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Researching a Franchise

Investing in an International Franchise Concept

What you need to know about investing in an international franchise concept.

Monique Verduyn

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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.

Exchange Controls

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.

Financial Muscle

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.

Paying Up

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.

For more information contact Bowman Gilfillan on +27 11 669 9000 or visit www.bowman.co.za or contact the Franchise Association of Southern Africa on +27 11 615 0359 or visit www.fasa.co.za.

Monique Verduyn is a freelance writer. She has more than 12 years’ experience in writing for the corporate, SME, IT and entertainment sectors, and has interviewed many of South Africa’s most prominent business leaders and thinkers. Find her on Google+.

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Company Posts

Choose A Job You Love, And You Will Never Have To Work A Day In Your Life

Join Col’Cacchio’s 26-year-long love story.

Col'Cacchio

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Vital Stats

  • Joining fee: R125 000
  • Monthly management fee: 6% of turnover
  • Monthly marketing fee: 2% of turnover
  • Total investment: approx. R2.5m to R4.2m (turnkey) Size: 140m2 to 350m2
  • Unencumbered cash (before loan): 50% of total investment

(Above figures exclude VAT) 

“Owning your own restaurant is like owning your own future.” – Dominic Dempers, Franchisee Durbanville, Belvedere & Meadowridge Cape Town

We’re looking for passionate franchisees who will love our brand as much as we do.

Why you should join this delicious success story

colcacchio-pizza-franchise-dessert

  • Assistance with site selection & lease negotiation
  • Store design & build
  • Full training provided for management and staff
  • Marketing & operational support
  • Product innovation & menu development
  • Efficiency in all systems
  • Healthy margins.

Related: 300 Business Ideas To Inspire You Into Entrepreneurship

#FoodwithaStory

“Our journey started with a single restaurant on the foreshore with the aim to serve the very best pizza around” – Greg Mommsen, Business Developer Director

“Watching this brand grow and empowering people has been immensely rewarding. We have staff that have been with us for over 20 years. It’s like a family, we work hard, we laugh, we cry, we celebrate and of course, we eat a lot of pizza.” – Michael Terespolsky, Founder and Managing Director

“Becoming a franchisee is an amazing opportunity to join the family and become part of the Col’Cacchio success story. We’re 100% behind out franchises at every step, making sure that we all continue to learn and flourish” – Greg Mommsen, Business Developer Director 

“It has been filled with challenges along the way, but all the rewards have made every moment worth it.” – Michael Terespolsky, Founder and Managing Director

Related: Got An Awesome New Business Idea? Here’s What To Do Next

Visit www.colcacchio.co.za or call Tarryn Godley on 084 800 7264 and let’s get this adventure going.

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Smoothie Franchise Opportunity: Puré Frooty Is A One-Of-A-Kind Smoothie Franchise Business

Looking for the next greatest franchise opportunity? Puré Frooty Smoothie is a highly perfected Australian business model launching in the South African market that doesn’t require extensive shop fitting or a large workforce.

Pure Frooty Smoothie

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Vital Stats

Puré Frooty Smoothie is a unique business model to the South African market. A delicious, fruit filled smoothie will be created at the touch of a few buttons.

An Innovative Franchising Concept

This innovation in the healthy smoothie industry is ground breaking for South Africa. The machine is manufactured in Australia by a highly skilled team. It took six years to perfect this business model for the consumer market.

The vision of Puré Frooty Smoothie is to offer convenient on-the-go smoothies for anyone. The experience and quality will always be of the highest standard. We aim to be a staple convenience in malls, schools, office parks and hospitals. This is a platform that will allow for self-growth for passionate entrepreneurs.

Our mission is to create a unique customer experience. We want to satisfy the nutritional needs of customers by providing quality smoothies. Puré Frooty Smoothie will be packed with all the goodness a smoothie should offer.

Related: Why Your Franchise Should Adopt A Shared Value Business Model

The four values we pride ourselves in are:

  1. Convenience
  2. Consistency
  3. Quality
  4. Customer Satisfaction.

Why Consider This Franchising Opportunity

healthy-smoothie-franchise

Extensive research into the business model and market

Puré Frooty Smoothie was an idea, researched widely, by people looking to simplify the business process for the consumer and business owner. There was a gap in the market for simplified customer service and a demand for a quicker turnaround time.

Simplified process for setting up a business

For an entrepreneur it can be very overwhelming to start or buy a new or existing business. There are so many crucial decisions that need to be made from the beginning and new concepts to adapt to.

