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Researching a Franchise

Franchising FAQ’s

Purchasing a franchise is a big investment, so be sure to get your questions answered before taking the plunge.

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Here is some useful advice to address some common franchising concerns.

Readers have almost as many questions about franchising as there are franchises to buy. Here are answers to recent questions.

Q: I’m interested in buying a fast-food franchise. But I’m not sure that I have enough saved to cover the entire transaction. Is it possible that a franchisor will help finance my purchase of an outlet?

First the good news. More and more big franchisors offer financing to those who would buy their franchises.

And the bad news: It’s tough to qualify for those financing deals as a first-time franchise buyer. The good news about franchisor financing stems from the fast growth of the franchising industry. For most people, coming up with the initial fees, licences and start-up costs is a significant investment. Whether franchisors will lend to a first-time buyer of a franchise depends on many things, including how much you invest and your track record as an entrepreneur. Any bruise on your personal credit history is likely to disqualify you.

Some franchisors have relationships with third-party finance companies and banks that specialise in lending to their franchisees.

For the franchisor, how much to lend franchisees is a tricky question. If a franchisor is too aggressive in its financing, it could saddle some of its franchisees with debt that may be too difficult to repay, which is in no one’s interest.

Franchisors need to draw a line between lending for ‘hard’ and ‘soft’ costs. For instance, it might make sense to finance a franchisee’s acquisition of real estate. But franchisees who seek funds for the initial licence fee or employee training will probably be too strapped to make the enterprise work.

Other good news on the borrowing front: Since franchising has experienced such a boom, the industry has established a track record that raises the comfort level for mainstream banks.

If you’re a first-time franchise buyer, you’d best have sterling credit and a nice nest egg to qualify for these programmes. Otherwise, if your heart is set on buying a franchise, you may have to save a while longer.

Q: What are the common issues that franchisees overlook when reviewing a franchise contract?

Just like in life, it’s not what we anticipate and fret over that gets us. It’s the odd banana peel that throws us into a skid as we run for the bus. In acquiring a franchise, most people thoroughly examine the fees, the long hours and the financial commitment required, looking at those issues from all angles. But rarely do they give sufficient attention to the terms of ending the franchise agreement. That’s always the one thing they don’t think about.

This isn’t like planning your divorce before you get married. There are all sorts of legitimate reasons for franchisees to end their relationships with their franchisers. They may just want to sell the business after a good run. A health issue may arise, or a spouse receives a job offer in another town, or they may decide that they’ve made a horrible mistake and just plain hate what they’re doing.

When the time comes to end things, you might find yourself obliged to pay fees even after you’ve shuttered your business, or endure other unpleasant and unexpected terms.

Here are some things to watch out for. Beware of an agreement which gives the franchisor the right to buy your franchise under a predetermined formula. You might do far better selling it on the open market.

Another scenario: You’ve paid all your current fees to the franchisor for three years, but now want to end a five-year contract. Even if you’re closing your business, you may owe the franchisor for the fees covering the remaining two years on the agreement.

Some of these issues are negotiable going in, depending on the franchise. One rule of thumb: the bigger, better-known and generally more desirable franchises typically have fairly standard, cookie-cutter-type contracts that leave little room for negotiating these terms. Meanwhile, it’s buyers of newer franchises who tend to have more leverage to draft the language addressing their exit.

Need we say this aloud? You must find a reputable attorney in the franchise field, one who is knowledgeable about these issues and will ensure you understand and can live with the terms of ending the franchise agreement. Get referrals from the local bar association and other franchisees.

Another troubling area for neophyte franchisees as they execute their purchase agreement: an over-emphasis on territory. Very often, a franchisee feels greedy about territory, assuming the bigger, the better.

Actually, the opposite is often the case. With more franchises already operating in a given city, a market presence is likely to exist for your business before you invest your marketing money. Many have cost-sharing plans for advertising that give you a bigger bang for your advertising buck.

Don’t forget to look beyond the contract. Take your time and interview as many franchise owners as you can. Ask questions like: ‘Knowing what you know now, after several years with the franchise, would you do it again?’ and ‘What surprised you after you purchased your franchise?’

If it takes you three weeks to do that, so what? Consultants can do this research for you, should you desire, but it’s best for you to get this information firsthand and write a report for yourself about what you find, looking for trends. At the end of this process, you’ll have very useful information.

Q: I’ve made a deposit on a pizza franchise. The franchisor has 40 stores in Gauteng and Mpumalanga. It wants to expand into Cape Town, and I’d be the first one there. Is this a good idea?

You sound a bit ambivalent about the fresh territory, which is understandable. Franchise buyers generally regard territory in one of two ways.

