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Franchisee Advice

The Legalities Of Shutting Down Your Business

Circumstances may lead to you deciding that it’s time to shut down your business. This is not unusual in the entrepreneurship lifecycle, but do you know what the legal consequences are?

Monisha Prem

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The main approaches of legally shutting down your business are through deregistration and liquidation.

When can your business be deregistration?

A company and close corporation may be deregistered by the Companies and Intellectual Property Commission (CIPC) in the following instances:

  1. Non-compliance with requirements: The CIPC will deregister the company if
    1. The business failed to lodge annual returns for two successive years.
    2. The CIPC believes that the business has been inactive for a period of seven years.
  2. Voluntary deregistration when trading has ceased: The business itself may request deregistration if it can show that it has ceased to carry on business and has no assets or, because of the inadequacy of its assets, there is no reasonable probability of the business being liquidated. According to the South African Revenue Services (SARS), this effectively means that the company or close corporation is not doing any business nor has any assets or liabilities.

Related: Closing Deals In Africa – Keep It Flexible

If a business wishes to apply for voluntary deregistration, it is required to write a letter to the CIPC confirming that it is not carrying on business or is dormant and has no assets, or because of the inadequacy of its assets, that there is no reasonable probability of the close corporation being liquidated. This letter must be signed by each active member of the business.

The finalisation of deregistration is dependent on the statutory advertisement process which is three months. After completion of the deregistration process, the final deregistration notice will be posted.

When can your business be liquidated?

Liquidation is the process by which a company or close corporation effectively declares itself insolvent as it is unable to pay its debts. A business can undergo voluntary liquidation, where the owners of the business choose to voluntarily liquidate, or compulsory liquidation through actionby creditors.

Once the business has been placed under liquidation, either voluntarily or by creditors’ court application, the business will cease to carry on its business activities except in so far as may be required for the winding-up. A liquidator is furthermore appointed to sell all the assets, pay off creditors, divide any residue amongst the former shareholders, and then close the business.

The main legal consequences of ceasing to trade are contractual, shareholder, employee and tax obligations. Let’s consider the consequences of contractual obligations during deregistration and liquidation.

Related: Closing the Deal Is as Easy as Smiling

Contractual Obligation

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1The effects of deregistration:

The effect of deregistration is that the business is dissolved, consequently being deprived of its legal existence, and upon such deregistration all its property passes automatically into the ownership of the state as bona vacantia (ownerless goods). All rights and obligations that once vested in the entity are brought to an end, meaning that contacts are terminated, and any debt due is rendered unenforceable against the business.

In the event of voluntary deregistration, the company will have no contractual liabilities and no outstanding debts, as voluntary deregistration is only possible if the business has no assets or liabilities.

If the business is deregistered due to non-compliance and has outstanding debts, the only available option for a creditor is to apply to the CIPC for the restoration of the registration of the company. The CIPC requirements for restoration, however, are very onerous rendering a successful outcome to the application unlikely.

2The impact of liquidation:

When a business is liquidated, all contracts concluded with the business remain in effect. The liquidator is then tasked with making a decision, within a reasonable period of time, whether or not he or she intends to abide by the contract or terminate it, depending on what would be most beneficial to the creditors.

Should the liquidator elect to terminate the contract, the other contracting party has a monetary claim against the insolvent estate as a concurrent creditor (creditors who do not hold any security).

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.

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Franchisee Advice

Factors To Consider Before Signing Up As A Franchisee

Franchising is a brilliant way to get into business with not many entrepreneurial skills as it comes with a roadmap to follow for success.

Diana Albertyn

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You’ve been considering entrepreneurship for a while, and now that you’ve finally raised some money and been approved for a loan, you’re ready to quit your 9-5 job to run your own business. You may even already have your eye on a particular franchise, but while franchising is considered an easier and more low risk way to get into business, are you suited to being a franchisee?

“The question is not ‘is franchising right for you’, but rather, are you right for franchising? Because if you don’t have the right attitude and skill set, it can be a very expensive mistake,” says small business expert and author Steve Strauss.

Franchising may seem like an easy way into entrepreneurship, but along with an established name and proven systems, come rules, regulations and little room for creativity. If you’re not ready to become a franchisee, but want to go into business for yourself, you may find yourself struggling to operate within the system’s blueprint.

Ask yourself these three questions before proceeding with the process of franchising:

1. Will you be able to follow the directions of the franchisor?

You’re buying into an existing and proven concept so it’s safe to assume that the franchisor knows best, and so you have to be open to learning and following guidelines for business success. If, for example, you have experience in advertising and think you have an improved technique of marketing the franchise, you may want to change the advertising material provided by the franchisor – don’t.

Related: 3 Ways You Can Innovate And Improve As A Franchisee

“Being a franchisee means following the directions of the franchisor, even when you think you know a better way,” advise experts from strategic and tactical advisory firm MSA Worldwide.

“In addition to initial training, you need to be prepared to accept coaching and advice from the franchisor on how you operate or market your location.”

2. Do you have the need to experiment?

Lou Groen may have had success in launching a new menu item that McDonald’s approved of in 1962, but not all franchisees are that lucky. Stick to the plan and limit deviations to the menu or anything that involves the customer experience.

If the franchisor’s concept doesn’t involve deliveries, offering them to your customers may cause issues for others within the franchise system. “If it’s not part of the franchisor’s concept, you’re deviating from the concept and therefore, no longer running your store as a franchise,” according to MSA. Franchising arguably limits innovation opportunities, so if you’re prone to implementing creative ideas and evolving business offerings based on said ideas, rather start your own independent business.

