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.”
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.
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