One is that the best territory is a big and lonely expanse. You plant your flag and declare dominion over all you survey, proclaiming all of Cape Town’s pizza lovers are mine, mine, MINE!

Other franchisees prefer the safety-in-numbers approach. You join a battalion of pizza purveyors sharing turf as well as your advertising costs and marketing presence. Together you impart a sense of scale, marching in lockstep to conquer the world with your many convenient locations.

If you buy the franchise in Cape Town, you belong to the first group. If you buy in the Gauteng area, you are in the second example.

Franchises differ in how they address territory, of course. Some offer ‘protected territory.’ Under these agreements, the franchisor promises that you have a certain specified turf to yourself. It could be defined by geography, demographics or other parameters.

Others scatter their franchises or crowd them where they like. It’s been a subject of litigation over the years, often with franchisees suing to keep their parent franchise from opening a new store down the street.

You’re in an interesting spot. Judging by its expansion in the region, your franchisor appears to have done quite well in the Gauteng area. Whether this translates into happy franchise owners you must discern from your own research. You’ve done that, right? Including talking to other franchisees?

You may be in a fortuitous position. If the franchisor is very interested in expanding, it’s going to want to help the first franchise in a new market.

To a great extent, the success of the franchisor in a new market depends on your success. So don’t be shy asking for help. Sometimes that may come in the form of financing, perhaps, or negotiating your lease. These are things you’d like to negotiate with the franchisor.

One issue for a franchisee in your position to address is the advertising and marketing agreement. Typically, the franchisees kick in a percentage of revenue toward advertising. Will you be paying to advertise in Gauteng? Will the Gauteng stores be paying for advertising in Cape Town? Or are there national advertising buys that help all?

Q: What franchises are good for absentee owners?

If you are searching for a franchise that is more of an investment than a lifestyle, they are out there. It depends on the franchise. For some franchises, it’s entirely possible, and, for others, it doesn’t make economic sense or is expressly forbidden.

This is an important issue for franchise chains, and it doesn’t take a genius to see why. A business can only benefit from on-site ownership. No one has a stronger incentive in the success of the business, after all, than the owner with his own capital at risk. Many franchises have become well-known for the long hours required to run their businesses – rising at 3am to make the doughnuts – a far cry from the distant oversight you envision.

For that very reason, many franchises demand an on-site owner, and make it a condition of franchise ownership. McDonald’s Corp franchises, for instance, are famous for turning away passive investors and corporate owners, and only accepting owner-managers. With people lining up for a chance to buy a McDonald’s, it can afford to be picky in the selection of its franchisees.

Most franchisors strongly prefer owner-operators. A franchisor selects franchising as a method to expand the business in part to have someone share the risk, and to have an owner with the vim, vigour and vitality to grow the business. Unlike the owner, the typical manager can too often say: I’m off the clock, that trash on the floor is someone else’s problem.

Look for exceptionally strong systems and effective marketing plans, factors that you wouldn’t control even if you were hovering like a nervous mom over the premises every day. Look to well-established chains that have worked the kinks out of their systems. Someone else is going to be following these blueprints, and the more specific, the better.

Food operations are poor candidates for absentee owners, because the detail work and interaction with customers is so important. On the other hand, an absentee-owner might do well with, say, brake or muffler shops, or hair salons.

An absentee owner requires an excellent manager, of course, someone with a track record of integrity and results. Less important is that the manager has experience in that particular franchise. If you are part of a good franchise system, an experienced manager can follow the plan.

Economies of scale also come into play. A small franchise, especially in its early phase, may not throw off enough cash to support a strong manager with profits left for you. It’s likely to be a different case, though, for the owner of several franchised units, all operating under one manager. So, going into this, you’ll require a reasonably good sense of sales and profits, which only a few franchised operations will project. You’re likely to discern this important information only by talking to other franchise owners in the system.

You still will have to figure out a way to stay close to the business, whether it’s reading through the data generated by automated reports or talking frequently to your manager. Nothing substitutes for the unannounced drop-ins. It’ s the best way to detect dirty floors or rude employees before those issues translate into anaemic sales.

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Company Posts

Don’t Tread On Toes – Why Investing In A HIQ Franchise Will Offer You More Opportunities

Are you looking at investing in a tyre replacement and service industry? Look no further than the Hi-Q franchise.

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Vital Stats

Established in 1999, Hi-Q is a successful and diverse multi-product, multi-brand leader in the tyre replacement and service industry with a network of over 130 franchisees nationwide.

With the support of international tyre giant Goodyear, Hi-Q has established a solid reputation of ‘the one you can trust’, and the Hi-Q approach and philosophy is embedded in this.  We have the trust of our customers, our network and our suppliers – that’s why you can trust us to take you and your business to the next level.

