Buying into a property franchise is very different from most other franchises. In terms of the basis of franchising, where support and proven systems are the cornerstones of the model, property franchising ticks all the blocks. But that’s where the similarities end. Choosing to buy a property franchise can be highly lucrative, but the process to get there is long and stringent, not to mention capital intensive. According to some of South Africa’s top franchisors though, once you get there it can be an incredibly rewarding business.
The property model
Buying a property franchise is like plugging into a network of proven systems, clients and agents. Franchisors have sales and marketing experience, they train you (the franchisee), as well as your admin staff, agents and principals (if you are not the principal yourself), and they provide you with the systems needed to run an estate agency.
“We even provide our franchisees with ready-made sales material that they can customise and print simply by accessing the network,” says Barry Davies, franchising director for Chas Everitt. “We set up local websites for each of our franchisees and we help them choose and employ staff.”
One of the most important aspects of buying into a franchise is the network. “A property franchise model works because we are careful not to flood a particular market,” explains Craig Hutchison, CEO of Engel & Völkers. “We evaluate each area’s market capacity and sell franchises in those areas based on that capacity. We also will not have franchisees competing against each other in the same area.” This system means that franchisees can share their contacts. All buyers and sellers become part of one comprehensive network that all partners in the franchise can access.
“The secret to success in franchising is that in order for the brand to be successful everyone needs to work together,” explains Pieter Davidtz, head of franchising at Jawitz Properties. “As the franchisor, we commit to upholding and continuously developing the brand, and in return we expect dedicated franchisees who are also great ambassadors for the brand.”
Choosing a franchisor
There are a number of well known, established and respected property franchisors in South Africa. There have also been fly-by-nights and less reputable brands. Before choosing which group you would like join, make sure you have done your research.
“When we were looking to buy the rights to the Engel & Völkers franchise in South Africa I flew to Germany to meet the licence holders,” says Hutchison. “I wanted to see their systems, their financials, research how they did things, and I expect exactly the same from my franchisees. They are investing a lot of money in their franchise, so it is essential that they are comfortable with the brand’s reputation and stability.”
Pam Snyman, chairman of the Institute of Estate Agents of South Africa (IEASA), recommends checking if the franchisor, its franchisee and the agents operating under the brand all have up-to-date Fidelity Fund Certificates (FFCs). “To be acting legally an agency must be in possession of an FCC, as well as all of its directors, members, partners and owners where applicable. If even one agent doesn’t have a valid FCC the whole company is legally disqualified from earning commission. Checking valid FCCs is a good indication of how well a franchise is run.”
According to Davidtz, a potential franchisee’s first stop should be the Estate Agency Affairs Board (EAAB). “Ask the EAAB about the company’s reputation and for how long it has been a member of the board. This should give you an indication of how established it is. You should also speak to other franchisees and gauge their experiences.”
Davies agrees. “It’s mandatory for all potential franchisees to speak to at least two of our practising franchisees,” he says. “That way I know they are doing their research, but it also gives them a better idea of the way we do business.”
In terms of research, franchisees should understand the areas they are looking to operate in, what the market in their area looks like, and what brands suit which markets. “Always ask questions before you sign anything, especially what you are not going to get,” says Davies. “Both parties are so prone to looking at what is on offer that they forget to look at what isn’t. That can result in the franchisee entering the relationship with certain expectations that won’t be met.”
The makings of a successful franchisee
Choosing the right franchise to buy into is vitally important for the franchisee, but choosing the right franchisees is as important to franchisors. “This is a partnership,” says Davies. “We need to work together, and as the franchisor we need our stores to be successful, as their success reflects our success. The last thing we want is shops closing down.”
Hutchison agrees. “Franchisees and their agents are our brand ambassadors. We need to make sure that they have the same attitude towards the property market as we do, that they agree with and will uphold our ethical principles and that they can afford to become property franchisees. We have actually cancelled two licences in the past because of unethical practices. We are very careful about who we choose as partners.”
The process involves in-depth interviews, getting to know each other and developing strategies for the areas the franchisees are interested in. “There is no such thing as a one-size-fits-all approach to this industry,” says Davies. “The capital involved in Brits is not the same as what’s needed in Sandton. Similarly different personalities are suited to different areas. It’s important to match the right franchisee with the right area.”
