As point of departure, we need to remember that franchising is a business tool developed by entrepreneurs for entrepreneurs. To be sustainable in the long term, the concept must offer franchisors and their franchisees realistic opportunities to make more money than they would make if left to their own devices. Over the past five decades, franchising has proven sufficiently robust to make this possible, provided that this is approached correctly.
- Sources of income for the franchisor
It is customary for franchisors to charge an upfront fee or initial fee and ongoing fees.
- Upfront fee
In terms of good franchise practice, the upfront fee should help the franchisor to recover over time the costs incurred in setting up the franchise. It should also pay for the expense of training the new franchisee and helping him/her to set up the business. Lastly, the upfront fee compensates the franchisor to some extent for the development of the brand and intellectual property associated with the franchise.
Upfront fee amounts range from R25 000 to R150 000 and more. This depends on the complexity of the business because it is influenced by training costs. The standing of the brand comes into play as well. When projecting capital requirements, prospective franchisees need to remember that in addition to paying the upfront fee, they need to raise funding for the establishment of the business and working capital.
- Management services fee
The management services fee (MSF) pays for the right of access to the franchisor’s intellectual property and ongoing franchisee support; it also allows the franchisor to make a profit. MSF levels range from 1-8%, depending on the industry sector, and fees are usually payable monthly in arrears.
Some people refer to the MSF as royalty but this is misleading. While royalty income is a passive income, payment of the MSF entitles the franchisee to receive extensive ongoing support in all aspects of successful operation of the business.
Seen from the franchisee’s viewpoint, it is preferable for the MSF to be calculated as a percentage of the franchisee’s sales. Indeed, this is a key element of successful franchising because it links the franchisor’s income to franchisees’ business success.
- Other fees
Some franchisors levy fees for providing additional services, for example a centralised administration service. Others charge a renewal fee when the franchise agreement comes up for renewal but this is less common in South Africa than in some overseas countries, notably the U.S.
In our view, such practices are acceptable only if they are disclosed during initial negotiations and franchisees derive a clear benefit. Our sentiment is supported by the CPA which provides that all franchise fees must be fully disclosed upfront and must constitute reasonable value for money.
- The vexed question of confidential rebates
It is common practice among suppliers to offer franchisors financial incentives linked to network-wide purchases. This is acceptable provided that it is administered correctly. According to the CPA, franchisors are under an obligation to disclose confidential rebates received and how they intend to apply them. The Competition Act comes into play as well. It prohibits franchisors from compelling franchisees to deal with prescribed suppliers unless they can show that this is absolutely necessary to protect the brand or delivers other benefits.
Although the law is silent on this aspect, we’d consider it good franchise practice for franchisors to either share confidential rebates with their franchisees or allocate payments received to mutually agreed projects.
- Advertising fees
Although most networks levy an advertising fee, we left this topic for last because the resulting payments are not income in the hands of the franchisor. It may be convenient to make advertising fees payable together with the MSF but in terms of the CPA, franchisors are legally obliged to keep advertising monies in a separate account. The resulting fund must be used solely for the purpose of brand and product promotions that benefit the entire network. Moreover, the franchisor must periodically account to franchisees for monies spent and supply them with audited financial statements.
In the next article, we will examine what constitutes a fair and balanced franchise agreement. To find out more about franchising and especially franchise finance in the meantime, contact the Business Manager at the Nedbank Area Office nearest to you. For contact details visit www.nedbank.co.za or your nearest Nedbank branch.
Written by Mark Rose of Nedbank and Eric Parker of Franchising Plus.
Copyright rests with the authors.
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.