For companies considering franchising, the decision to franchise can be a daunting one. We often liken this decision to choosing a mode of transportation. When choosing a vehicle to get from one place to the next, we first consider how far we need to go, how fast we have to get there and what obstacles are in our way. The closer we are to our goal, the more choices we have for transportation.
If your growth goal is just down the block, you could drive your car, ride a bicycle or walk. But if you’re trying to get to the moon, only a rocket ship will do.
But once the decision to franchise is made, the new franchisor faces some basic ‘design’ considerations. As most franchisors soon find out, franchising itself comes in many flavours.
Franchisors can expand aggressively with more risk and more expense – or they can expand more conservatively and with less risk and less expense.
Put simply, the question you need to address is, ‘Should you build a Corvette or a Volvo?’
1. Starting with the End in Mind: Goal-Oriented Planning
When counselling new franchisors on their development options, my first question is always the same: “Where do you want to be in five years?” It is vitally important to start with the end in mind.
But when asked about their growth plans, many new franchisors tell me their goal is to “grow as fast as possible,” and sometimes the more thoughtful among them will add, “as long as we maintain quality.” But they’re all, unfortunately, missing the point. Growth does not come without a cost. And faster growth comes at a greater cost. That cost is measured in rands, commitment, time and risk.
More important, success in franchising, like any other business endeavour, rarely comes about by accident. It is the result of carefully drawn out plans that start with goals systematically reduced to tactics. So we encourage our clients to be specific about their goals, and to design their tactics around achieving very specific objectives.
Let’s say, for example, that a new franchisor decided they wanted to sell their business in five years for R40 million. We would typically want to start by translating that goal into actionable tactics. As a first step in this particular case, we would divide that R40 million by an assumed selling price. If, for example, we believed the franchisor could sell the business for seven times earnings before interest and taxes, dividing that R40 million by seven would indicate the company needs to achieve an EBIT of approximately R5,6 million by the time they are ready to sell. In order to make this actionable, however, we need to determine how many franchises the franchisor needs to sell.
Going further, if the franchisor anticipates average unit volumes of R2 million we might then look at comparable franchisors and do some financial analysis to determine that this franchisor should charge a 6% royalty. If, after conducting our financial analysis, we determine this franchisor can then bring 35% to the bottom line, we could estimate that the net contribution per franchise might be about R40 000. Thus, to achieve their goal, this franchisor would need to open about 140 franchises in the next five years.
Of course, this is a gross over-simplification. It does not account for franchise fees, product sales or other sources of revenues, such as
profits from company-owned locations. And we have not determined the service and staffing needs required to make these franchisees successful. But it provides us with a starting point.
Assuming the franchisor wants to achieve the ‘hockey stick’ growth curve that leads to maximum valuation, this franchisor might attempt to sell 10 franchises in year one, 20 in year two, 30 in year three, 50 in year four, and 75 in year five (assuming not all the year five stores will open in year five). This ‘game plan’ can now be used to develop specific tactics designed to meet these goals.
Based on industry averages, this franchisor should now be able to calculate a specific budget for franchise marketing activities and know precisely whom he needs to hire and when he needs to hire them. In fact, every step of this process can be mapped out so the franchisor can develop a series of specific tactics and budgets to attain each year’s specific objectives.
But what if this franchisor does not have the resources to achieve the year-one plan? What then?
In that case, our budding franchisor has four basic choices:
- Revise his goal downward
- Extend his timeframe for achieving that goal
- Bring in outside capital (and simultaneously increase goals to offset equity dilution)
- Implement more aggressive franchise structures in order to accelerate growth
2. Strategies for Speeding Growth
One strategy that is increasingly favoured by new franchisors looking for accelerated growth is the use of alternative franchise structures. In most franchise systems, franchises are awarded for a single location. While the franchisee may later be granted the right to one or more additional locations, the process of continued growth is controlled solely by the franchisor.
3. Conversion Franchising
Closely related to a start-up franchise, some franchisors in highly fragmented markets choose conversion franchising as a means of accelerating growth. A conversion franchise is granted when a franchisor awards a franchise on different (usually preferable) terms than an individual franchise, based on the fact that the franchise prospect has an established business, established clientele and/or requires less training.
