It’s no easy task to get a bank to buy into a business concept. They are notorious for having strict requirements and being cautious when deciding who they will do business with. A franchisee looking at investing a significant amount of time and money into a new franchise needs to do thorough research before signing any agreements. By applying the same thinking as banks, you should be able to determine whether the franchise you are interested in is a good investment.
Here’s how four of South Africa’s biggest names in banking evaluate franchises.
According to Morné Cronje, sector head: Franchising, Absa looks at the support structure provided by the franchisor. The bank looks at whether or not the franchisor has a programme in place to assist the franchisee over any stumbling blocks that may arise. “Where the franchisor is more involved, it is easier to assist,” he says. Cronje explains that Absa doesn’t grade franchisors, and views emerging franchisors very differently from those with no track record. He says the franchising division will assist in building a plan for a new franchisor to enter the market.
The bank will need to look at their business plan to determine the risk involved. Absa employs regional franchise specialists who will compile a report based on a full analysis of the franchisor, this is then presented to the bank’s shareholders. Some of the aspects analysed include the financial background, where the franchise first started, how many closures they have had, their profits and how many new stores they plan to open.
Riaan Fouche, head of FNB Franchising, says FNB has a franchise rating model that it uses. A franchisor earns points for certain aspects of the business and is then given a rating of A to D. The rating is used to determine the risk posed by that franchise and will influence the pricing. While FNB does not publish its rating system, Fouche highlights five important points to look at when evaluating the risk posed by a franchise.
Background of the business and its directors. This includes looking at their past experience and qualifications.
- Financial stability of the franchise.
A franchise cannot support a franchisee if it is not financially stable. It is also important to look at the franchise’s main source of income – is it from company-owned outlets, rebates from suppliers or royalties from franchisees?
- Franchise agreement, disclosure document and the operations and procedures manual.
- Performance of existing franchisees.
- Expansion plans of the franchise.
While an ‘A-grade’ franchise is generally considered to be lower risk, Fouche explains that FNB also has an incubator category which recognises franchises with great potential. In this case the bank will fund some franchisees and see how they perform. The bank also assists a franchisor in the ‘B’ category to improve and move up to an ‘A’ rating.
Mark Rose, head of new business development, Nedbank Business Banking, says Nedbank doesn’t work with categories. Instead, the different brands are grouped into segments – retail, fuel and the food sector.
Nedbank goes through a full accreditation process on a brand, taking into consideration the sector it operates in. He calls this a “fit for purpose approach.” Rose explains that Nedbank targets the brands that have a good track record, strong brand presence and have shown that there are opportunities for growth. A full accreditation is then done on the brand, which involves sitting with the franchisor and doing an in-depth analysis. Some of the aspects that are looked at include the franchise system, how many stores there are, how many closures there have been, and the reason for the closures, the franchisor’s strategy for distressed stores, what support is given, how the site selection works for a new store and how a franchisor recruits and selects franchisees.
Standard Bank uses an ABC, 123 system in its franchising division, explains Thabiso Ramasike, head of franchising. When it comes to franchisors, he explains that not all brands are at the same level or have the same profile. The rating system helps the bank understand its clients requirements much better, he adds.
A ‘C’ franchisor is usually one that has been franchised for five years or less, hasn’t become a member of FASA and is still finding its feet while it has picked up an opportunity to fill a gap in the market. The entry barriers tend to be minimal, so C franchisors have lower costs and offer more flexibility in terms of accrediting franchisees. These brands are usually growing quite rapidly, but haven’t really mastered the art of providing training and support to a franchisee. There are usually a few failures.
Ramasike says a ‘B’ franchisor has usually been operating as a franchise for five to ten years and has systems like IT, management support and training in place. They will usually have developed tools to assist with site location and are still in the growth space, even looking beyond South Africa’s borders. They are fully established FASA members and have established relationships with banks. In South Africa, Ramasike says this category of franchisor is quite dominant.
An ‘A’ franchisor has been operating for over ten years, is usually listed on the JSE and is often multinational. These franchisors have limited failures, in most cases there are no failures. They are passionate about their brand and have an influx of franchisees so they can afford to cherry pick them to ensure they get the “best of the best.” The training offered is intensive and the support structure immense. According to Ramasike there will usually be a team responsible for the different components. He explains that there are only a few ‘A’ franchisors in the market, but they have a huge footprint.
There is also a ‘D’ category, adds Ramasike.These are typically franchisors Standard Bank doesn’t want to do business with, usually because they have been dishonest or unscrupulous. They have sometimes been expelled by FASA, have a weak franchising system, numerous closures and only train franchisees for around two days.
