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Franchisee Advice

Why Unencumbered Funds Are So Important In The Franchise Sector

It’s vital to understand why a franchisee needs unencumbered funds to start a new business.

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A financial institution looks at the expected cash flow generated by a franchise and determines the amount of debt that the franchise can sustain. The purchaser must provide the difference between this amount and the cost of the newly acquired franchise – this is known as unencumbered funds. According to Alan Greenspan, former US Federal Reserve chairman, “Any informed borrower is simply less vulnerable to fraud and abuse.”

Entrepreneur asked Anita du Toit, franchise specialist at FNB why unencumbered funds are so important in the franchise sector.

Why are unencumbered funds necessary to buy a franchise?

If the franchisee borrows 100% of the funds, albeit from a bank or other sources, the business will be over-geared. The franchisee will have to make huge repayments every month and it’s unlikely that a young business will be able to afford this.

Putting cash into the business avoids the over-gearing scenario. Secondly, banks want to see the intent of the franchisee to take some risk by also investing in the business.

Related: DTI Funding Guide

What percentage of unencumbered cash is required upfront to buy a franchise? Is there a set amount?

Most franchisors and banks require the franchisee to invest 50% of their own funds in cash into the business. In some instances, such as petrol stations and retailers, this amount can drop to 30%.

Are alternatives available for entrepreneurs who have some unencumbered funds but not enough to meet the franchisor’s requirements?

The alternatives include getting a partner on board to contribute to the business or saving some more discretionary funds like bonuses towards the own contribution. Some government institutions have special programmes for BEE franchisees where they accept a lower own contribution.

What are the advantages of unencumbered funds for the bank?

unencumbered funds for the bank

It mitigates the risk of the bank by reducing the amount the franchisee will have to repay towards debt.  It ensures that there is enough free cash flow to pay the bank and other debtors, thereby ensuring the ongoing success of the business and reducing risk for the bank.

What disadvantages face the franchisee?

Obviously, the franchisee will have less cash available to use personally or in the business. However, taking a bank loan has advantages including the fact that the interest repayments reduce the taxable income of the business. Franchisees can also apply for an overdraft to ensure that there is a buffer in case of a cash flow problem.

Related: How To Start A Business With No Money

Is there any small print that should be of concern to a franchisee in terms of unencumbered funds?

The  unencumbered funds should really be cash available in liquid form and not obtained from a bond or other loan which would increase the debt level of the franchisee in his/her personal capacity. Banks also look at the personal balance sheet of a franchisee when assessing affordability.

Any useful advice or tips that I can use regarding unencumbered funds?

Don’t over-extend yourself by putting your last available cash into the business. You should still have an emergency fund to draw on in case business conditions worsen or in case of personal emergency.

Just like a salaried employee, a franchisee should aim to have enough cash to cover his/her living expenses for at least three to six months.

Even if you have unencumbered funds what if banks refuse finance?

A bank can finance the balance if the applicant meets the required criteria. In addition to a franchisee’s own contribution, the franchisee also needs to offer some form of collateral. If no assets are available to offer as security, the applicant can apply to Khula Enterprise Finance here.

Khula is dedicated to the development and sustainability of small businesses in South Africa. They have been assisting entrepreneurs for more than 13 years. However, they are a wholesale lender and the franchisee would need to approach a commercial bank, such as FNB or any of their non-bank retail financial intermediaries to apply.

For more information contact FNB Franchising +27 11 632 0390

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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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