Is it wise to become one of the first franchisees in a new franchise system?
Sure, it’s a thrilling proposition to get in on the ground floor of what is hopefully a great concept. And it might be particularly lucrative if start-up costs (compared with those of long-established franchises) are low.
But, of course, the downside is that some new franchises don’t survive the journey and are buried in unmarked graves along the way.
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Before buying into a young or unproven system, it’s important to weigh the pros and cons. Most people think of young franchises as small start-ups, but there are typically three types of businesses in this category, including established companies that have finally decided to franchise.
The common denominator is that each is asking you to invest when there’s little or no proven results from other franchisees who have gone before you.
Here’s a look at the most common types of new franchise opportunities — and the questions you should ask before signing up.
1. The mature company that is new to franchising
In this situation, the company typically has many years of experience and has opened a number of company-owned units.
The people at the top know the business inside out and have worked out the bugs in the operating methods.
The only transition the company needs to make is learning how to work effectively with franchisees, rather than employees.
This is typically the least risky young franchise to invest in, though it can still be a challenge to deal with the growing pains.
Questions to ask:
- How do your training programmes for new franchisees differ from the previous training programmes for new employees?
- What support systems do you have in place for franchisees, such as manuals, DVDs or online intranets?
- Are you willing to treat franchisees as business owners?
2. The experienced franchise company that is changing its traditional operating model to something new
Let’s face it, most companies don’t change their business model unless they are in trouble.
We’re seeing a lot of this in today’s market, especially with retail and discretionary-service operations, as the continuing recession has hammered franchisees’ results.
Though the company may have a big name in the marketplace and substantial operating experience, there is little assurance that the ‘new’ operating model will be a success until a group of new franchisees have put it to the test.
Questions to ask:
- What research and testing supports the proposition that this new model will work better than the old one?
- How many units of the previous model have failed in the past two years?
- How many do you expect to lose in the next two years?
- What changes have been made to your marketing programmes to support the new model, and how will you allocate marketing support and dollars in the future between the new and old models?
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3. The fairly young company that’s new to franchising
You’ve got to admire the bravado of entrepreneurs who have the confidence to start a company and then begin franchising with little or no practical experience. That’s how most of the big franchise companies got started.
Ray Kroc of McDonald’s or Fred DeLuca of Subway are just two examples. That said, this is by far the riskiest venture to invest in. For every one success story, there are dozens of others that did not succeed.
As a new franchisee in a young system, you’ll have to suffer not only through your own learning curve, but the franchisor’s as well.
In fact, you may wish to find a different franchise with a proven track record or else wait a year or two to see if the young company can create a reliable success pattern with other new franchisees.
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If you decide to take the risk anyway, the rewards for being a pioneer — namely, better economic terms and intimate relationships with top executives — can be great if the business succeeds.
Questions to ask:
- Do the company executives have previous experience growing a franchise company, or are they working with advisors who do?
- Does the company have sufficient cash reserves to weather any storms during its initial ramp-up period?
- How many training and support people does the company have and what is their background and experience?
- What kind of discounts on fees and other expenses are you offering to the initial group of pioneer franchisees?
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.
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.
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.
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.
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.
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.
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.
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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