What is your category?
Standard Bank uses a 1-2-3 rating system for franchisees based on their experience and commitment to franchising.
1. A multiple store owner is placed in this category. These are people who are in the business of franchising. They have their own companies with subsidiaries, which are the various outlets they own. They should own a minimum of three to five to qualify for this category of franchisee. They are considered corporate entities on their own, and are often multigenerational franchisees. They are taken very seriously by the franchisor and usually sit on councils, executive committees and assist in driving strategy. Larger franchisors prefer to have one franchisee owning three outlets than four franchisees each owning one outlet as it reduces the need to coach new franchisees.
2. Franchisees in this category usually own two to three stores and work on franchising full-time. They are in a totally different space to the other categories but are starting to see the benefits of franchising. They begin building a strong relationship with the franchisor and achieve a certain level of success.
3. This is a franchisee who owns one store, is new to franchising, and usually runs the franchise on a part-time basis.
6 Questions Before You Discount
Try this checklist so that discounting doesn’t give you nightmares.
For some retailers, discounting is a way of life. Most, though, begrudge the thought of discounting – and I completely identify with that.
It was not until last year that we ran our first company-wide discounting, our “Spring Clean” campaign. It took Trevor Locker, our Chief Operating Officer, to convince me that there are times when discounting makes great business sense – just as there are times when it could spell business disaster.
Here is the checklist of questions which we hammered out as a guideline to successful discounting that will let you sleep peacefully at night:
1. Is this a stock clearance?
Some businesses stock ranges that have a very short shelf life, such as clothing that quickly goes out of fashion. If this is your market, you need to learn to accept that some of the goods you have bought in will be less appealing than others to your customers. The sooner you shift them out of the store through sale discounts, the sooner you can replace them with goods that repay you with a full profit.
2. Is this a cashflow crunch?
If you are reluctant about devising quick discounts on selected ranges to generate enough cash to pay the rent, you are right. This is a red flag that your business could be in trouble. Pay attention and spend time focusing on how you will recover once you are past this immediate crisis – otherwise you are in a downward spiral.
3. What are you celebrating?
Maybe you have a business or seasonal anniversary that you want to celebrate. Selected discounting in this situation can help you reward repeat customers and consolidate their loyalty as well as attracting new customers into your business.
4. Is your promotion a win-win?
Long-term repeat discount promotions can have a negative impact on even your most loyal customers. Effectively you are training them to wait for your discounts – unless you set up a win-win strategy such as partial discounting. A great example of how this can work is Steers’ Wacky Wednesday. Customers win when they come into the branches for a discounted hamburger. Steers wins because customers still pay the normal price for cool drinks, chips and so on, sales that the company probably would not otherwise make on a quiet midweek trading day.
5. Are you joining the herd?
Black Friday is a classic example of this. Some retailers have felt stampeded into offering discounts because they worry that everybody else is. The jury is still out on whether this new trading phenomenon increases sales overall or just moves them out of December and into November. To benefit most, you need to have stock that you want to clear or loss leaders that you have bought in at prices that do not cripple you financially.
6. Do you own your own sale?
Our company-wide “Spring Clean” concept sale was a great example of finding a reason to discount that worked for our branches, our customers and our brand and meant that our discount was not drowned out in the marketplace.
We encouraged customers to bring us unwanted goods from their homes and benefit from freeing up the cash value.
At the same time, we also attracted customers into the stores to pick up bargains from stock that we wanted to clear. Running this promotion at a time of year when many other retailers are quiet promotionally meant that we owned the spring-clean discount concept and it highlighted our brand across the market.
What To Know About Franchising Your Business
For many businesses, franchising is an excellent route to growth, opening up new opportunities and markets. Laurette Pienaar, National Franchise Manager at Nedbank, unpacks why it’s worth considering this route.
- Player: Laurette Pienaar
- Position: National Franchise Manager
- Company: Nedbank Limited
- Visit: nedbank.co.za
What type of business is ideally suited to the franchise model?
Franchising has been proven successful across all industries, including the automotive, food, entertainment and retail industries. However, several key qualities ultimately determine a concept’s ability to successfully become a franchise.
Firstly, the business model must be scalable and able to be repeated in several locations. Secondly, there must be demand for the products sold and, thirdly, the franchise model must be proven as profitable.
Why is franchising a good growth option?
Franchising is often used as a cost-effective growth strategy for businesses. A key benefit of this strategy is that no capital layout is required for a new franchised store as opposed to corporate-owned stores.
