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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.

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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We Want To Invite You To Join Us On The Hi-Q Journey And Become A Franchisee

As the leader in the tyre replacement and service industry, we are invested in providing our network with the tools needed to thrive and grow in an ever-challenging market.

HI-Q

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Vital Stats

This is an invitation to all innovative entrepreneurs who are seeking new and exciting opportunities – here’s your chance to become part of a winning team.

As the leader in the tyre replacement and service industry, we are invested in providing our network with the tools needed to thrive and grow in an ever-challenging market.

The Hi-Q Way

  • Hi-Q’s been voted the 1 tyre retailer by South African consumers in the Ask Africa Icon Brands Survey from 2010 – 2017.
  • Over the years Hi-Q has established itself as ‘the one you can trust’, with customers, the network and suppliers.
  • Hi-Q prides itself on first-class service, a multi-product/multi-brand offering as well as ground-breaking product innovations such as TyreSurance on all tyre brands.
  • Hi-Q has an extensive network of over 130 franchisees
  • Hi-Q has the support of the Goodyear value proposition.

If you are looking to join a new franchise and you share Hi-Q’s values and vision, please get in touch.

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Puré Frooty Ready To Launch In South Africa

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.

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.

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.

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.

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. The business model revolves around a free-standing vending machine which needs to be visited to refill and maintenance. 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. 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.

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. 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.

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.

Related: SA Fast Food Franchising On The Rise

Everything is done with a computer which leaves little to no room for errors. It is self-order and very user friendly.

A vending machine which 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.

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