Chas Everitt requires the prospective franchisee to complete a 28-page formal application document, stating where they will access the funds to buy and run the franchise, how much capital they have, what scale of operation they are looking to run and which territory they are interested in. “Once the application is complete and we have gotten to know each other a bit better, we require a full competitive market statistical report on the area. We will help the prospective franchisee with the process, but what I really want is for them to tell me what is going on in that area: What are the top agencies in the area? What are they doing that makes them successful? What are the drivers in that particular market? Without researching the area the franchisee cannot be prepared to open a successful agency.”
Not all areas are suitable for new franchises either. “We often get prospective franchisees who are looking for a life change,” Davies continues. “They have worked hard in Jo’burg for most of their adult life and they are now ready to relocate and invest their money in a franchise on the coast. Before we can decide to sell them a franchise in that area I expect them to have done thorough market research of the area in question: Who is already operating there? How buoyant is the market? Which brands have successful operations? If it is a small coastal town, the most successful agent in the area might be a local who has grown up there and doesn’t even belong to a franchise. Will the market accept someone who has not grown up there? It is essential to know the market that you are planning to operate in from top to bottom.”
Only once the research is complete and both parties want to go ahead with the deal does what Davies terms ‘the countdown plan’ begin. This consists of a 382 step plan that covers everything from registration with the board to recruitment plans and training. It’s a slow process, but the idea is that once it’s complete the franchisee has the strongest chance of success possible.
There are two types of franchisees in the property market: owner operators and non-practising franchisees who hire strong principals to run their agencies for them. According to Hutchison, some of their most successful agencies are run by principals (who cannot necessarily afford to buy their own franchises), while Chas Everitt insists on its owners being hands-on. The qualifications involved mean that a new entrant into the market has to spend time preparing to run a franchise, but this is not the biggest barrier to entry. You need capital to buy a property franchise.
“Cash flow is an important part of a real estate business,” says Davidtz. “Over and above your initial capital outlay, you need at least three months’ capital to fund your business and personal expenses until your first sale clears.”
Depending on the market, it can take even longer than three months before the business starts generating cash flow. “You need to plan for the worst and hope for the best,” says Davies. “Transfer delays and a tougher finance market mean it can take up to six or even eight months before you close your first sale. It is important for franchisees to be able to finance themselves during this period.”
According to Snyman, one of the biggest risks faced by the industry is naive franchisees who cannot support themselves initially until their first sale is transferred and they receive their commission. “Property is not a get-rich-quick-scheme,” she says. “It’s capital intensive.”
Start-up costs, depending on the area and size of operation, can vary from between R500 000 and R2 million, and most franchisors expect the franchisee to have between 60% and 70% of that themselves, with finance only covering 30% to 40%. “This isn’t like buying a take away store that immediately starts generating capital,” says Hutchison. “It’s an expensive business and it’s important for franchisees to realise that.”
According to Davies, monthly expenses can range from R40 000 to R250 000 per month, depending on the size of the store, and until the first deal is closed, these
expenses will need to be paid by the franchisee. “It’s important that franchisees do not make base assumptions about what they are getting themselves into. It’s not a cash-flow friendly business, and you need to cover monthly costs. It’s essential you know what those costs are.”
His advice to franchisees is that they research property values in the area they are interested in, have a good idea of what kind of rent they will be paying and to have researched the property market thoroughly. “The South African Property Transfer Guide has all the figures and data you need from the deeds office, and we will even help you analyse it, but it’s important to have those numbers,”
An alternative property model
Don’t have the capital to buy a property franchise? Purchasing a licence instead is a viable – and more affordable – alternative.
When Barry Davies first began developing the Chas Everitt Notebook Licence, he did so to accommodate experienced agents who wished to own or operate their own businesses or trade for their own account, or independent operators wanting to convert to a national brand, but who either didn’t want to or couldn’t afford to incur the high costs and traditional expense structures associated with a full franchise and office set-up.
“We’ve got a licensed agent in Mooi Nooi for example, who the model works perfectly for,” explains Davies. “Mooi Nooi is too small for a full franchise, but the licence agreement works perfectly. She is able to hire assistants but not agents under the licence agreement, and the model is simple – there’s a low annual area licence fee of R15 000 and a monthly user fee of R1 000, which gives full access to our system. There is also a marketing pack cost, and then a royalty percentage payable only on registration of sales.”
