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Researching a Franchise

Making Sense of Franchise Fees

Buying a new franchise requires a considerable investment. Understanding the different fees involved can aid franchisees in making the right decision.

Chana Boucher

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After a long period of conducting research to find the franchise that suits your business needs and personality, it’s time to hand over a large sum of money. But how do you know if you are paying a fair price? And are you getting value for your money?

Franchisees need to take the operating costs into consideration when deciding whether or not to buy a franchise, but they should also look at what they are required to pay the franchisor upfront as well as on a monthly basis.

The upfront franchise fee

According to Anita du Toit, partner at Franchising Plus, with the Consumer Protection Act coming into being, a franchisor will be required to describe exactly how the upfront fee is allocated.

She says that in most cases a portion of it is a licence fee which allows franchisees to use the brand name and gives them access to the company’s intellectual property. Some of it covers the cost associated with start-up assistance, including project management or liaising with architects and builders. It can also be used for initial marketing support for the launch of the franchise, and the initial training.

Du Toit advises that franchisees ask what this training entails.

Bigger, established brands or franchises in lucrative areas charge higher fees and Du Toit says they have a right to do so, but should disclose the reason for charging the higher fees to the frachisee.

Vera Valasis, executive director of FASA, says franchisors have different views on the upfront fee. She explains that there are different models in that some charge an upfront fee, and some franchisors don’t charge an upfront fee or royalties but build commission into a product. She says the upfront fee is not related to goods in return as the amount depends on what brand you get into.

Claus Kuhl, managing director of Java Brands, says once a franchisee pays the upfront fee they are initially given a disclosure document. “Once they are approved as a franchisee they would receive a comprehensive induction session,” he adds. Kuhl explains that the upfront fees are determined by taking into consideration the costs associated with training, administration and project management. He says upfront fees are generally revised annually to ensure that they remain relevant and market-related.

Glenda Zvenyika, marketing communications manager for BP, says the upfront fee gives franchisees access to the business, in other words, the licence to operate a BP franchise as well as in-depth training on how to operate a BP franchise.

Ongoing franchise fees

In most cases, the franchisee is required to pay certain royalties to the franchisor for the various services provided. These are usually worked out as a certain percentage of the franchisee’s turnover, but can also be a fixed amount. “We dislike fixed fees. It doesn’t incentivise the franchisor to help the franchisee achieve better performance,” says Du Toit. She adds that it is also fair if the franchisor benefits as the franchisee grows, because they put a lot of effort in to make sure the franchisee is successful.

According to Kuhl, Java Brands’ ongoing fees are reviewed periodically but do not tend to change often as they are generally contained within a five year franchise agreement. Zvenyika says: “For a convenience store, the fees currently payable are 11%.” She explains that franchisees are essentially paying for use of the BP Express brand, including rentals as the layout and equipment are installed and paid for by BP. Further, she says a portion of their fees goes to marketing material and support, including through-the-line advertising support.

Management services fee

The management services fee is payment for services provided by the franchisor. This comprises general support services and having access to head office support. Franchisor support staff, referred to as field service consultants, should visit stores on a monthly basis. This should not only be done for quality control purposes, but also to discuss things like performance or local marketing opportunities.

Marketing fee

The marketing contribution is usually paid into a separate fund and used by the franchisor for national marketing campaigns, explains Du Toit. Valasis says in most instances, franchisors use this money at their discretion as they see fit.

“The owner of the intellectual property and know-how has the expertise so it is their decision how the funds are used. They can take advice from a franchisee, but the decision ultimately rests with
the franchisor.”

Other fees

Du Toit says some franchisors charge an admin fee, but this is usually if they perform certain functions for the franchisee like book-keeping. However, she explains that this is not the norm. This can be charged as a percentage or fixed, but should be cost-based for the franchisor to recoup costs.

Franchisors could also require franchisees to save up for revamps, which may happen every five years at renewal or when the brand and corporate identity is updated. Revamps can be draining if they are not provided for or planned, so some franchisors ask franchisees to contribute regularly towards them.

A trend in the US, which has been slow to take off in South Africa, is the charging of a renewal fee. “Franchisors have the right to do that, but it has to be noted in the disclosure document and franchise agreement,” says Du Toit. This fee is normally the same as the upfront fee at the time of renewal.

Do the research

Franchisees need to do thorough research before paying any money. Du Toit says franchisees should look for transparency from franchisors. Franchisors should clearly outline what a franchisee can expect for each of the fees. Franchisees can also look at what is market-related by researching what other franchises in the same sector are charging. “The question to ask is ‘what am I receiving for my fee?’”