When you’re working with people’s safety, trust forms the most significant part of the equation

Hi-Q introduced the original and innovative TyreSurance initiative – the only aftermarket tyre damage guarantee product that backs the consumer no matter the brand of tyre. Each Hi-Q Franchise offers a broad range of brands within the different product and service categories that customers know they can trust, and at prices they can afford. Product and services include tyres, exhausts, shocks, batteries or brakes, wheel alignment or balancing, and a 10-point safety check.

We have identified areas of opportunity to extend our Franchise footprint growth. If you are looking to join a new franchise and you share in our values and vision, we would like to hear from you.

For further information on how to become a franchisee, call us on +27 11 394 3150.

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Related: We Want To Invite You To Join Us On The Hi-Q Journey And Become A Franchisee

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Researching a Franchise

Be In The Property Business For Yourself, Not By Yourself

Why property franchising makes good business sense in today’s market.

Keith Broadfoote-Brown

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Opening a real estate franchise has been a thriving and successful business model in South Africa for decades. Despite the challenges currently facing the South African economy, property will continue to prosper and provide entrepreneurs with an opportunity to own their own successful businesses and become leading members of their local business communities.

“The residential property market is a dynamic, thriving industry offering substantial career opportunities.

Joining a property franchise business gives entrepreneurs the opportunity to align themselves with reputable, established businesses with a national footprint who have invested in their brands and have access to international networks,” says Russell Berkman, Franchise Director at Jawitz Properties.

While the property industry is competitive there is still great potential for growth. Worldwide, franchising has proven to be one of the most successful business models with failure rates well below those of starting a business from scratch.

Related: How to Become a Property Franchisee

For the franchisee, it is one of the most intelligent ways of starting and growing a business and by combining the proven business formula of the franchisor with the entrepreneurial drive of the owner-franchisee, the likelihood of a successful business venture for both parties is increased significantly.

According to Keith Broadfoote-Brown, the owner and Principal of the Jawitz Properties Ballito franchise in KwaZulu-Natal, property franchise still makes good business sense in today’s market.

The benefits of being a property franchise owner

Becoming a property franchisee gives a businessperson unlimited potential to succeed in the property industry as the success achieved is a direct result of the effort, commitment and drive put in. It means being self-employed within an organisational structure and offers the same structure and benefits to sales and rental consultants.

“It gives you the opportunity to leverage your business’ success off the intellectual capital, brand, expertise and know-how of an established business that has a proven business model, IT platforms, marketing expertise, training and self-development programmes as well as having access to years of experience in these fields.  My mantra is ‘be in business for yourself, not by yourself’,” says Brown.

Skills needed to succeed as a property franchisee

The most important competencies would be to have an entrepreneurial character and business skills such as financial literacy, HR/people skills and marketing acumen; a people’s person with a resilient and driven personality. Experience in real estate is always beneficial but not required as it is all about using business skills, marketing acumen and entrepreneurial tenacity to make your mark.

Related: How Brigid Prinsloo Made (A Lot Of) Money On Airbnb

Brown explains, “Absolute professionalism and integrity and a fierce determination to exceed your client’s service expectations are essential. And you must be able to develop a highly competent sales team, explore new opportunities for your business and operate as a team player within a franchise structure”.

Current state of the property market

The property market in SA currently reflects the economy and is weighted in favour of buyers, so sellers need to be very realistic with their price expectations. Buyers are buying where they perceive good value and value is indeed the key driver in the market today.

The opportunities are strong for buyers to invest in this ‘down’ market and conditions are also ideal to upgrade one’s home. In every region and in every suburb there are homes offering good value and these are selling well, despite the tougher trading conditions.

Opportunities outweigh the challenges

“The opportunity for real estate professionals is to find and secure the well-priced, good value, properties as they are selling!

It is also an opportune time to enter the market as a franchisee or new agent/intern as I am firmly of the view that great estate agents learn their profession well in a tough market and when the market improves, as it surely will, these sales professionals will have a solid grounding and strong foundation on which to build their real estate careers.

Challenges are to manage costs in these tough trading conditions. To keep motivated and continue to consistently drive the very basic activities needed to succeed in real estate,” says Brown.

Top 3 things to consider before entering the industry

According to Brown, his top 3 considerations are as follows:   

  1. You need sufficient start-up capital as the initial investment in starting the business and the monthly expenses to run the business can be substantial. The income from sales and rentals may be slow in the early years, hence the need for good planning and sufficient start-up funds.
  2. Owning one’s own business means the buck stops with you! A well thought out and well implemented business plan is key. The first 2-3 years consist of long hours and could potentially be financially strained, as in any start-up business, but the rewards of owning your franchise and being ‘master of your own destiny’ are worth it!
  3. This is a tough business for tough-minded people. Having an initial mindset of ‘it is harder than I think’ rather than ‘it will be smooth sailing’ is a better approach and will prepare the franchisee for the hiccups that will surely come along.

