brooklyn Brothers, Smooch, Cafe Fino and Go! outlets.
Ensure your response to these concerns is swift. “If not discussed they could fester ad create undesirable rumours,” says Niblock.
3. Create events for network collaboration
One of the most important aspects of managing your franchise is meeting with all your franchisees, at least annually. “Franchise conventions are almost certainly the biggest tool when it comes to building profitable engagement,” says Peleva. “They’re one of the most important things to focus on when you’re considering how to lead your franchise network.” According to her, a successfully attended and executed convention will let you:
- Boost your network-wide productivity
- Hugely increase your profitability
- Drive passion for your brand
Communicating with your franchisees is the best way to identify problems, work towards solving them, and building a pleasant and fruitful relationship with your owners.
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