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Researching a Franchise

Is The Price Right on Your New Franchise?

How to determine whether a franchise is a good deal or overpriced.

Jeff Elgin

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IsThePriceRight

There’s an old saying that “beauty is inthe eye of the beholder.” It has been my experience that “value” is likewisedefined by personal perception.

Value is often brought up by prospectivefranchisees, who commonly ask, “Is the price right?” or “Is the franchise tooexpensive?” or “How do I know what the true costs are in a franchise?” Thesequestions cut to the heart of one of the key factors in making a decision abouta franchise business: whether or not the fees and costs that must be paid to afranchise are fair, reasonable and appropriate.

Let’s start with the last question first.You should have a big advantage with a franchise, because the norm is forfranchisors to disclose all fees and costs in their disclosure document, whichthey must demand prior to any purchase. This document breaks down theinformation you need. Because the franchising sector is not yet regulated by specificstate imposed legislation you will be best advised to follow up on the accuracyof details in the disclosure document by way of your own in-depthresearch.  

Some of the most typical costs and feespaid to the franchisor (or to direct affiliates of the franchisor) include:

InitialFranchise Fees

Most franchise companies require a newfranchisee to pay a one time initial fee to become a franchisee. This fee canbe as low as R100 000 to R150 000 or as high as the sky – in some cases wellover R1 million. The average or typical initial franchise fee for a single unitis about R200 000 or R350 000.

Royaltiesor Ongoing Franchise Fees

Franchisees usually pay an ongoingfranchise fee or royalty. This fee is normally expressed as a percentage of thegross revenue of the franchised business but can also be a fixed periodicamount such as R5 000 per month, regardless of revenue. The average or typicalroyalty percentage in a franchise is 5% to 6% of volume, but these fees canrange from a small fraction of 1% to 50% or more of revenue, depending on thefranchise.

MarketingFees

Franchises often require participation in acommon advertising or marketing fund. This fund is frequently a nationalprogram, but it can also have a regional or local market focus. As with royaltyfees, this can be a fixed contribution, but is more often a percentage ofrevenue in the 1% to 4% range.

RequiredPurchases of Products or Services

Some franchisors also require that afranchisee purchase certain required products or services either from thefranchisor or from affiliated entities of the franchise company. The thing towatch for in this situation is whether the pricing is competitive or not.

Other

There are no other typical or common feesor costs, so if you see anything else in a franchise disclosure, check it verycarefully to make sure it’s appropriate.

The franchisors’ disclosure document willlet you know what these costs and fees are. The other question about whetherthese costs are reasonable is more difficult to answer, because it involves aperception of value. The secret to answering this question is to focus on theglobal picture of the opportunity from your perspective rather than the detailsof any specific fee or cost.

As an example, let’s suppose we’re comparingtwo franchise opportunities, A and B. The total investment required for each isan identical R1,5 million, including initial franchise fee and all other costs.We determine from our investigation that the typical franchisee in A is makingan average profit, after all expenses, of R200 000 per year in their business,whereas the typical franchisee in B is making an average profit after allexpenses of R5 million per year.

In examining the disclosure documents forthe two opportunities, we further learn A has an initial franchise fee of R10000, a royalty fee of 1% and no other costs. Franchise B has an initialfranchise fee of R1 million, a royalty fee of 25%, a marketing fee of 10% andfurther requires the franchisee to purchase required supplies for theirbusiness at what we’ve determined is a 1 000% mark-up – well above competitiverates for comparable supplies.

Which is the better opportunity? Whichdelivers better value to the franchisee? Which is more fair and reasonable inrelation to the fees and costs that they charge? In this example, most peoplewould identify B as a far better opportunity, in spite of the fact that itsfees and costs are dramatically higher than A. This is because, from thefranchisee’s perspective, it offers a much greater return.

The fees and costs that go to the franchisecompany are what they are. The true test of value is what goes to thefranchisee.

That said, there’s one caveat that everyprospective franchisee must be aware of. Occasionally, franchises have averagereturns far outside the range that would be considered normal for a business toproduce. These situations are rare, and they typically don’t last for long,because extraordinary returns tend to attract a huge number of competitors veryrapidly.

If you see an opportunity that looks like Bin the example above, you should be wary about how long these types of returnsmight last. If the business follows form, it will soon attract competitors andexperience pricing pressures that will bring the margins way down. B is notgoing to look very good, with these extraordinary costs and fees, if therevenue starts a rapid downturn. This very dynamic has happened in the past 25years of franchising in the USA in what were booming sectors such as videorental, diet and fitness centres and speciality foods to name a few.

A standard formula for calculating areasonable distribution of business proceeds is one-third of the averagepre-tax profit margin (before any franchisor fees or costs or any franchiseecompensation) goes to the company and two-thirds to the franchisee. If, forexample, the net margin is 21%, then the total of all royalty and other feesshould be no more than about 7%. This formula may or may not seem fair to you,but you will find that many of the most successful franchise opportunities seemto stay very close to this formula.

You should never enter into a franchiseagreement if you don’t feel the fees and costs you’re required to pay thefranchise company are fair and reasonable. Rather than focusing specifically onwhat is going to the franchise company, though, make sure your focus is on whatis coming to you, and then you’ll know if you’re paying the “right price.”

Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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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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colcacchio-pizza-franchise-food

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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Company Posts

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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franchise-opportunity

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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