Connect with us

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

Published

on

Prithivan-Pillay-Nedbank-franchise

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.

Franchisee Advice

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.

Richard Mukheibir

Published

on

retail-franchise

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.

1. Strategy

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.

Related: Effective Ways To Bring Customers To Your Door

2. Scope

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.

3. Synergy

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.

4. Sight

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.

Related: FASA Establishes Industry Specific Food Franchise Forum

5. Security

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.”

Continue Reading

Franchisee Advice

6 Things You Need To Know About Profit And Cashflow

Why your business needs both and how to check.

Richard Mukheibir

Published

on

profit-and-cashflow

In the heat of the action as you build your business or launch a new line, it’s easy to hope some aspects will take care of themselves. It’s especially tempting to fall into that trap with your accounts if you don’t like dealing with figures.

Despite having a B. Comm degree, I’m happy to admit that I don’t really like accounts. I much prefer strategies, management and business development. Fortunately, my co-founder and our Chief Financial Officer Peter Forshaw tirelessly keeps us on track financially – and his message to our franchisees is always that in your own business, you must understand enough of the financial basics to know whether your business is swimming or sinking…

It’s so important that we include this as part of our franchisee training. To get you started, here’s what Engela van Loggerenberg, our Group Financial Manager, tells new franchisees:

  1. Cashflow and profit aren’t the same: You can’t track one and assume the other shows the same pattern. There is no natural correlation between the two – your cashflow can be positive and you can be making a loss or your cashflow can be negative but you’re making a profit.
  2. Cash keeps you going: It’s vital to have money available in your business so you need to be generating enough cash to pay operating expenses. Otherwise you could be making a profit but not be able to pay staff wages. If so, you will either have to put in some of your own money or take a loan to keep your cash flowing and your business afloat.
  3. Time for a checkup: Both cashflow and profit are important to a business – but you can’t do anything without cash which is why you have to manage your cashflow carefully. Check your profit monthly but your cashflow daily. This will alert you to problems in the making so you can head them off. You will see if your clients are overdue in paying their accounts with you, for example. If they fall behind, this could in turn squeeze your ability to pay your operating expenses, which is why cashflow monitoring is such an important tool to keep your business afloat.
  4. Different perspectives: Remember when you look at your figures that profit figures are a result of what has already happened and are usually reported with a time lag of a month. Cashflow is a snapshot of what is happening in your business now and will have an impact on profit figures in the months to come.
  5. Know what you’re looking for: What you need to know are your net, not gross, figures. For net cashflow that is your incoming cash less your outgoing cash for the period. So if you are receiving more than you are spending, you will be left with money in the bank to meet future expenses. Similarly, your total sales less direct costs make up your gross profit. Deduct all your operating expenses from the gross profit to calculate whether your business is making a net profit.
  6. Make the most of your cash: Take pressure off yourself by keeping spare cash for future expenses such as VAT and taxes in a good interest-bearing account such as a money market, call or investment account. Then set up reminders ahead of time to arrange to withdraw the sum required.

Remember that any system is only as good as the person operating it. So if like me, figures aren’t your thing, make sure that you have someone at your side who can manage them for you.

Read next: 4 Factors To Consider Before Converting Your Independent Business Into A Franchise

Continue Reading

Franchisee Advice

3 Ways To Ensure Your Loyalty Programme is Working Hard For You

Plastic cards are making way for app-based loyalty programmes. Is your franchise keeping up with the digitally savvy consumer?

Diana Albertyn

Published

on

loyalty-programme

The average consumer today is a member of at least five of the 100-plus loyalty programmes in South Africa, according to a 2017 study by Nielsen. As the loyalty playing field becomes more cluttered and competitive, what are you doing to ensure each one of your franchisees are catering to customer needs when it comes to loyalty?

Mobility. It’s not the newest buzzword, but it is useful for attracting customers who don’t want to lose loyalty points because their card is lost or not with them. Ailsa Wingfield, Nielsen’s Head of Emerging Markets: Thought Leadership, says that as adoption of non-traditional payment methods increases, loyalty programmes also need to introduce payment type flexibility.

“Mobile payment platforms will increasingly deliver an opportunity for loyalty-programme engagement with consumers, providing a convenient and personalised way for programme members and retailers to engage with one another all along the path to purchase.” – Ailsa Wingfield Nielsen Head of Emerging Markets Thought Leadership.

Related: 11 Ways To Double Your Customers In 4 Weeks

Have you considered what role tech could play in your current loyalty programme? Here are three ways to apply digital enhancements that appeal to present and potential customers: 

1. Offer differentiation through more options

Research has concluded that the loyalty programmes devised by retailers and franchises are not innovative enough to capture the attention of the youth – Millennials and Gen Z. it’s time to diversify your rewards offering. But how?

If your customer base is predominantly younger, being omni-present is key, according to the Truth Loyalty Whitepaper: “An omni-channel approach will not only meet the demands of the younger customer, it will also allow your business to combine intelligence on shopping, search and web behaviour history to assist you in identifying when to offer an in-store promotion, extend a seasonal offer or make a product recommendation through the appropriate channels.”

Implementing a digital loyalty campaign is also a smart way to reduce costs. Coffee shop franchise Mugg & Bean’s Generous Rewards App and partnership with Vitality Active Rewards, means members can earn cash-back rewards to spend on their favourites. Just downloading the app earns you a R25 voucher.

2. Use your tools to engage more

A crucial mistake most franchisors make is not communicating consistently with their loyalty programme members once they’ve signed up and increased numbers. They spend a lot of time recruiting customers to join, but expect them to prompt cashiers for points’ balances and produce their cards independently in their various locations.

“You have gained permission to talk to your customers and created the opportunity to collect enormous amounts of valuable data. Use this to your advantage by creating meaningful and relevant engagement initiatives and communications across your customers’ lifecycle,” advises Truth, a boutique consultancy business specialising in customer centricity and loyalty programme strategy and design.

When enhancing your engagement strategy, Accenture advises that you keep the following in mind:

  • 54% of South African consumers are loyal to brands that actively engage them to help design or co-create products or services.
  • 57% are loyal to organisations that present them with new experiences, products or services.
  • 47% are loyal to brands that engage them in ‘multi-sensory’ experiences, using new technologies such as virtual reality or augmented reality.

Related: 3 Ways To Stop Taking Your Most Loyal Customers For Granted

3. Keep the experience simple

Review your loyalty programme. Honestly. Then ask yourself if you’ve made your programme too complicated for the layman. If your answer is ‘no’ or even ‘maybe’, how can your target consumer ever reap the full rewards of this programme if they don’t understand the rewards on offer and how to redeem them?

Changing rules too often is the first complication to go. No matter which one of your stores they choose to shop at, the redemption and earning process should be simple enough to keep members interested and engaged in the programme. Make sure you keep your programme simple and transparent.

“Clicks made a simple but fundamental change to its redemption process – paper-vouchers were replaced with virtual points that can be redeemed as cash-back when you swipe your card at the till. While Clicks and Dis-Chem are among only a handful of brands that do this, it’s a sure-fire mechanism for increasing redemption,” said Amanda Cromhout, founder and CEO of Truth.

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending