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.
5 Tips For Franchise Agreements
Below are 5 tips to ensure that your franchise agreement complies with the CPA.
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.
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.
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.
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.
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