The franchising sector in South Africacontinues to grow by between 15% and 20% every year, making it one of the most attractive markets for international franchisors.
Entrepreneur spoke to Eugene Honey, head of Trade Mark Prosecution and Commercial IP at Bowman Gilfillan and a member ofthe Franchise Association of Southern Africa’s executive council, to find out more about what local entrepreneurs need to know when buying into an international franchise system.
When you decide on the home you want to buy, you have to await bond approval. The process of buying an international franchise is similar. Until exchange control approval has been obtained from the South African Reserve Bank (SARB), the franchise agreement is suspended. Exchange control authorizes payments – such as royalty fees – going out of the country. The exchange control department of the SARB will examine the franchise agreement and determine whether the royalties fall within certain parameters and are not unreasonably high. It is unlikely that approval will be granted for minimum royalties – set fees which are payable regardless of financial performance. Upfront fees must also be deemed reasonable for payment approval to be granted. Application to the exchange control authorities is made via brokers at any of the leading banks.
The financial strength of the franchisor is crucial to your survival. Determining the financial viability and stability ofa franchise system, however, is never an easy task. “A complete due diligence must be done, including a detailed analysis and appraisal of the business sothat you can ensure that there is nothing which contradicts your understanding of the current state and potential of the business,” says Honey.
The franchisor should be able to prove thatthe product or service has yielded at least three successive years of profitable trading, preferable five. Failing that, the investment may be risky. The franchisor’s financial statements and profit projections must stand up to expert independent scrutiny. Collect all the financial data pertaining to franchise and present it to your accountant for financial analysis. If there is a flaw in the financial picture presentedby the franchisor, your accountant should be able to spot it.
It’s advisable to obtain an up-to-date credit rating on the franchisor and its principals, as well as a credit rating from a credit-checking organization. Be aware that the franchisor is bound to inform you of any on-going or pending litigation against the business.
“To establish the financial stability of the master franchisee in South Africa, your best source of information is existing franchisees,” notes Honey. “Contact them, find out if they are profitable and ask them what level of support they receive from the master franchisee. If advertising support has suddenly dried up, for example, is it because finances are tight? The franchisees are at the coalface; they knowbetter than anyone else what is going on at the heart of the business.”
It’s always advisable to bring in aconsultant or a business broker to help you assess the financial status of thefranchise operation before you make a final decision.
When it comes to franchising systems, thereis a general principle which most people are unaware of. “Franchisees should not pay more than 25% of profits to the franchisor,” says Honey. “This figure may vary slightly depending on the value add and services provided by the franchisor, as well as the profit margin of the franchised outlet, but it’s good to bear in mind.”
The average fee in South Africa is 8% for royalties and 3% for advertising, depending on profitability. Because this figure is linked to the turnover of the outlet, the franchisee is notaffected by fluctuations in exchange rates as the royalty is reflected as a percentage of profit. “If the net margin is bigger than average,the franchisee can sustain a higher royalty,” adds Honey. “It’s important to assess this upfront. The whole point of a franchise system is that it’s a partnership which must result in a win-win situation for those involved.”
Don’t expect to qualify for a lower up front franchise fee just because you’re a pioneering franchisee. By the time a franchisor is ready to expand internationally, the system is well developed and all business processes have been refined; it is therefore highly unlikely that you will qualify for a “discount”. Should you wish to exit the franchise at any point, the franchisor or master franchisee will generally have first optionto buy the business from you. Note that this is not a buy-back option and there are no guarantees given in advance
The Legal Stuff
- How do international tax laws affect local franchisees? “South Africa has double taxation agreements in place with most of its trading partners, eliminating the double taxation of income,” says Honey. “This means that franchisees do not have to pay tax twice.” As a rule, franchisees in any country are governed by the tax laws oftheir own state.
- Are local franchisees subject tointernational legislation? They may well be because licensing agreements areoften subject to the laws of the country in which the franchise system is headquartered. “A U Sfranchisor, for example, is likely to want to be protected by US law,” saysHoney. “However, where a franchisee signs a franchise agreement with a master franchisee, it is most likely to be governed by South African legislation as both the master franchisee and the franchisee are operating locally.
Thus, foreign laws generally come into play only when the local franchisee is dealing directly with the international franchise.”
- Check trademark class registrations.Trademarks are registered in different classes in accordance with the International Classification of Goods and Services. The classification is divided into 45 different classes that sub-divide into 34 goods and 11 service classes. For example, wholesale and retail services fall into class 35, while clothing falls into class 25. The practicality of the classification lies in the fact that protection is afforded to the mark in the classed in which it is registered. Protection is also given to goods similar to those contained in the specification. “Check that trademarks which are being licensed from the franchisor are properly protected,” Honey advises. “Most franchises sell a range of products and services and it’s important to ensure that all are protected in this country.”
- Check domain registrations. Very often the local franchise system will have its own website. Make sure that the domain name is registered in the name of the franchisor. If it is not, the franchisor may enforce their rights on the basis of trademark registration
- Does the franchise agreement comply with local laws? You may be given disclosure
Documents that are used in the US or Australia, for example. Your legal advisor will be able to make any recommendations regarding changes that need to be made in line with South African law. This is particular pertinent at the moment, given the Competition Act and the new Consumer Protection Bill.
- Does the franchise agreement comply with local industry regulations? A franchise in the food or restaurant industry, for example, will have to comply with local regulations. This is unlikely to pose any problems for local franchisees as they are generally aware of all theserequirements before they go into the business.
- Are local franchisees protected against change of ownership of the international franchise? There is little protection offered, but the overseas franchisor usually transfers its rights to the new owner and business continues as usual. Established international franchises are well organised and it is unlikely that the sale of the franchise will affect franchisees. Where the franchise system is smaller or newer, it’s best to be more cautious.
SA’s Changing Legislation
“Be aware that franchising law in South Africa is changing and developing, particularly around the Competition Act and the new Consumer Protection Bill,” cautions Honey. “Broadly speaking, the Competition Act states that franchisors cannot specify prices or maximum discounts, and that franchisees are entitled to charge what they feel is reasonable.
“The Consumer Protection Bill, expected to come into effect soon, affects every transaction in the country. It introduces the concept of contracts that are reasonable, fair and equitable into our law for the first time. In the past, a contract was binding on the parties involved. Now, if a contract or term is not reasonable, fair or equitable, itcan be struck out.” Franchise agreements and disclosure documents should therefore be audited to ensure they comply with both the Billand the Act.
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.
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.
Be In The Property Business For Yourself, Not By Yourself
Why property franchising makes good business sense in today’s market.
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.
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:
- 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.
- 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!
- 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.
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.
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.
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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