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?
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.
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
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.
How To Hire Skilled Workers For Your Franchise
Your staff run your business – you just have to show them how. This is why employing the best people for the job is essential.
According to the Franchise Association of South Africa (FASA) 2017 Franchisor Survey, one of the main challenges facing franchisees is finding the right staff.
“Staffing your franchise can be one of the most challenging parts of running a successful business. Without a great team of employees, you cannot run your business effectively,” says Saxon Marsden-Huggins, founder of WebRover.
These three tips could help you find the best employees for your franchise outlet:
1. Don’t hire in haste
While you may be rearing to go and keen to fill gaps to speed up profitability, research your candidates thoroughly.
As the job applications keep flowing into your inbox, keep in mind that not all of them qualify for the positions available – it may even be a small percent who are actually viable candidates. This is why your hiring process should include:
- Taking the time to thoroughly screen CVs to develop a short list
- Creating a carefully crafted list of interview questions
- Setting aside adequate time for thorough interviews
- Getting to know the candidates through a second round of interviews to confirm your choice.
Giving the hiring process dedication and attention will ensure you get the cream of the crop, contributing to the long-term success of your franchise.
2. Demonstrate support in the workplace
While you can instil the necessary skills into new recruits, it’s difficult to train for culture. This is why choosing the right employees from the beginning will make the rest of your franchise management system will run more smoothly.
“The manner by which you run the franchise will influence employee perceptions of the brand as well,” says Hireology’s Erin Borgerson. “Your staff must become ambassadors of your franchise system to attract the target consumer market.”
The best way to do this is encouraging staff to give you their honest feedback. Your commitment to creating and upholding a positive culture will result in increased loyalty from your current staff and a superior pool of applicants.
3. Offer appealing incentives
When advancement opportunities are clearly communicated, staff is keen to hear how they can get there, as they have career goals of their own. Encouraging this ambition will draw good employees to your franchise.
“Helping employees understand the steps to advancement helps them to view their current job as an important part of a career with an upward path, not just a pay cheque for this week,” say financial reporting technology experts at Qvinci.
Performance bonuses and employee benefits incentivise staff’s efforts, therefore increasing their income alongside the profit of the business. “This serves to make employees a part of the business and not merely people ‘who work there’,” they explain.
Start-up Advice2 months ago
9 Quotes Every Entrepreneur Should Live By
Lessons Learnt2 months ago
15 Wise Insights From 15 Entrepreneurial Icons
Company Posts2 months ago
Enhance Your Entrepreneurial Flair With An Online Postgraduate Diploma From The University Of Pretoria
Personal Finance2 months ago
If You Think These 5 Things, You’ll Never Get Rich By The Time You’re 30