Franchisors who go the conversion route find their prospects are generally easily identified, reducing marketing costs substantially. And since these franchise prospects generally have established business relationships, they begin paying royalties sooner (and early royalties tend to be larger). Moreover, these franchisees require less in the way of training and initial support.
That said, conversion franchising presents some significant challenges. As entrepreneurs, conversion franchisees can be more difficult to control than start-up operators. And since the best operators are already successful, they tend to be difficult to convert, while the worst operators, who may be desperate to convert, still need to be avoided by the astute franchisor. Finally, post-term restrictive covenants (eg. incompete agreements) are more difficult to enforce if the conversion franchisee is operating within the franchisor’s industry prior to joining the franchise programme.
4. Development Franchising
Another structure used to accelerate growth is area development franchising. An area development franchise is similar to an option agreement in which the area developer is granted an exclusive option to open a pre-established number of franchises in a defined geographical territory according to a predefined opening schedule.
From the franchisor’s perspective, an area development strategy is often attractive, because it enables the franchisor to work more efficiently with a limited number of area developers in larger markets that would otherwise be dominated by multiple start-up franchisees. Area developers are often better capitalised than start-up franchisees, and more experienced in terms of business ownership.
On the negative side, however, a franchisor often assumes greater risk by awarding large markets to area developers in advance of their demonstrating to the franchisor that they will be strong operators and contributors within the franchise system.
Moreover, while area development contracts can be responsible for large numbers of franchise sales, the need for each area developer to open sites according to a development schedule that allows them some time between unit openings (combined with the fact that many area development contracts go unfulfilled), can mean the franchisor’s market penetration is, in fact, slower – not faster.
5. Area representative franchising
Lastly, some franchisors have adopted an area representative strategy to supercharge franchise sales and growth. Area representative franchising involves the grant of a territory in which the area representative is subsequently allowed to sell individual franchises. In essence, the sub-franchisee becomes a smaller version of the franchisor, selling franchises and providing a predetermined set of services (training, support, etc.) in return for a fee-splitting arrangement relative to franchise fees and royalties.
While providing the franchisor with the fastest form of growth, sub-franchising done improperly can lower the level of quality in a system (since a third party is involved in quality control) and is generally responsible for lower levels of profits on a per franchisee basis (because the sub-franchisee is a ‘middle man’ who requires additional ‘compensation’). Adding this extra layer between the franchisor and individual franchisee can also result in less control within the franchise system.
6. The Risk of Slow Growth
I typically encourage my clients to start conservatively. It is my belief that new franchisors are more likely to fail from over-aggressive expansion than from a more conservative approach. It’s much easier to expand more aggressively once a franchisor has established and proven its basic systems for supporting the initial group of franchised locations.
In my experience, the key to success in franchising is not franchise sales. Franchise sales are not the hard part. In fact, generally speaking, franchise sales are simply a function of franchise marketing.
The key to success in franchising is successful franchisees. If your early franchisees are successful, you are on your way. But if early franchises fail, it is almost impossible to recover. So while franchises can be sold as fast as we can line up qualified prospects, the real question to be addressed is whether or not we can adequately support this influx of franchisees.
That said, there are times when a company may judge the risk of aggressive growth to be less than the risk of losing its market leadership position. And when that is the case, there is an argument to be made for more aggressive growth strategies.
Spur’s Got A Taste For Success
With eight brands across five countries, the Spur Corp’s secret sauce to success has all the best ingredients — most importantly, its franchisees. Sacha du Plessis, Group Marketing Executive at Spur Corporation, explains the company’s 51-year journey in creating some of the most popular places to eat the world over.
What is the biggest contributor to Spur’s success?
Since the beginning, we’ve made an unwavering commitment to run restaurants that are operated by entrepreneurially-minded owners who put the customer first. Customer satisfaction is one of Spur Corporation’s most important value drivers, we partner with people who ensure we retain and grow a loyal customer base. We seek to work with franchisees who take pride in the training of their staff and prepare food with passion.
This mindset has been alive for over 50 years in our staff and franchisees.
Please share some of the challenges Spur encounters as a franchisor?