The Notebook Licensing model is designed for smaller areas, although in one case so far a number of licensees formed a partnership and have bought a franchise together. “Two years of licensee experience gave them the confidence in the market and experience in our systems that they needed to make the decision to buy a franchise. By partnering together they were able to put up the required capital as well,” says Davies.
According to Pam Snyman, chairman of IEASA, there are a number of annual fees in the real estate market:
- Non-principal registration: R529,80
- Non-principal annual levy: R364,80
- Principal registration: R1 270
- Principal annual levy: R855
Hiring a good team
Agents are a real estate franchise owner’s best assets. They are the core of the business. For that reason it is essential that owners hire the best – and franchisors will help them with the process.
“Part of the franchise agreement is providing training for agents,” says Pieter Davidtz of Jawitz Properties. “But it is essential to hire the right agents to begin with as well. This is always a challenging step, but finding the right people can mean the difference between merely running a business and running a highly successful agency.”
As a franchisee, don’t be shy to ask your franchisor for help. Often they know the agents in your area and offer advice. You should also do your homework on who is available and what their personalities are like.
“Invite agents in your area of interest for casual evening chats,” advises Chris Hutchison of Engel & Völkers. “Get to know your area and the property specialists in them. See who would be a good fit in your agency. The right agents have great contacts, good relationships with the banks and understand their area dynamics.”
Hutchison does not say that new blood should be avoided. “Because the franchise model comes complete with training, a good mix between established agents and new entrants to the industry is not only possible, but gives you a nice, fresh balance.”
Craig Hutchison offers tips on how to spot a red flag when researching a franchisor:
- If you can’t get a referral from a current fanchisee, be wary of the franchisor’s support of its franchisees
- If the franchisor doesn’t want you to speak to any of its franchisees and won’t give you a list of contact details
- If the franchisor is in too much of a hurry to sign the agreement
- If the franchisor is not willing to disclose financials or how its systems work, even after a non-disclosure document has been signed
- Most importantly: does the franchise grab you? Do you feel comfortable with the franchisor? This is a relationship – you need to all get along at a professional level.
Although multiple-franchisee owner Francois Greeff owns the Engel & Völkers office in Centurion, he isn’t running it. He has a great principal doing that in his stead, Wendy Williams.
When the Centurion office was put up for sale in 2004, it had a successful team of agents working for it and an experienced principal, Wendy Williams, running the show. “Head office was very comfortable with a buyer who was inexperienced in the property industry buying the Centurion office because we had an established team running the shop,” she says.
Greeff invested in the franchise and is involved in the weekly buyers meeting and general meetings, but on the whole he remains the owner but not an active principal in the business, leaving the day-to-day operations in Williams’ capable hands. And they are indeed capable hands. Nominated as top office team leader five years in a row and winner for the last three years, with an additional three nominations as top international leader under her belt, Williams runs the Engel & Völkers Centurion office seamlessly – so well in fact that head office sends potential franchisees and trainee agents and principals to her shop to see how it’s done.
“Francois is an investor. As long as he has a team who he knows is running his store well and who knows the business, he is comfortable with the arrangement,” says Williams. “It is vitally important that a non-hands-on owner has a manager who is not only hands-on and well-versed in the industry, but understands marketing, HR and administrative areas of the business as well. A principal who is only a store manager will not be able to address other departments if something goes wrong. A principal needs to understand all aspects of the business and still be empathetic and sympathetic towards the agents.”
Types Of Funding Available For Franchisees
If you’re interested in investing in a franchise, there are a number of funding routes available to you.
In South Africa, a franchise is considered a separate, specialised field of business and from a financing perspective is viewed differently to an existing business. It’s typically easier to get funding for a franchise as franchises have a proven product and they vet potential franchisees and offer support to new business owners. This support can include extensive training on running the franchise, branding and marketing, operational policies and procedures and a highly-tuned supplier network.
The reputation of the franchise will, to a large extent, dictate which finance options you choose and how easy it will be to raise the required funds.
It’s important to understand the cost of purchasing the business and the expected operating costs to work out how much finance you’ll need until the business starts to generate profits. Be clear about the upfront costs, including access to the brand, the market structure, start-up support and the set-up fee, which usually includes construction, equipment, stock and other necessary resources.
