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Should you Offer Financing?

What franchisors need to know about helping franchisees get financed.

Mark Siebert

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One of the most common problems in the franchise sales process is helping prospective franchisees secure financing for their new investment. As a franchisor, should you offer financing to your franchisees? Or should you just not get involved? How much help is too much? And when should a franchisor say enough is enough?

Options for Franchisee Finance

In addressing this issue, you should first realise there are a myriad of options for franchisee financing assistance. These range from a relatively low level of involvement (such as assistance in the development of a business plan) to a high level of involvement (such as providing direct financing to franchisees).

The level of involvement that a franchisor should have in the finance process should be based on several factors: size of investment, nature of the assets financed, the profile of the targeted franchisee, the ability of the business model to carry financing, the financial strength of the franchisor and the relative demand for the franchise in question.

Since significant involvement on the finance side involves some degree of risk, the first question you should address is the extent to which your involvement is necessary to meet development goals. In essence, if you are not having any difficulty selling franchises, a minimalist approach will certainly suffice. Provide outlines for business plans, but do not put any of your hard-won assets at risk.

There are also some non-finance alternatives to easing the franchisee’s financial burden that would open a franchise opportunity to a wider market of prospective franchisees. Some new franchisors have chosen to reduce or waive franchise fees altogether for their initial franchisees. Franchisors who double as manufacturers or suppliers may offer discounts or extended terms on initial inventory. But franchisors should beware. If these provisions are structured as an ‘introductory offer,’ they need to be disclosed.

It is a New Business

While a franchisor thinking of getting more involved in the franchise finance process may initially look at the advantages of providing financing to franchisees, the downside can be considerable.

Yes, providing financing assistance can increase the number of prospective franchisees who might otherwise qualify for your franchise, but these same franchisees are likely to be the worst credit risks with the highest likelihood of loan default. And there is certainly an argument that we should allow Charles Darwin to sort our prospects for us. Any time a franchisor is taking on any incremental exposure in the lending process, the default rate on these franchise loans should be of substantial concern, and should not be overlooked.

Likewise, it is important to understand that providing limited guarantees, credit enhancements or direct loans to your franchisees will encumber your balance sheet with contingent liabilities that may, in turn, make it much more difficult for you to obtain a loan should the need arise. Such a posture may make it difficult or impossible to build that new building, finance additional corporate growth or acquire that competitor. In essence, this financing can eliminate the very leverage you were trying to create when you turned to a franchised growth strategy in the first place.

Moreover, most franchisors are distinctly unqualified to get into the lending business. First and foremost, they are not in the lending business, which is ultimately a business of assessing risk and assigning a fee to that risk. And equally important, the franchisor who gets into the direct lending business has a built-in conflict of interest that could easily cloud his or her judgement.

Even if a franchisor can overcome the difficulties of mastering this new business, many will not qualify from a financial perspective. To provide a meaningful guarantee of any type, you must first evaluate your own creditworthiness – as each such guarantee will encumber your assets, and a fast-growing franchise can rapidly outstrip its balance sheet. And, if those guarantees come due because of loan defaults, that debt can easily consume an organisation.

Get Paid for Your Risk

If you do choose to provide some form of credit enhancement or otherwise assume risk on behalf of your franchisees, you should treat this credit enhancement as any other part of the value proposition – and turn it into a profit centre.

It is not enough to benefit from the existence of incremental franchisees. The economic benefit you receive from those fees and royalties represents your return for the value proposition you have created by being a good franchisor.

Over time, even the best finance programme is likely to see some defaults, and you should seek to offset those defaults by realising interest on those loans – enough to offset administrative costs, forecast defaults and still provide some profit.

As a franchise consultant since 1985, Mark Siebert founded the iFranchise Group, a franchise consulting firm, in 1999. During his career, Mark has personally assisted more than 30 Fortune 1000 companies and over 200 startup franchisors. He regularly conducts workshops and seminars on franchising around the world. For more than a decade, Mark also has been actively involved in assisting U.S. franchisors in expanding abroad. In 2001, he co-founded Franchise Investors Inc., an investment firm specializing in franchise companies. He's on the board of directors of the American Association of Franchisees and Dealers and the board of advisors to Connections for Community Ownership, which encourages minority business and job development through franchising.

Company Posts

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.

Nedbank Franchising

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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.

Related: A Three-Pronged Approach To Franchise Success

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.

Related: Nedbank’s Full Service Offering for Franchise Owners 

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.

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Company Posts

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.

Muscle and Grill

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Vital stats

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.

About us

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.

Concept

muscle-and-grill

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.

Related: 3 Crucial Considerations For New Multi-unit Franchisees

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 info@muscleandgrill.co.za 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.

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Company Posts

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.

Nedbank

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nandos

Vital Stats

  • 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.

Related: (Watch) Why Nando’s Is Clucking Its Way To The Top

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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