During the Internet boom in the late 90s, you could count the VC firms interested in acquiring franchise companies on one finger. Today the story is very different. VCs are expanding their scope, and we are seeing more interest in the acquisition of franchise companies, from professional and individual investors.
In fact, as the power of the organisational and financial leverage of franchising is finally being realised in the financial marketplace, franchise companies are often fetching premium valuations. Many franchise companies, already familiar with the franchise process, are acquiring complementary brands so they can leverage off their skills in the areas of franchise sales, franchise support and franchisee relations. There are also funders actively looking for franchise companies, with many more interested on a peripheral basis.
Franchising, as a means of business expansion, is largely geared toward helping companies leverage their growth. At its core, franchising is about helping companies with limited resources grow using ‘other people’s money.’ This basic premise begs the question of ‘why should businesses buy a franchise company instead of franchising a similar concept themselves?’ – especially since acquisition requires the buyer to spend significantly more capital to get into the ‘franchise business.’
The reasons companies choose acquisition are simple. First, it is difficult to create the original successful business model. Second, given the speed with which new franchisors can expand, the target franchisor may establish too much of a head start in the franchise marketplace. Finally, existing franchise companies are attractive acquisition candidates, because they have already demonstrated a market for the sale of their franchises.
On a regular basis, we hear from individuals who are eager to franchise – and yet they do not even have one profitable operating prototype. What we tell these companies is that without an operating prototype, it is virtually impossible to franchise. More important, the development of a prototype successful enough to franchise is often the hardest part of franchising.
For a business model to be ‘franchisable,’ it needs to be more profitable than a business that is simply successful. A franchise company needs to be profitable enough to allow the franchisor to collect a royalty – and still provide an adequate return to their franchisees.
For a brand new concept, a potential buyer may face two choices: buy one of the pioneer franchisors or spend six months opening the unit, six months refining it and another six months preparing to franchise the business. For entrepreneurs intent on entering a new market, the dynamic nature of franchising itself often forces them to buy, because they realise that with the time it takes to test and prove a prototype and begin franchising, they may have missed the boat if the market leaders have all sold 100 franchises or more.
And while some acquisitions are straightforward, many are made for strategic purposes. Existing franchisors acquire a new and perhaps competing brand. Manufacturers may want to acquire a channel of distribution for their own products. In some instances, the buyer may be looking to acquire a troubled franchise company or a sleepy, underdeveloped concept, raising an entirely different set of questions. But regardless of whether or not the acquisition is strategic, the nature of the strategic goals (and specific challenges posed by that strategic relationship) must be understood and evaluated.
Let the Buyer Beware: Due Diligence in the Franchise Acquisition Process
Of course, finding the franchise company to buy is only half the process. Once you have settled on your acquisition target, determined that the company is for sale and negotiated a price, you must then establish if the franchise company is what the seller has claimed. But in doing this due diligence, the acquisition of a franchise is complicated by the fact that, by definition, there are multiple interested parties in the ultimate transaction: the franchisees.
Is the Business Model Viable?
From a business perspective, the biggest concern you face when acquiring a franchise company is that the business model is not viable. There is also the potential threat that the acquisition could spawn dormant or perhaps newfound litigation.
While secondary research on the market can provide some information in this regard, the best way to unearth both of these potential problems is to undertake a systematic survey of franchisees. With that in mind, the first order of business in acquisition due diligence involves a survey of franchisees to ‘take the pulse’ of operators prior to an acquisition.
As a related step in gauging the effectiveness of a franchisor’s business model, you should conduct unit-level due diligence (if the operation is operating out of a fixed location) to assure that the franchise model and unit economics are viable. In conducting this analysis, someone with appropriate consumer-side expertise should visit a number of franchisees of different markets to examine factors such as brand and operational consistency, quality control and overall business model viability.
You should also gain insight and perspective as to how the seller measures up against its major franchised competitors. To conduct this analysis, the seller’s legal documentation, business plans, marketing plans, historical sales and marketing performance data and other materials should be reviewed and compared.