Consider the operating costs, which must include management service fees and franchise marketing and advertising levies. The franchisor will advise you on the time it should take for the franchise to start generating profits. Upfront costs plus operating costs are the total amount of finance required to purchase, set up and run the franchise.
What’s available for prospective franchisees?
Many of the large franchisors have their own funding mechanisms. These can range from their own established finance arm to funding assistance through partnerships with external lenders. Franchisors seldom fund 100% of the purchase costs; the amount of funding varies according to the size and reputation of the franchise and usually ranges from 25% to 75% of the costs.
Once a franchisor approves you as a franchisee, your chances of being approved for funding are significantly stronger. Some franchisors go a step further and suggest a business partnership with another potential franchisee who has good financial resources but less experience. Pairing experience with finance can be a useful option, but needs to be explored properly as it is a long-term partnership that must work for both parties.
Tandem Funding and Specialised Franchise Funders
South Africa’s B-BBEE legislation has led to a new option for franchise funding. It’s a particularly innovative way of quickly upskilling inexperienced potential franchisees. The franchisor funds the new franchise and retains ownership of the majority of shares in the business.
The franchisee initially purchases a small number of shares and is then mentored by the franchisor to set up and run the franchise. Profits are used to buy more shares until the franchisee has purchased all the franchise’s shares.
Specialist franchise funders are also a useful option. They typically consider a wider variety of franchises than banks and have in-depth knowledge of the industry. However, like other funders, their primary concern is to be sure that the loan will be repaid within the required period.
Franchise Funding from Banks
All of the large banks have specialised franchise funding departments. Their approval rate for funding franchises is generally higher than for independent businesses.
Banks will expect you to provide a sizable contribution toward the purchase of the franchise and funding is dependent on proof that the business will be able to repay the loan.
Other factors they consider are the location of the business and its proximity to competitors and catchment markets, your level of business experience, your credit record and the amount and type of support offered by the franchisor. The higher the level of support, the less the risk to the funder of the business under-performing.
If the franchisor is willing to enter into a joint venture with you to partially fund the purchase, the bank will consider this positively as it means the franchisor has a vested interest in helping you to succeed.
Government Franchise Funding
All of the government funding agencies offer franchise funding primarily to encourage black entrepreneurs to enter into the franchise business. For example, the National Empowerment Fund considers funding based on a minimum of 50,1% black shareholding, provided that the black shareholders are actively involved in managing the business.
They prefer to fund well-established franchises, fund up to R10 million and expect to exit within seven years, so you’ll need detailed projections to show that the loan can be repaid within that period. Ithala Bank considers funding for KZN-based approved franchisees who do not have collateral.
What funders expect from you
Lenders expect you to provide detailed information that will enable them to assess the risks of lending to the franchise. This means they require a detailed business plan, comprehensive and well- substantiated financial projections and full details of the franchise, its agreement terms and the levels of support they will provide. They will also need details of start-up costs; for example, construction, set-up costs, equipment and other resources required to establish the franchise.
Franchise lenders expect you to have concluded discussions with the franchisor and want to know that you have been approved. This pre-approval means that there is less risk to them. You’ll also be expected to provide feasibility studies from the franchisor.
The purchase of a franchise requires an injection of your own cash and if you are borrowing money, you’ll probably need to provide collateral. You’ll need a statement of personal assets and liabilities for each of the directors, a good credit record and detailed CVs of the owners to show the required business experience.
The more well-known the franchise, the higher the price, so do your homework before applying for finance. Understand the full cost of starting and running the business to make sure you aren’t in for future surprises. In particular, work out your current liquidity status.
Keep a small contingency fund available for unexpected expenses, so don’t invest all available capital in the venture.
Shop around. Compare finance institutions’ offerings to make sure you get the best deal. In the case of less expensive franchises, consider working with a couple of lenders; for example, an asset funder to fund equipment needs and a franchise funder for the start-up and working capital costs.
Factors To Consider Before Signing Up As A Franchisee
Franchising is a brilliant way to get into business with not many entrepreneurial skills as it comes with a roadmap to follow for success.
You’ve been considering entrepreneurship for a while, and now that you’ve finally raised some money and been approved for a loan, you’re ready to quit your 9-5 job to run your own business. You may even already have your eye on a particular franchise, but while franchising is considered an easier and more low risk way to get into business, are you suited to being a franchisee?