Property franchising makes good business sense

The end result of being a successful property franchisee is financial security. Owning a brand office assures the owner of having an asset and the credibility, back-up and brand promise assures clients they are in safe and professional hands.

“I would definitely recommend being part of a major brand rather than a being a small real estate entity, especially in this competitive industry. Property is a challenging industry that, like everything else, goes through cycles, influenced by factors like inflation and interest rates, among others.

Drive, initiative and resilience are therefore essential qualities for a successful property franchisee. Absolute professionalism and integrity and a fierce determination to exceed your client’s service expectations are essential,” Brown concludes.

Related: Want To Start A Property Business That Buys Property And Rents It Out?

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Researching a Franchise

Col’Cacchio – Benefits Of The Franchise Model

Six key benefits of the restaurant franchise model – and what to look out for when considering a franchise.

Russell Otty

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For investors looking to the restaurant industry and considering a franchise knowing it has a proven track record and is therefore possibly a lower risk, there are a few key things to be aware of about the benefits of the franchise model, which if investigated, can also point to a franchise that is not for you.

Russell Otty, Chief Operating Officer of the Col’Cacchio Group, shares some of these key benefits and indicators of whether a franchise is for you:

1. Making the cut as a franchisee gives you the confidence that you are making the right decision

You may think psychometric testing, three days in a restaurant following a franchisee around, and a panel interview with the senior management of the franchisor, is a bit over the top, but the franchisor that puts you through your paces and assesses your ability and commitment to running the business, is doing you a huge favour and may even help you see this is not for you. It goes both ways, and after an intense courtship, you should know if you want to try a long-term relationship.

Related: Col’ Cacchio: A Passion For Pizza

2. Assistance with location selection and negotiation of the terms of your lease

One thing you can do to limit your risk is to not open a restaurant in the first place if your rent is not going to be reasonable or you simply won’t get customers through the door. The franchisor will vet and approve the site – they will have extensive insight into what has worked or not worked location-wise for their brand, and can assist you to weigh up the area and it’s potential to attract customers.

The commercial terms of a lease is very important – you can’t be too ambitious about turnover targets, and having the backing of a franchisor can be beneficial if a landlord becomes unreasonable.

3. Staff training and development tools on hand

Consistency is important with restaurant franchises, as a customer visiting a brand anywhere in the country, goes there knowing exactly what they are going to get. This is best achieved with solid training, perhaps access to resources such as training videos, and regular visits from franchise managers.

You should check with your franchisor what level of training and franchise support you will have on an ongoing basis. Ask about the ratio of field trainers and operations managers to the number of franchisees in the group. You want the franchisor in your restaurant in some shape or form, two or three times a month, whether it be the training manager, the regional franchise manager or the national operations manager.

4. Access to supplier networks to manage your input costs

Negotiating basket pricing with distributors regionally and nationally, the franchisor will leverage their buying power on your behalf. They should assist to manage your suppliers and make sure deliveries happen on time, and ensure that product quality remains consistent. They can also negotiate to ensure your input costs do not increase before the next menu launch – so you can ensure your margins remain intact.

5. Brand loyalty and locality marketing

When you buy a restaurant franchise, you gain a group of customers who know who you are, the food you serve and the way you make them feel. The money you will pay towards marketing each month gives you insight into the broader restaurant market, the experience of what is working across a number of sites, and how best to keep the attention of new and existing customers.

Some franchisors offer locality marketing assistance – your site and area has specific needs that other outlets may not have, or there may be events in the area that can be leveraged to run special offers. Ask if the franchisor offers this as a service, as it can assist you greatly to have an advantage over other restaurants in your area.

Related: Beginners Guide To Digital Marketing In South Africa

6. Business development insights

The franchisor has access to insights gained across the group, and the systems that they have in place to track costs and increase profit margins, can be of huge assistance. If you are looking for business support, a franchise manager can be the one sitting with you telling you that you spent R2 000 too much on cleaning this month or saying you need to wait till next month to make that purchase. The level of business support you will have access to, is an important factor to consider, depending on the level of support you may require.

Recipe for success

Nine times out of ten, a restaurant franchise that fails, fails because the franchisee loses interest or lacks the commitment to make it work. Selecting the best franchise for you as the investor, or as a restaurant entrepreneur, is the most important first step you can take towards success, so do the homework.

Don’t assume that because you are buying into a successful brand that it will be a success – business is not an exact science – you need to do your own due diligence and take responsibility for your business, because it is after all your own investment.

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