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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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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.

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.

HI-Q

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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.

tyresurance-visual

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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