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Franchisee Advice

Is It A Good Time To Invest In A Franchise Right Now?

Is now a good time to become a franchisee? And how should you identify a franchise that can weather an economic storm? Prithivan Pillay, Nedbank’s national manager for new business development shares his thoughts.

GG van Rooyen

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Vital Stats

  • Player: Prithivan Pillay
  • Company: Nedbank
  • Position: National Manager: New Business Development
  • Visit: www.nedbank.co.za

Given the state of the economy, is now a good time to invest in a franchise?

There is no doubt that people are nervous about the economy. Because of this they will obviously be hesitant to invest a large amount of money in anything, and franchising has certainly not been exempt from the current economic pressures. However, a franchise remains a solid investment. The industry is resilient, and the success rate for franchises remains at around 80%, which is far above the 20% success rate of a start-up.

What do you think of the state of our franchise sector?

South Africa boasts quite a mature franchise sector. Established and respected local franchisors generally have systems in place that are on par with international brands. I think this is evident from local franchises going into overseas markets. Nando’s is an excellent example. It has managed to carve a place for itself in very saturated markets, and that’s because the foundation of the business was sound.

Related: Nedbank Once Again To Provide Free Franchising Seminars

What do you think of the overseas brands that have come to South Africa over the last few years?

Some of these obviously represent great opportunities for prospective franchisees, but it is important to realise that a big international brand doesn’t guarantee success for everyone involved. A big overseas brand can still fail. And what proves popular overseas will not necessarily be popular here. Look at the frozen yoghurt market.

It is absolutely massive in the United States, but proved itself to be much smaller here. You can’t assume that the strength and recognisability of the brand will carry it through.

As a prospective franchisee, you need to make sure that the franchisor has done proper feasibility studies before plunging into the market.

What do banks look for when new franchisees approach them for finance?

As a general industry standard, a franchisee is expected to be able to provide 50% of the cost of a franchise in unencumbered capital. But this isn’t set in stone. For example, if someone is trying to finance their fourth or fifth franchise unit, they might not need 50% of the capital, since there is less risk on offering them finance.

Prithivan-Pillay-Nedbank

What are some of the common mistakes you see franchisees make when it comes to financing a business?

It is important to understand that the bank and the franchisor have very specific reasons for expecting 50% of the money in unencumbered capital. Gearing a business too aggressively is very risky. It is very difficult to make a success of a business and turn a profit if it is 100% financed.

It’s also important to remember that merely having the cash needed to buy a franchise is not enough. You will also need enough money to purchase stock, keep the business afloat and live off for a while. It can take a business a while to break even, and until then, you will need to be able to carry all costs.

How long does it typically take a franchise to break even?

That is difficult to say. It really depends on the nature of the business. Some break even within the first month, though most tend to take three to six months. Some can take as long as 18 months, though, so it’s important to have a very good idea of how long you’ll have to be able to carry expenses.

The prospective franchisee needs to speak to the franchisor and find out what the typical time to break-even is within the organisation.

How long does it typically take to see a return on investment?

Once again, it all depends on the nature of the business, but the average is around 36 months. What is worth keeping in mind is that many franchises will expect franchisees to refresh or revamp a store about four years after opening, so there is a high probability that you will need to put a lot of cash back into the business soon after seeing an ROI. You need to plan accordingly, as this can be an expensive process. A revamp can cost R1 million or more.

Related: Healthy Body20 Franchise Leads To Happy Hearts

What other advice do you have for franchisees?

Do your research. Don’t make any assumptions, and don’t just accept the word of the franchisor. Research the brand and find out who the directors of the franchise are, as it is important to know who the people are behind the business. Also, chat to existing franchisees. If eight out of ten grumble about the franchisor, there’s probably an issue in the organisation.

One should also do research on the larger industry. How saturated is the sector you’re trying to enter? A franchisor might allocate you a large area, but how many competing brands are already active in that area? Are there similar shops up and down the street? You need to be confident that there is real opportunity for your particular franchise to succeed in your area.

What about the financials of a store being purchased? How should a franchisee go about evaluating the numbers?

As a prospective franchisee, you should be provided with the financials of the business you want to purchase.

You should use this as a foundation to prepare your cashflow projections, ideally for three years. These financials together with your business plan can then be presented to your bank for assessment to determine the business’s viability.

How do you view the role of a bank within a franchise structure?

It’s in the interest of everyone involved — the franchisor, the bank and the landlord — to see the franchisee succeed. We are part of a chain of support that should be there to offer help if something goes wrong. If a business shows signs of distress, we want to help and see if the situation can be rectified.

What separates the great franchises from those that fail?

A lot of it comes down to systems and support. The whole point of buying into a franchise, after all, is to gain access to a proven business model, which means proven systems and support structures. Without those, you might as well open your own independent operation.

Great franchises are the ones that provide new franchisees with a lot of help and support, and have the systems in place to get new franchisees up and running with ease. Running a franchise organisation isn’t easy — there are a lot of functions involved — so you don’t want to buy into a small operation that’s being managed by a handful of people. They can’t possibly keep a handle on everything. You want to buy into an operation that has divisions focused on all the different functions associated with franchising, such as marketing and training.

Related: Xpress Operation On A Roll

What else should a franchisee expect of a franchisor?

A franchisor should have a solid understanding of the industry, and should be innovating and expanding at the corporate level. Don’t let the franchisor perform R&D inside your store. Concepts should be proven before they are rolled out to franchisees.

It’s always a good sign if the franchisor runs corporate-owned stores. By doing this, the organisation gains real insight into the issues franchisees deal with, and can also test new programmes before rolling them out to franchisees.

Remember this

Even though the success rate of a franchise is generally much higher than that of a start-up, it still doesn’t guarantee success. Not all franchises are created equal. It is important to do a lot of research before committing to a brand.

GG van Rooyen is the deputy editor for Entrepreneur Magazine South Africa. Follow him on Twitter.

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Franchisee Advice

5 Tips For Franchise Agreements

Below are 5 tips to ensure that your franchise agreement complies with the CPA.

Justine Krige

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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.

Related: The Perils Of The Franchise Agreement

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.

Related: What Constitutes a Fair and Balanced Franchise Agreement?

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.

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Franchisee Advice

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.

Richard Mukheibir

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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.

Related: 6 Things You Need To Know About Profit And Cashflow

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Related: 7 Things Every Entrepreneur Should Know About Managing Cash In The Business

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Company Posts

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.”

Nedbank Franchising

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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.

Related: How Sorbet Franchisee Kate Holahan Is Nailing Success By Following Her Dream

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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