Related: 3 Pricing Tactics To Recession-Proof Your Franchise

3. Are you a team player?

These first two questions you address should already lead to the realisation that everything you do affects everyone in the franchise chain. One bad experience at your establishment and suddenly, all the stores are affected by bad press or unsavoury social media attention.

“Other franchisees are relying upon you to offer to the consumer a consistent level of service, product quality, and brand message. You are going to have to work with others in the system in making decisions,” advise experts.

Remember that as part of a chain of other business owners, you may have to accept that majority rules when it comes to decisions where franchises do have a say.

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Franchisee Advice

3 Ways You Can Innovate And Improve As A Franchisee

Although your role as a franchisee isn’t really to innovate, there’s room for creativity if you go about it the right way.

Diana Albertyn

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When you signed on the dotted line after reading and agreeing with the franchise agreement, you knew that you were buying into a proven system where everything has already been thought out for you, and all you have to do is follow the formula for success.

But you’re a franchisee longing to put your own imprint on your business, and it may be frustrating to feel boxed in by a formula, while you’re bursting with new ideas.

“Franchising, by its nature, discourages innovation on the part of franchisees, who are required by their franchisors to follow very specific policies and procedures on exactly what they will sell, how they will make or deliver it,” notes Randy Myers, contributing editor for CFO and Corporate Board Member magazines.

Related: Types Of Funding Available For Franchisees

This doesn’t mean your ideas will never see the light of day though. But before you approach your franchisor with your brilliant insight, consider the following steps that may well lead you down an innovative path:

1. Get the basics right first

Franchisors know that customers like consistency as it makes them comfortable and trust every location of their franchise they choose to visit. But, even the strictest franchisors get hungry for new ideas. It’s the timing that’s vital for your idea to even be considered.

“Most good systems don’t want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star,” said Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants. “At that point, they have become successful, their base is secure, and they have earned the right to consider innovations.”

It’s wise to ensure you’ve learned your franchisor’s existing business model before you suggest any improvements.

2. Do your homework

So, you’re doing well and you’re sure your idea will be welcomed as a crucial innovation to the franchise system – but research your proposal, suggests Kim Stevens, VP of Regional Development and Director of Franchise Awarding at Woodhouse Day Spas. “Especially if you’re suggesting something that would impact all franchisees, create a business plan before approaching your franchisor,’ she says.

Related: To Buy Into A Franchise Or Purchase A Licence? 3 Factors To Consider

It’s also good to have another look at the franchisor’s policy for accepting new ideas to ensure you’re prepared for tough questions before you propose your idea.

3. Speak to the right people

Elgin recommends you first identify the person at the franchisor’s head office who’s responsible for receiving new ideas. “Many of the ideas a franchisee comes up with will already have been proposed by another franchisee,” notes Elgin.

To avoid wasting your time, no matter how great you think the idea is, present it as early as possible before spending anything developing the idea.

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Franchisee Advice

3 Pricing Tactics To Recession-Proof Your Franchise

As consumers tighten their belts, how can you ensure your franchise is their first choice in the midst of strict budgeting and curbing of spending?

Diana Albertyn

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Whether or not there is a dip in the economy, you have stock on shelf you need to sell. But, if consumers are cash-strapped, you have to make every effort to ensure that your franchisees aren’t running at a loss.

“There’s no doubt that shoppers are more discerning about what they need and how they shop. However, quality remains significant and brands that continue to delight their customers will reap the benefit of being chosen,” says Ailsa Wingfield, executive director marketing and communications: Africa, at Nielsen.

Why not give customers the best of both – value for money at a competitive price – by applying one or more of the following pricing tactics in tough economic times:

1. Consider a greater focus on your house brand

“The days of in-house retail brands being treated with a fair amount of disdain by South African consumers have come to an end,” says Wingfield.

Related: What Makes Franchises Recession Proof?

The global performance management company’s research has found that R38.4 billion of the amount consumers spend at hypermarket and supermarket tills – or R10 out of every R50 – is spent on private label products. South African consumers are beginning to feel that the quality of these house brand products is as good as that of established name brands.

Since research indicates consumers are further likely to shift between branded products and retailer private label offerings, it would be of benefit to your franchise if your in-house products are perceived as viable value alternatives of similar or better quality.

2. Sell products in bundles

This the method combining various products and selling them together as one bundle for a lot less than if they were being sold separately. This method is great for moving items that might be selling slower but also great for achieving a higher value perception in the minds of consumers.

CEO of GuruShots, Gilon Miller, says there are several bundling techniques you could apply, including:

  • Pure bundling, where you offer a group of products that are only available as a bundle and aren’t sold separately.
  • Mixed bundling, where you offer products that are sold both as bundles and as individual units.
  • New- or lesser-product bundle, where you bundle a successful product with a newer or less successful product – the stronger product will help the other product find its way into a new market.

Bundling results in cost efficiency, more competitive pricing and might also encourage customers to regard a single store as a source for several solutions.

Related: How To Recession-Proof Your Business

3. Add even more value

When you price your product in alignment with the value your customer sees in it, you’re preventing both you and your customer from the possibility of losing out on value.

Calculating your optimum price, involves asking yourself these questions:

  • Will your customers save money or time by using your product or service?
  • Is your product or service is unique?
  • Will your product or service help customers gain a competitive advantage?
  • What does the competition charges?

“Value-based pricing ensures that your customers feel happy paying your price for the value they’re getting,” says Patrick Campbell, co-founder and CEO of Price Intelligently. “Pricing according to the value your customer sees in your product prevents you from short-changing yourself while creating an experience for customers that’s most aligned.”

The more value your customers see in your product, the more they will be willing to pay for it, ultimately improving your bottom line. When your pricing is reasonable, they won’t need much convincing to make the purchase at your franchise instead of your competitor’s.

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