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Franchisee Advice

Pay Attention To The Small Print

Here are seven critical clauses (and the associated legal risks) that you should consider before signing on the dotted line.

Monisha Prem

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The franchise agreement governs the relationship between the franchisor and franchisee and includes critical provisions relating to obligations of parties and prevention of conflict, dispute and financial loss. It is essential for a franchisee to understand his rights, obligation, general provisions and risks in terms of the agreement.

Seven critical clauses in the franchise agreement:

1. Consumer Protection Act acknowledgment

In terms of the Consumer Protection Act 68 of 2008 the following provisions are to be acknowledged or included in the franchise agreement:

A franchisee is entitled to cancel a franchise agreement without cost or penalty within 10 business days after signing the agreement, by giving written notice to the franchisor.

The franchisor is not entitled to direct or indirect compensation from suppliers, its franchisees or franchise systems, unless this is disclosed in writing with an explanation of how it will be applied. The franchisor must supply the franchisee with a disclosure document, pre-agreement certificate and current list of franchisees.

Related: The Perils Of The Franchise Agreement

2. Grant clause

An important clause relates to granting the franchisee a licence to operate the franchised business and use the franchisor’s intellectual property rights such as brand names, confidential information and copyright.

This clause will designate the territory in which the franchisee may operate and whether or not the franchisee has exclusivity rights. Where a franchisee is given exclusive rights to use the franchisor’s intellectual property in a certain area, for example, the franchisee will be entitled to exclude all others, including other franchisees and the franchisor, from operating in that area.

A franchisee can alternatively be granted the sole but non-exclusive right to operate the franchised business in a certain area. This means that the franchisor will not grant a licence to other franchisees in the area, however, it does not exclude the franchisor from opening one or more outlets and competing with the franchisee in that area.

A franchisee may be granted a non-exclusive licence, giving it the right to use the franchisor’s intellectual property without any exclusive or sole rights.

3. Payment clause

The franchisee is usually required to pay an initial lump sum, which is paid to obtain the licence to operate the franchised business. The breakdown of this amount may include the costs of setting up the franchise, equipment, advice, assistance and training by the franchisor, and an amount for goodwill.

Once the franchised business is operational, the franchisee is required to pay royalties to the franchisor monthly, quarterly or annually. These royalties may be fixed or calculated as a percentage of turnover, and are payment for ongoing use of the franchisor’s intellectual property.

In most instances, the franchisee will also be required to contribute a regular amount towards the marketing of the franchise. Such contributions are paid into an independently managed fund and the franchisor and its associated businesses may not enjoy any direct or indirect benefit from such contributions not afforded to independent franchisees.

Related: 3 Of The Biggest Misconceptions Of Entering Into A Franchise Agreement

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4. Obligations of parties

The franchisor’s initial obligations include assisting the franchisee with setting up the franchise, furnishing the franchisee with the operating manual, disclosing the franchise system and training the franchisee. Ongoing obligations include additional training, assisting with resolving problems, assisting with management and providing guidance.

The obligations of the franchisee are fairly wide-ranging and include paying all sums due to the franchisor timeously, operating the franchised business in accordance with the franchise system as set out in the operating manual to protect the intellectual property, goodwill and reputation of the franchisor, keeping records and books of account, and marketing the franchise.

5. Termination

The termination clause should deal with timeous payment and provide the franchisor the right to terminate should the franchisee fail to comply with the operating manual, or challenge the intellectual property rights of the franchisor, or commit an act or omission that will damage the brand of the franchise system.

6. Resale rights

Franchisees are usually only permitted to sell their franchise with prior consent of the franchisor, and provided that the purchaser enters into a new franchise agreement with the franchisor on acceptable terms.

Many franchisors include a right of first refusal, which allows the franchisor to buy back the franchise at a rate determined by them, or to match any potential purchaser’s offer.

Related: Assemble Your Franchise Team Like A Pro 

7. Restraint of trade

It is advisable to include a restraint of trade provision to protect the franchise system, which should be reasonable with regard to the area, nature of activity and period in order for it to be enforceable.

Monisha is a corporate advisor, admitted attorney at M. Prem Inc, and author with over 14 years deal-making experience. Monisha litigated for several years before joining an investment banking firm specialising in mergers and acquisitions. Monisha has owned and operated several businesses, is passionate about business development, commercial and corporate law.

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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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

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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.”

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