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Franchisee Advice

Save on your Franchise Start-Up Costs

When starting your franchise, there are times when you should pay for convenience and efficiency, and times when you shouldn’t.

Jeff Elgin

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Save-Spend

Most franchise owners will tell you that they could easily have saved quite a bit of money from the costs incurred while opening their first units. This begs the question:

If this is such a universal truth, then why didn’t the franchise companies show them how to save this money as part of their training?

The answer is that they probably did.

The biggest money waster in terms of start-up costs, by far, is impatience of the franchisee. Most new franchisees are thrilled and excited to get going, as they should be, and they can’t wait until their new franchise opens for business. If there are two ways to do something, and the faster one costs more money, most new franchisees opt for speed. Those kinds of choices can really add up to a lot of money and in many cases the time gained doesn’t really produce any long-term value to offset the increased costs.

The secret to reaching the best result in terms of start-up costs is balance. If you picture the cost vs. speed quandary as a continuum, you don’t want to be at either extreme. Trying so hard to save money that you never open the business isn’t going to be any better for you than spending too much to open a little sooner than you otherwise would.

 

Where to Find Savings

There are five common expense categories where most start-up cost savings are found. Some of these are quite easy to take advantage of while others require some extra work or expertise. The old adage that ‘time is money’ applies to virtually every category since you’re usually trading some of your time to get the financial savings. The key areas to focus on include:

1. Franchise Company Fees

Though most good franchise companies don’t negotiate their fees, occasionally you’ll find one that does. If this is the case, make sure you save as much in this area as possible. Contact existing franchisees to determine what kind of deal they received so you have a ballpark idea of what’s possible. If you’re not comfortable negotiating yourself, use an attorney or someone who can drive the best bargain.

2. Turnkey Packages

Many franchise companies offer a turnkey package where nearly all you need to start, is available in a package from the franchisor or a third party vendor. In either case, the package is often chosen because it’s so convenient. Keep in mind that convenience is what is being sold in these packages – not the best value or lowest price. It’s quite common to learn after the fact that the components of a turnkey package could have been acquired by the franchisee for a significantly lower overall cost. The tradeoff, of course, is that the franchisee has to invest the time and effort to source and purchase each component to get the savings.

3. Construction Costs

Most franchises have a physical location and that site needs to be prepared according to the specifications of the franchise. There are a few simple things that can produce significant savings in this area. First of all, get multiple bids for the work that needs to be done. You won’t believe the variances you’ll see in the bids from one contractor to another.

Second, give a little thought to what you might be willing to do yourself. As an example, if you’re renting a 1 200-square-foot bay in a strip centre and the construction bid says it’s going to cost you R10 000 to paint the walls a simple off white colour, you may want to consider painting it yourself.

4. Equipment, Signage and Fixtures

This is a substantial expense category for most franchises and there are two big secrets to saving money here. The first is, again, get multiple bids on everything. It takes a little more work but you’ll see price variances of as much as 100% on things as simple as a standard sign for your business. The same is true of the cabinets and other fixtures. In terms of your equipment, you may be able to realise big savings from buying used items. Some franchises don’t allow the choice but most will allow you to source and purchase used equipment as long as it meets guidelines.

If you’re opening a business with a commercial kitchen as an example, you can potentially save a ton of money. Used equipment is readily available for many businesses and your franchisor should know of good sources in this area.

5. Lease Terms

This can be a huge category in terms of potential savings and it’s an area where you want expert advice and assistance if you’re not experienced yourself. This expertise is found in a good commercial realtor but you’ll also want an experienced real estate attorney familiar with the local market. All leases are negotiable to some extent, but most leases don’t initially offer a number of concessions that may be obtained through negotiation.

Use both your realtor and your attorney to determine what’s standard in the current marketplace in terms of items like the square foot rental rate, the Common Area Maintenance (CAM) charges, free rent periods, construction allowances and other economic terms. Then you have a baseline to use in determining if you’re getting a really good deal instead of just an average one. A good negotiator can sometimes get a landlord to include tens of thousands of rands in build-out costs into the lease that can be direct savings to you.

Learn From Others

As a final thought on this topic, remember that it’s easy to determine which areas will produce the most savings for you in whichever franchise you select.

All you need to do is ask the existing franchisees. Again, this will take some of your time but it will be an investment that can pay you big dividends in savings on your start-up costs if you’re willing to learn from their experience.

Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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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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