We have a sizable franchise network and a big priority is to ensure that we meet customers’ expectations in every single franchise they visit. Another challenge is finding the best franchisees to partner with, people who are aligned with our company values and customer orientation.
In terms of growth, it is sometimes challenging to find the correct locations per brand and to ensure the rental is at a level where it’s sustainable for the franchisee. The management of our marketing communication to ensure we remain relevant and distinctive in an ever changing landscape can also be a challenge.
Name a few of the qualities you look for when selecting franchisees?
Our business was built on a highly focused customer orientation and centred on a love for food. Our franchisees need to be focused on the customer: Pleasing the customer, meeting the customers’ needs and being willing to spend large amounts of time in growing a business that essentially is the hospitality industry and is really about people. Our franchisees are people who have an appreciation for, and love, food as well as serving their local community over and above their product.
Why is Spur a solid investment for entrepreneurs seeking to pursue franchising?
We’ve invested greatly in growing our brand over a long period of time. Spur was founded by our Executive Chairman Allen Ambor in the spirit of entrepreneurship. Over the past 51 years, we’ve built a track-record of comprehensive operational, finance, marketing, IT, training, procurement, distribution and development support. Our marketing approach grows sustainable brands in a considered and well researched manner.
Our customer scope is broad, so while our main brands are focused on the wider South African market, we also have niche brands. This track record reassures the franchisee and broader market about Spur Corporation’s credibility.
What kind of support can a franchisee expect when joining Spur?
Franchisees can tap into expertise that’s been built up over five decades. We provide franchisees with the most effective tools to help manage and sustain their businesses successfully. Our operational support is wide-reaching and includes access to procurement, development, logistical as well as IT support. Skills development is one of the most important ways in which Spur Corporation supports its franchisees to run successful businesses.
Marketing support enables franchisees to actively identify opportunities and get assistance in developing and implementing bespoke marketing plans for each restaurant. Most importantly, when a franchisee joins Spur Group he or she gets access to cutting-edge management know-how from an experienced team of people who are passionate about our business.
Why is it important for successful franchises such as yours to have a strong banking partner and how does it benefit the franchisee?
Buying into a brand is a substantial investment for a franchisee, so they need a banking partner that will help with financial planning and running the business. Nedbank has built relationships with franchisees while helping to open and maintain their businesses.
Muscle And Grill Is Your Daily Chef. We Provide Fresh, Nutritional Food At Affordable Prices
It isn’t always easy to stay in tune with both body and mind. We do all the prepping for you so that you can keep up your pursuit of greatness.
- Brand: Muscle and Grill
- Established: 2018
- Website: www.muscleandgrill.co.za
Muscle and Grill is a healthy fast food establishment based in South Africa. In the face of modern South Africa, lives spent on the go require a fuel to match their aspirations while maintaining a delicious, fast and fresh service.
As our lives swirl into life’s vast depths of opportunity, our bodies are often the product of poor health habits, while trying to keep on the move to achieve our goals. Muscle and Grill challenges this. We want to be able to support the South Africa of tomorrow by offering the food your body needs to keep reaching new heights – to keep pushing the boundaries of accomplishment with health food convenience.
At Muscle and Grill we’ve got you covered. We provide nutritional fast food that is fresh and affordable. We have your health at heart. You could start your day off with some free-range scrambled eggs or fresh oats – for lunch a mixed bowl of rice, protein and fresh vegetables – or to round off your day, replenish your mind and body with a hearty health-infused burger and all its wholesome goodness. We have not forgotten that home constitutes a hungry family who have all been active, so grab a lean beef pasta salad with some greens on the side to go.
Related: SA Fast Food Franchising On The Rise
It isn’t always easy to stay in tune with both body and mind. We do all the prepping for you so that you can keep up your pursuit of greatness.
It was once said that great ideas are born from ones’ frustrations. That is exactly how Muscle and Grill came about. Having no real on-the-go option to stay healthy, or having the time to prepare to be healthy, became a huge frustration for us. We struggled to find enough hours in the day to keep up with a busy lifestyle and still eat healthy while on the move. Our work came first and our lifestyles suffered.