Franchised stores are also proven to be more successful than corporate-owned stores. This is mainly due to the fact that the franchise owners have a vested interest in the store, whereas corporate stores are supervised by a manager. Franchising is therefore also a great way to build your brand.
What should business owners focus on?
Franchisors should set up good infrastructure to support their franchisees, including good upfront and ongoing training to both the franchisees and their staff, the correct legal advice and assistance, and a strong operational team to assist franchisees daily.
Many successful franchisors provide support by expanding through vertical integration, which provides franchisees with logistics, supply chain security and product consistency.
Several franchisors advocate a structure with both franchisee and corporate-owned stores. This enables a franchisor to keep in touch with the daily challenges franchisees experience and new products and solutions can be tested at a corporate store before being rolled out to the franchise network.
How can franchising consultants assist business owners?
Franchise consultants provide daily operational support to franchisees. They are responsible for daily store visits to assist with quality checks, process flows, supplier relationships and, often, financial assessments. They are a helpful soundboard on any improvements to be made in the business model and can convey suggestions to the franchisor.
What challenges should business owners be aware of?
Businesses looking to franchise need to ensure that their business is teachable to others. Overcomplicated products and systems may deter franchisees from investing in your brand.
Franchisors have to do ongoing introspection regarding their company culture. For example, does the culture promote innovation and inspire franchisees and consumers, which ultimately is a culture worth investing in?
New franchisors’ selection criteria for franchisees are often not sufficiently thorough and comprehensive. For a new franchisor, it is important to choose good quality franchisees and to have strict selection criteria to ensure that your brand remains reputable and stable during fast-expanding cycles.
What lessons can be learnt from SA’s successful franchises?
Businesses looking to expand through franchising should consider setting up several corporate-owned stores first. This assures potential investors that your business is based on a proven model with a track record and supportive infrastructure.
There is not always a one-size-fits-all model. Many franchisors have created custom models to accommodate and adjust to the need of a specific property or consumer market. A great example of this would be the food industry where many franchisors offer shopping centre concepts, drive thrus and kiosk or express concepts. Consider this when developing your model.
Develop Digital Marketing Competency In 3 Simple Steps
Conquering the digital revolution needn’t be daunting. Polish up your tech skills and watch your digital marketing prowess increase throughout your franchise.
As a franchisor, digital marketing may be proving to be a challenge due to the unique structuring of the business.
“The very nature of franchises is ‘structured’, however, when it comes to marketing, that structure often lacks,” says Marcela De Vivo, Founder and CEO of Gryffin Media.
Franchisors and franchisees often struggle to reach common ground when looking to achieve different marketing goals. While the franchisor needs to control the brand in its entirety, the franchisee wants to market their business using particular strategies suited to their location.
Research has found that smartphones are the biggest influencers of 82% of users when they make their in-store purchase decisions while. It’s for this reason that the importance of digital marketing for franchises has increased.
Here’s how to harness its power of influence, amplify foot traffic and solidify brand loyalty:
1. Recruit digital natives and early adopters
As much as you’re the leader of your franchise network, there are franchisees in your chain you could learn from. The global increase in millennial franchise owners means it is highly likely that you’ll be able to identify early digital adopters within your franchise network.
“The best people to learn from are those who have been in your shoes before,” says Matt Forman of the Franchise Centre at Griffith University.
“Encourage and support their efforts and use them as case studies to demonstrate to the rest of your franchisees the value of digital marketing, and how to do it right.”
2. Invest in training your team
“Each digital competency level requires more education and resources in order to integrate digital marketing with your physical stores,” says Forman. For this reason, regularly investing in continuous training for your team so as to ensure they keep abreast of any new and emerging trends.
Proactivity and adapting to the constantly evolving digital landscape led KFC to open a LinkedIn account for its founder and mascot Colonel Sanders. KFC’s out of the box tactic is a fresh approach to what has long been considered a B2B platform, under-utilised as a B2C platform.
3. Apply custom targeting techniques
The discovery of new and small businesses is being fuelled by Google searches, social media and online reviews, making these platforms a goldmine of invaluable tools.
Leveraging certain custom targeting techniques like easily searchable keywords and exposure on other reputable and high-traffic websites, gives your franchise’s digital marketing efforts a boost. This results in an effective campaign, favourable reviews and meaningful and lasting interactions with consumers “whether it’s a reply to a Facebook comment or a retweet,” says Entrepreneur’s Emily Conklin.
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