According to Valasis, all fees should be in the disclosure document. She says the franchisee should have a clear breakdown of the fees as well as details on when they should be paid before they are required to put any money into the business.

Why should you pay?

While buying a franchise can be expensive and a percentage of turnover has to be paid to the franchise head office, buying into a franchise is buying into a proven business concept. “The market is already aware of the brand so you know you can achieve certain levels of profitability,”
explains Du Toit.

Further she adds that establishing and developing a brand from scratch is very expensive and potentially difficult for an individual.

“The negotiating power a group has will also get you better rates and prices from suppliers. It is a bit more expensive to buy a franchise than starting your own company, but your potential to succeed is greater,” says Du Toit.

Can you afford it?

Franchisees should not only look at the upfront and ongoing fees to determine whether or not they can afford a franchise. Franchisees are also required to cover the start-up costs, and some of this has to be money they already have.

“There is no such thing as a 100% loan,” says Du Toit. She says banks are more open to lending money to franchisees than start-ups, as around 80% of franchisees succeed. Banks are usually eager for the business and have dedicated franchising divisions. However, most banks want the individual to take some risk too, so most franchisees are required to contribute around 50% of the total investment as their own contribution. Du Toit says paying back a 100% loan is also not realistic; the business won’t have enough free cash available to service the loan.

When applying for a loan, if the upfront fee is more than R200 000, it is possible that the bank will question the fee and further research will need to be done to determine whether or not this is a fair price.

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Researching a Franchise

Maximise Your Social Media Reach This Holiday Season

Quick and cost-effective, social media is your best tool to reach target markets when it matters most – during the holidays.

Diana Albertyn

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It’s not just the end of the year that can be lucrative for businesses. School holidays and other major breaks during the year present consumers with more time to spend shopping. Why not ensure money is spent at your franchise by capitalising on the minimal cost and maximum exposure of social media?

You don’t have to create entirely new deals or promotions from what you may already have running on your store, but find a way to make it special for your social media followers, suggests Kelly Mason, marketer at Customer Paradigm.

Holiday campaigns on Twitter, benefitting from popular hashtags, streaming live content, and receiving information instead of just distributing it via social media are just some of the ways to stay ahead of the competition.

Related: Why Your Business’ Social Media Marketing Strategy Is Probably Wrong

Know your customers well

The first step to attracting customers and getting them to complete a sale is understanding their customer journey.

“Being able to document where they spend their time online, which social channels they use most, and what they’re reading or watching on those channels is a huge plus. Finding that crucial information is fairly easy to do, thanks to modern-day marketing tools and resources,” advises Paul Herman, ‎VP: Product and Solutions Enablement Group, at Sprinklr, a unified customer experience management platform for enterprises.

The better you understand your customers, the easier it is to reach them through a campaign optimised for their interests.

Master social listening

You could be using social media all wrong in the run up to all your holiday campaigns. Perhaps it’s time you used this platform to listen to your customers?

“Through social listening, marketers can identify major trends and product keywords in their industries,” says Herman. “For instance, knowing those keywords can help marketers identify which social platforms are more popular for a target audience. With that information, they can make smarter decisions about where to spend their money and which products or services to promote on each platform.”

Related: 10 Laws Of Social Media Marketing

Use the information gathered to determine what customers like about your product, what they dislike about it, and how you can improve upon it so they can buy more of it. The more of this data you collect, the better and more effective your interactions with customers will be.

Try something new

50% of consumers look for a video of the product they want to buy before going to an ecommerce store to buy it, according to a 2016 Google survey. “Video can be an extremely effective way to get your customers to take action – in this case, to make a purchase with your store,” adds Mason.

Video adverts are often used as an experimental tool in social marketing and switching it up on platforms such as Facebook Live, Instagram Live, Instagram Stories, or Snapchat – depending on your brand’s activity and your audiences’ interests – can help attract customers during seasonal periods.

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Researching a Franchise

Selling Your First Franchise? Consider These Key Pointers

You’re ready to franchise your business, but who do you sell to and how? Your first few franchisees may be the hardest to acquire, but the process will be smoother if you get some basics right.

Diana Albertyn

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Business experience gained running your independent brand will come in handy, but looking for franchisees is a different ballgame. “We have to attract the right people in enough numbers to make the difference; and, the key to more leads is to have a multi-prong strategy to marketing,” says franchise strategist and expansion expert Lizette Pirtle.