Puré Frooty Smoothie simplifies that drastically:

  • Free-standing machines: The business model revolves around a free-standing vending machine which needs to be visited to refill and maintenance.
  • No shop-fitting required: There is no need for shop fittings or a large work force. All that is required is an inside space for the machine with a power supply.
  • Minimal human resources needed: In terms of a work force, you could either do it yourself or have one person to assist you. There is also a part time involvement where refill station teams can refill and maintain the machine.
  • Cashless business: The business is completely cashless so there are no worries of a note jam, full cash canister or insufficient denomination rand values. More importantly the machines would do a higher turnover than an ordinary vending machine so safety of no cash is important.
  • Easy tracking of stock and performance: A cloud-based system is linked to the point of sale which allows you to monitor your performance and stock from the back-office platform at any given time.
  • Efficient handling of maintenance: With a live point of sale system, the business is linked to a software which monitors the operations of the machine. Should anything malfunction an immediate notification will be sent with a diagnostics report.
  • Human error is eliminated: Everything is done with a computer which leaves little to no room for errors. It is self-order and very user friendly.

Related: SA Fast Food Franchising On The Rise

Why Will Customers Love It

Puré Frooty Smoothie offers a vending machine that can produce a delicious smoothie in forty seconds. An informative touch screen ordering panel which displays all the nutritional information of the smoothie ordered and has the current news and weather.

No time wasted for the consumer. In fact, it’s a learning session disguised as a waiting period. The machine has two wash cycles after every smoothie is made to be freshly prepared for the next smoothie, business hygiene is important.

Consumers live in the fast lane. We are looking for something quick and most times we would like to be healthier. With the hustle and bustle of today’s life every little bit helps. Puré Frooty Smoothie fills that gap in the market.

Interested in Becoming A Franchisee?

Visit our Franchise Info Page for everything you need to know about how to become information a Puré Frooty Smoothie Franchisee owner.

You can also call or write to us:

Phone / 012-942 6360
Email / info@purefrooty.co.za 

Want to know more about this franchise? Watch the video below for more.

 

ent_mag_6-11-18

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Researching a Franchise

4 Top Tips To Find Your Best Franchise Opportunity

The President’s recent Job Summit highlighted the critical need to reduce unemployment. The franchise sector employs 369 573 people, 93 percent employed by individual franchisees rather than franchisors.

Richard Mukheibir

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Several years of strong sectoral growth combined with business opportunities that are often backed by an investor safety net is making franchising the top choice for many who want to own their own business.  This assessment is based on the strong foundations of my own experience of establishing Cash Converters nearly a quarter century ago and the recent results of Franchise Association of South Africa (FASA) annual industry survey.

These figures show that the SA franchise industry has grown its turnover by 55 percent from R465 billion in 2014, when FASA conducted its first survey, to R721 billion in 2017. Alongside this, the sector’s contribution to South Africa’s GDP has expanded by 62 percent, from 9.7 percent in 2014 to 15.7 percent in 2017.

The President’s recent Job Summit highlighted the critical need to reduce unemployment and boost the national economy by growing business and stimulating job creation. The franchise sector employs 369 573 people, 93 percent employed by individual franchisees rather than franchisors.

Franchising can be a win-win for franchisees. It enables you to make your dream of running your own business come true as well as contributing to providing much-needed new jobs.

These factors make franchising a particularly attractive option for those wishing to start their own business. But with 865 different franchise systems active in the country last year, the huge range of choice can be confusing.

Related: Key Phases Of The Franchising Relationship

To prevent analysis paralysis and ensure you can get set to make the most of franchising, I can offer four top tips for selecting the best franchise opportunity for you:

1. Choose a credible brand

As you shortlist franchisors that appeal to you, go beyond what they tell you about themselves and find out about what people are saying about them. Do social media searches to find out how consumers are reacting to the product or service offered, pricing and customer service. Your franchise fee should buy you a halo effect thanks to your franchisor’s good reputation. Too much negativity around the brand will affect the potential success of your franchise, from your ability to attract customers and the turnover and profit you can hope to generate.

2. Look for a proven business model

A worthwhile franchise shares with franchisees the intellectual property it has developed over the years. It has created and grown this business model over time, knocking off rough edges and fine-tuning systems for mistakes as they become apparent. Check the brand’s news history online as well as its own sales material. Be wary of any franchise that claims to be perfect or invincible.

Nobody is – so either it has something to hide or it is fooling itself. Either way, such a brand is not keeping its eyes open to navigate the brand and its franchisees through the changing fortunes of business.

Related: Thinking Of Going Into Franchising?

3. Check the support systems

Getting relationships and systems right is vital in business success. They have become even more important since we founded Cash Converters nearly 25 years ago because the volume of legal compliance has mushroomed. Make sure that the franchises you shortlist offer you support in coping with this and that those running the brand are in touch with what happens on the ground in the franchisees’ stores. At Cash Converters, for example, our front-end support staff are in stores every day and the directors devote three days each month to visiting stores. This ensures that our expertise is available to guide the franchisees through any business issues they face.

4. Follow the recipe

When you sign up with a franchisor, you receive access to its business model, including the “recipe” for running your franchise. This forms a kind of safety net so you do not need to reinvent a wheel when setting up your business. But you cannot complain that the business model does not work if you do not implement it. This is one of those times when you must follow the recipe to bake the cake successfully. If you are not the kind of person who wants to do that, then think again about whether franchising is for you.

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