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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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Franchisee Advice

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.

Diana Albertyn

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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.

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Franchisee Advice

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.

Diana Albertyn

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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.

Related: Insights On Recruitment That Could Affect Franchise Performance

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.

Related: 3 Things You Should Consider Before Buying Your First Franchise

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.

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Franchisee Advice

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.

Diana Albertyn

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“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.

Related: 3 Core Strategies For Building Successful Franchise Organisations

“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.

Related: How To Write An Operations Manual For Your Franchise

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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