The vision for Muscle and Grill is to make it possible to stay healthy on the go. We want healthy food to be easily accessible for all walks of life.
Our mission is to provide quality, healthy fast-food. The food we provide is delicious and will keep you coming back for more.
Muscle and Grill works on an almost self-service basis. The point of sale system is customer operated where you can select what meal you would like to have. Once payment has been processed electronically the kitchen staff will receive the order and prepare it to spec. Muscle and Grill will be a completely cashless business, making it super-efficient for consumers and business owners.
The concept of Muscle and Grill is partnered with Puré Frooty. Puré Frooty is a self-service smoothie bar which prepares smoothies for you at the touch of a button. You can have a store with or without a machine – the choice is yours. Both concepts look to promote the idea of healthy living on the go.
We’ve looked to compliment our values by looking after that which grounds us. Our packaging and utensils are all eco-friendly, as we believe ‘going-green’ is not just a choice of eating but of the environment too.
So, when you are ready to join the next revolution in the fast food industry contact Muscle and Grill at email@example.com or visit the website at www.muscleandgrill.co.za to inquire on our franchise options today. Achieve your goals, stay on the move and look after yourself through Muscle and Grill.
Nando’s Is Firing Up The East
Carlos Duarte has been part of the Nando’s brand since inception. When his brother Fernando co-founded the flamed grilled chicken brand in 1987, Carlos soon participated in its success and today owns four highly successful franchises in Johannesburg — three in the east and one in the south. Here’s how it all began.
- Player: Carlos Duarte
- Franchise: Nando’s
- Position: Franchisee
- Visit: www.nandos.co.za
What were you doing before becoming a franchisee?
I was in the audio visual technology field, as an employee. Then I joined Nando’s as an assistant manager in the Savoy and Rosettenville corporate stores. Franchising was my first experience of entrepreneurship.
Why did you decide to become a franchisee?
When my brother, Fernando Duarte, launched Nando’s in 1987, I noticed its quick growth and wanted in on the action. Being assistant store manager prepared me for when the opportunity to run my own store came along soon after.
What prompted you to partner with Nando’s?
I joined Nando’s in 1991 as a joint venture partner. At the time, Nando’s hadn’t yet franchised its operations, and the JV partnership meant the brand owned 51% of the business, while I owned 49%. My first franchise store was in Edenglen in 2001.
Describe some of the challenges of running not one, but four franchise locations
At the Edenglen store, we initially battled with sales and getting feet into the store. To be honest, I think the area was overtraded at the time, so it wasn’t the best location. Since acquiring the store in Lambton, Germiston, another in Greenstone and a third in Comaro, I’ve learnt to be cleverer in how I do things — and how I handle some of the same challenges — and learn every day from the brand itself.
Name some of the benefits you’ve experienced as a Nando’s franchisee
Nando’s is 31 years old this year. We’re in 30-odd countries worldwide with thousands of stores across the globe. As franchisees, we leverage off the dynamism of an operational business that’s known for its marketing — customers talk about our ads and they love our food.
What kind of support do you receive from Nando’s as a multi-unit franchisee?
Besides the popular marketing campaigns that attract customers, Nando’s has an extensive training manual along with a skills development training consultant who comes to the store for two days to help staff understand and implement it. The training is really effective — it has to be as this industry involves a very high turnover of staff and new skills need to be taught often.
Why is it important for a franchisee to have a good banking partner?
As a franchisee, your bank should understand your business — from operating costs, to overdraft needs and revamping expenses — so it has cash available for loans that can be approved quickly, with minimal hassle. On the technical side, a reliable mPOS device is imperative, especially for us, because 30% of our sales volumes are from home and office deliveries. It’s a fundamental method of payment every bank should provide its customers of a similar nature.
What advice do you have for budding franchisees on seeking out a good franchise brand and banking partner for their business?
- Do your research to ensure you’re partnering with a brand that is established, well-known and expect to pay a fair price for that franchise.
- Be aware of how the franchise brand is perceived in the market and what location opportunities are available to you as a franchisee.
- Choose a banking facility that always has the funds available to grow your business.
- Ensure the bank understands the brand’s business model and where you’re falling short.
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