You also need to compare franchisor performance to anticipated performance to try to uncover any areas of concern. In doing so, it is important to scrutinise all variances from the norm, as even ‘positive’ deviations from the norm can be an indication of an underlying problem. For example, high close ratios in the franchise sales department may be an indicator of a great concept, great marketing and a strong sales force. Alternatively, these high ratios could also be an indication of a sales force run amok and potential disclosure issues that will surface years from now.
Strength of Management
The single most important factor in the success of any franchise organisation – perhaps even more important than the concept itself – will be the management team charged with its growth. If the existing management remains with the company being acquired, you should conduct an assessment of their abilities to grow the franchise organisation. It is imperative that you assess the franchisor’s existing organisational structure, budget and personnel needs (if any), with an eye toward evaluating what additional tools the franchisor may need to achieve the seller’s future goals.
As part of this process, you’ll want to analyse staffing ratios versus those of direct competitors and franchisors in general. One serious problem that such an analysis might uncover, for example, involves the question of whether the organisation has been intentionally understaffed (or under-resourced) in an effort to inflate earnings (and the selling price). In the case of a planned sale, a franchisor may use employee attrition or even terminations to affect this end, causing serious concerns about whether the franchisor can maintain quality and continue to grow at the current pace without staff additions.
Of course, the business issues discussed above make up only a small part of the due diligence required in any franchise transaction. And while these issues represent only a fraction of the issues that go into a successful acquisition, this process will provide you with a better analysis of the opportunity and a fuller understanding of the risk involved in a purchase.
Ultimately, like all business decisions, the acquisition of a franchise company is an exercise in measuring risk versus return. The advantages of acquisition (proven concept, existing franchise operations, and speed to market) must be weighed against the risks (increased cost, existing problems with the franchisor, etc.) if the acquisition is to provide the desired results.
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.
Make Your Business A Good Neighbour
Take your business from invisible and struggling to a thriving neighbourhood landmark.
Is your business invisible to your customers? You may have fewer customers than you would like because your business does not seem relevant to those in your neighbourhood. This is an even bigger mistake than not being able to reach beyond your direct trading area.
To appeal to people – customers – you should also present your business as a group of people who help other people. This can be helping supply them with goods they need to buy, helping provide them with loans or simply being a reassuring and consistent presence in your neighbourhood.
As our Local Area Marketing Manager, Juan Botha, tells Cash Converters’ franchisees, this is about blending and fitting in like a neighbour. It is about give and take. And all of that adds up to community engagement.
Here are six of his top tips:
- Introduce the family: Cultivate a friendly, welcoming atmosphere in your shop or office. Introduce new staff to regular customers. Make sure that new customers can get to know staff through your in-store welcome boards and name badges.
- Find your partners: Identify the gatekeepers in your community and create partnerships with them. Think about approaching sports clubs, schools, church groups, sewing circles and book clubs.
- Snatch some selfies: If you have local celebrities as customers, take a selfie and post it on your social media: “Guess who came to say hello today . . .” Build relationships with local heroes and you will be able to call on them to host your in-house fun day or charity drive.
- Give back to business: Be involved in local business chambers and groupings as more than a participant. Show you are a good business neighbour by facilitating speed networking, hosting a speaker or sponsoring a sound system or catering for the next meeting.
- Adopt a cause: Identify a local charity and rally support for it.
- Help the community: Launch or participate in a community project – anything from an area clean-up or helping repaint school classrooms to planting trees or a community vegetable garden.
Building relationships helps you build your business’s reputation. That is because you can make people start to feel a certain way about your business and influence them positively towards you. Then, when they need something that you supply, you will be top of mind.
That neighbourhood warmth creates a sense of ownership. These prospective customers will already know how you can benefit their lives and so are more likely to become your regular customers.
They will be acting on the fact that people remember you for the experience you give them. As top American writer Maya Angelou said, their memories will be shaped by how you make them feel – not how or what you make them think. Relationships may be intangible but they can bring real value to your business.
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