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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

Franchisee Advice

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.

Richard Mukheibir

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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.

Related: 6 Things You Need To Know About Profit And Cashflow

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Related: 7 Things Every Entrepreneur Should Know About Managing Cash In The Business

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Company Posts

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.”

Nedbank Franchising

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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.

Related: How Sorbet Franchisee Kate Holahan Is Nailing Success By Following Her Dream

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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Franchisee Advice

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.

Richard Mukheibir

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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.

1. Strategy

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.

Related: Effective Ways To Bring Customers To Your Door

2. Scope

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.

3. Synergy

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.

4. Sight

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.

Related: FASA Establishes Industry Specific Food Franchise Forum

5. Security

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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