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.
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.