“The question is not ‘is franchising right for you’, but rather, are you right for franchising? Because if you don’t have the right attitude and skill set, it can be a very expensive mistake,” says small business expert and author Steve Strauss.
Franchising may seem like an easy way into entrepreneurship, but along with an established name and proven systems, come rules, regulations and little room for creativity. If you’re not ready to become a franchisee, but want to go into business for yourself, you may find yourself struggling to operate within the system’s blueprint.
Ask yourself these three questions before proceeding with the process of franchising:
1. Will you be able to follow the directions of the franchisor?
You’re buying into an existing and proven concept so it’s safe to assume that the franchisor knows best, and so you have to be open to learning and following guidelines for business success. If, for example, you have experience in advertising and think you have an improved technique of marketing the franchise, you may want to change the advertising material provided by the franchisor – don’t.
“Being a franchisee means following the directions of the franchisor, even when you think you know a better way,” advise experts from strategic and tactical advisory firm MSA Worldwide.
“In addition to initial training, you need to be prepared to accept coaching and advice from the franchisor on how you operate or market your location.”
2. Do you have the need to experiment?
Lou Groen may have had success in launching a new menu item that McDonald’s approved of in 1962, but not all franchisees are that lucky. Stick to the plan and limit deviations to the menu or anything that involves the customer experience.
If the franchisor’s concept doesn’t involve deliveries, offering them to your customers may cause issues for others within the franchise system. “If it’s not part of the franchisor’s concept, you’re deviating from the concept and therefore, no longer running your store as a franchise,” according to MSA. Franchising arguably limits innovation opportunities, so if you’re prone to implementing creative ideas and evolving business offerings based on said ideas, rather start your own independent business.
3. Are you a team player?
These first two questions you address should already lead to the realisation that everything you do affects everyone in the franchise chain. One bad experience at your establishment and suddenly, all the stores are affected by bad press or unsavoury social media attention.
“Other franchisees are relying upon you to offer to the consumer a consistent level of service, product quality, and brand message. You are going to have to work with others in the system in making decisions,” advise experts.
Remember that as part of a chain of other business owners, you may have to accept that majority rules when it comes to decisions where franchises do have a say.
3 Ways You Can Innovate And Improve As A Franchisee
Although your role as a franchisee isn’t really to innovate, there’s room for creativity if you go about it the right way.
When you signed on the dotted line after reading and agreeing with the franchise agreement, you knew that you were buying into a proven system where everything has already been thought out for you, and all you have to do is follow the formula for success.
But you’re a franchisee longing to put your own imprint on your business, and it may be frustrating to feel boxed in by a formula, while you’re bursting with new ideas.
“Franchising, by its nature, discourages innovation on the part of franchisees, who are required by their franchisors to follow very specific policies and procedures on exactly what they will sell, how they will make or deliver it,” notes Randy Myers, contributing editor for CFO and Corporate Board Member magazines.
This doesn’t mean your ideas will never see the light of day though. But before you approach your franchisor with your brilliant insight, consider the following steps that may well lead you down an innovative path:
1. Get the basics right first
Franchisors know that customers like consistency as it makes them comfortable and trust every location of their franchise they choose to visit. But, even the strictest franchisors get hungry for new ideas. It’s the timing that’s vital for your idea to even be considered.
“Most good systems don’t want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star,” said Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants. “At that point, they have become successful, their base is secure, and they have earned the right to consider innovations.”
It’s wise to ensure you’ve learned your franchisor’s existing business model before you suggest any improvements.
2. Do your homework
So, you’re doing well and you’re sure your idea will be welcomed as a crucial innovation to the franchise system – but research your proposal, suggests Kim Stevens, VP of Regional Development and Director of Franchise Awarding at Woodhouse Day Spas. “Especially if you’re suggesting something that would impact all franchisees, create a business plan before approaching your franchisor,’ she says.
It’s also good to have another look at the franchisor’s policy for accepting new ideas to ensure you’re prepared for tough questions before you propose your idea.
3. Speak to the right people
Elgin recommends you first identify the person at the franchisor’s head office who’s responsible for receiving new ideas. “Many of the ideas a franchisee comes up with will already have been proposed by another franchisee,” notes Elgin.
To avoid wasting your time, no matter how great you think the idea is, present it as early as possible before spending anything developing the idea.
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