Using media (social, or otherwise), trained experts in franchise sales, and keeping in mind that whoever you sell to will become an extension of your brand, are important considerations before selling your to first franchisee:

1. Use (all) media wisely

Website marketing, print advertising and social media are just some of the many different ways to attract potential owners to your franchise. But the most cost-effect of the three may be a ‘tweet’ or ‘post’ away, says former Director of Marketing at the International Franchise Association and owner of Burris Branding and Marketing, Jack Burris.

Related: To Buy Into A Franchise Or Purchase A Licence? 3 Factors To Consider

“Three out of four people using the Internet are either on Facebook or LinkedIn or Twitter or all of them. Take advantage of social media,” he says.

“There’s typically no cost to play in the space except for the time that you need to invest to build your brand with a social media presence.”

2. Seek out franchise coaches or brokers

While this is a more traditional method of making reliable franchise sales, it’s a great way to form lasting associations that will take you beyond your first few sales. “Using broker networks is a great way to supplement your own efforts. However, you must spend time developing relationships with these people if you want to get results,” advises Pirtle. “Don’t think that just listing your opportunity with them is sufficient.”

Franchise coaches and brokers have multiple options for potential franchisees, so to put yourself high on their list of consideration when prospects enquire, you have to form memorable relationships.

Related: 3 Factors To Focus On When Opening Your First Franchise

3. Always consider the bigger picture

Out of all the people your marketing efforts attract, always keep in mind that few will check all the boxes and compromising could cost you in the long run.

“The franchise relationship is a long-term one. If you’re going to be successful as a franchisor, you should start with the attitude that every franchisee will be someone who you’ll have to live with for years to come. And nowhere is this philosophy more important than when awarding your first franchise,” says Mark Siebert, CEO of the iFranchise Group, a franchise consulting organisation.

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Researching a Franchise

3 Factors To Focus On When Opening Your First Franchise

To become a successful franchisee, there’s lots more to learn. Take notes and this will be an adventure still with its challenges, but less stress.

Diana Albertyn

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Experts and those who’ve gone through the launching, managing and successful running of a franchise will tell you that owning a franchise can be just as risky as owning an independent small business – and it doesn’t get easier after signing on the dotted line. But that doesn’t mean it isn’t worth giving franchising a shot.

“The hardest part of being a franchisee is learning and adopting all the processes that exist in the brand you’re buying into. But it’s important that a customer can walk into any franchisee’s property across the country and have the exact same experience,” says Jeff Chew, Pizza Factory franchisee.

With that in mind, remember the financial, emotional and physical investment you’ve made in this new venture and let it fuel your success, from before you even serve your first customer

1. Financial and intellectual wealth

Don’t buy into a franchise where you might be undercapitalised, advises Paul Durant, a Junk King franchisee.

Related: Expansion Funding Options For Your Growing Business

Keep in mind that running a new business isn’t challenging only mentally strenuous, but financially too, because you’re not always immediately profitable. Ensure you have enough runway for a few years at a loss or minimal profit.

“I did not do a thorough job in my initial research and discovery calls. I used a lot of my own assumptions and luckily they were fairly close,” recalls Durant.

“I would, however, suggest that you ask very detailed questions during the discovery process and listen carefully to the responses. Often what is not said is equally as important as what is said.”

2. Remember the purpose of the manual

The point of buying into the concept you’ve chosen is to ensure success based on a roadmap that’s already been drawn out for you. Straying from this plan unnecessarily is a shortcut to failure. This doesn’t mean you cannot make changes, but always ensure your growth is where it needs to be by following the system completely.

Franchisee Mark Arduino thought he was taking the advice he’d been given countless times: Just follow the system. But he quickly realised he wasn’t when all the franchise-specific training he’d been through was forgotten in favour of easier shortcuts.

“Then I realised my mistake. I came to see that it’s very user friendly. I’m sorry I didn’t use it from the start!” he says.

Related: How To Choose The Right Finance For Your Business Or Property Portfolio Expansion

If you think you have a better way of doing something detailed in the franchisee manual, do your research. Your decision should follow a discussion with your franchisor, then align to the business plan.

3. Learn at every opportunity

It’s great that you have previous experience in business. It’s a huge bonus that could put you ahead of other franchisees in your network. But, always be willing to learn and put your hand up or open a book if you’re not sure. A vast business background doesn’t guarantee automatic success as a franchisee, so be open to learning from others.

“I have learned more from two of the franchisees in my area than I could ever have imagined and I owe my early success in large part to their willingness to help,” says Jeff Steele, a CMIT Solutions franchisee.

It may sometimes seem like you can do it all on your own, but even when you feel you can do anything, you cannot do everything. That’s why you joined a franchise that (hopefully) offers good support structure.

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