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Franchisee Advice

How to Attract Franchise Investors

How to get your franchise funded by hard-to-reach outside investors.

Jim Casparie

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There’s no doubt about it, franchises are popular. For someone looking to escape the confines of their boring cubicle, there’s something definitely appealing about buying a ‘business in a box’ that takes the mystery (and at least some of the risk) out of starting your own business.

You’ll get no arguments from me about the benefits of a franchise business. Just understand that if you’re going to need help financing the acquisition of that franchise, you’ll probably find few takers in the professional investment community. Now let me emphasise that I do not consider banks to be part of the ‘professional investment community.’

Typically, banks will help finance the purchase of a franchise but if your credit’s bad and you need an outside individual (angel investor) or venture capital firm to help you get the cash, there could be a problem.

Here’s why:

1. Franchises can be expensive.

Generally, the more expensive the franchise, the more earning potential there is for you (simply put, ‘hot’ franchises cost more because they earn more). To get started, you have to pay to obtain the right to use the franchisor’s name and gain its assistance in helping you succeed. This fee may include all the following:

  • Franchise fee. This fee, which may be non-refundable, can cost several thousand to several hundred thousand rand. In addition, there may also be costs to rent, build and equip an outlet and to purchase initial inventory. Other costs may include operating licenses and insurance. There may also be a ‘grand opening’ fee for the franchisor to promote your new outlet.
  • Royalty payments. The franchisor may charge royalties based on a percentage of your weekly or monthly gross income. This may be true even if your outlet hasn’t earned significant income. Royalties are usually paid for the right to use the franchisor’s name so even if the franchisor fails to provide promised support services, you still may have to pay royalties for the duration of your franchise agreement.
  • Advertising fees. On top of everything else, you may have to pay into an advertising fund. Some portion of the advertising fees may go towards national advertising or attracting new franchise owners, and some may even target your particular outlet.

So how much money will you need? It depends on whether your goal is to own a single franchise or to purchase a master franchise that generally covers a specific geographic territory. For most, the single franchise purchase will be daunting enough.

Granted, some franchisors may be willing to take a down payment as low as 20% to 25% of the total, but you’d better have excellent credit and a net worth in excess of R1 million.

2. The franchisor is king.

Here’s the real problem. If you’re looking to get an outside investor to help fund your entry into this type of business, never forget that this is not your business! It’s the franchisor who has built this business, made it successful and will always maintain control over anything that would threaten that.

Thus, any outside investor is totally dependent on two uncontrollable variables: you and the whims of the franchisor. That’s why most franchises are financed by second trust deeds on homes, loans from relatives, and/or borrowed money or pension funds (be sure to check with your tax advisor if you’re considering this last option.)

3. The real money is in multiple franchises.

Owning a single franchise will generally allow the franchisee to make a modest income for themselves but not offer a great return to any investor. Thus, if you want to pursue this strategy with vigour, you need to think multiple franchises. Such a strategy can be pursued on a one-at-a-time basis or by acquiring what’s called a ‘master franchise.’ However, the former strategy can be slow and costly, and the latter may not be possible for the older, more developed franchises.

As a private investor, the only investment strategy that might interest me would be to invest in a master franchise. The challenge, however, is in determining if my partner (the one who’s going to do all the work) can actually be successful at building a franchise. Here, the decision is simple. As a private investor, I would only invest in a partner who has a clear and proven track record for building successful franchises in the past.

I simply can’t afford to invest in someone who’s never done this before.

So what’s the bottom line on getting an outside investor to invest in a franchise with you? Unless you’ve done this before and are now looking to take over a large, multi-franchise territory, you’re going to have your work cut out for you. Outside investors are rarely your ticket out of your cubicle. For that, you’re going to have to bite the bullet and dig deep into your
own pocket.

Local experts

Anita du Toit, Franchising Plus:

“There is no formal network of angel investors in South Africa. Some financial institutions may consider taking some form of equity in a promising franchise. The other option is to approach friends or relatives for help”

Petro Bothma, Business Partners:

“Business Partners does look at the financing of franchises. We look at the application in exactly the same way as general applications – ensuring (as far as possible) the long-term viability and sustainability of the business, as well as the capabilities, skills and expertise of the entrepreneur. We also do a due diligence on the franshisor.”

The requirements:

Applications for finance are assessed on the viability of a business, which comprises two important elements:

  • the business
  • the entrepreneur

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1 Comment

1 Comment

  1. Nomvuyiseko Mbenene

    Nov 29, 2011 at 02:21

    I am looking for an investor to invest in a franchise that I intend to buy, the King Pie Franchise…..
    If you are a serious investor, Please contact me on +27721499599 or mcuyi.mbenene@gmail.com

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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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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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