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