There are many reasons people decide they want to acquire their own franchise business – and each of these reasons involves a variety of considerations. In the mind of most people contemplating such a decision, however, there is one overriding factor: money. If you’re considering buying a franchise, you should be asking yourself a number of significant money-related questions. Here’s what we consider to be the ‘Top 10’.
|1. How much total investment will this franchise require?|
This is a key question, since the franchise agreement normally expresses this information in terms of a very large range of possible answers. In your calls to existing franchisees, and your research concerning your local market, narrow down these answers to provide as accurate an answer as possible. If you aren’t completely sure, err on the high side.
|2. How much will I need in operating capital reserves to cover losses after opening the franchise until it reaches the break-even point in terms of cash flow?|
You’re not going to have any customers or revenue on the morning of your first day in your new business, but you will have expenses. Until your revenue grows enough to cover these expenses, you’re going to have to feed additional cash into the business to pay the bills. Make sufficient allowance for this factor in your plans and, when in doubt, guess high. No one has ever gotten into trouble on a new business start-up because he or she had put too much in financial reserves.
|3. How much extra cash do I need to cover living expenses while I’m starting my franchise?|
This is one of the critical areas many new franchisees fail to consider. After becoming a franchisee, there’s a gap in time before your new business begins operation and typically another gap before it starts making enough profit to cover your living expenses. You need to carefully budget your living expenses to understand how much you’ll need on a monthly basis and then make sure you’ve got sufficient cash – in addition to your business investment – to cover your expenses during this period. Then add a significant reserve on top of this amount – it’ll help you sleep better at night.
|4. How long will it take my new franchise to reach break-even?|
This is one of the most important money-related questions you’ll need to answer. It’s no fun to feed extra money into a business to cover operating losses, but that’s the reality in most start-ups. You’ll normally find the answer to this question is a potential range of time for the franchise you’re considering. Always plan that it’ll take the longest time within this range to reach break-even, so you’re as safe as possible.
|5. How much of my total investment (including capital reserves) do I need to have in cash?|
This answer can range from 0 to 100%, depending on the franchise business being contemplated. There’s no right or wrong answer – just make sure you know what applies to you and that you easily have that amount of cash on hand.
|6. What standard financing options exist for me?|
The most common forms of standard financing are bank loans and/or commercial leases. Any bank loan to start a new business will probably have to be secured by your personal collateral (such as the equity in your home). Most new franchisees find that securing an open line of credit against their home equity is the easiest and least expensive form of bank financing available to them. Leases can also be a favourable option, since they are typically fast to procure and secured by the assets that are being leased (though they sometimes require a personal guarantee as well).
|7. What alternative financing options exist for me?|
In addition to standard sources, there’s always the standby financing source: family and friends. There are also a number of companies that assist people in accessing retirement money, without early withdrawal penalties, to use as a funding source for a franchise business.
|8. How much money can I make in this franchise?|
You will normally find the answer is related to the amount of time the business has been open. The first year will probably be a loss, but by the third year the business should be making good money. Ask a lot of existing franchisees about their experience at these levels, and make sure you know what your probable income will be by the time you complete that critical third year.
|9. What are the ranges in financial performance of the existing franchisees?|
Don’t stop your research until you are completely confident you know both the high and low end of the range. Two answers are not sufficient to establish a range you can have confidence in – 10 or even more would be much better.
|10. How financially strong is the franchise company?|
The franchise company is required to provide you with a copy of their audited financial statements in the disclosure document. You obviously want to work with a franchise company that is strong enough to survive, but also has the resources to reinvest in training and support of the franchisees. Review their financials and ask for help from a competent advisor if you’re not comfortable doing this yourself.
You should know the answer to each of these questions before you decide to invest in any franchise opportunity. If you do, you can minimise some of your concerns about money as you build your new business.
The Future Of Franchising Looks Smaller (And Fancier)
Franchises are adding smaller locations and reduced menu options, as niche markets emerge, to attract the customer of the future.
As the owner of a thriving franchise, you’re well aware of the fact that fluctuations in the world economy has both negative and positive effects on business. When it comes to your successful franchise, tough times could mean adopting new trends or seizing gaps, potentially resulting in a new franchise concept you wouldn’t have otherwise thought of.
“The buzz word in global franchising is ‘flexibility and adaptability’,” according to the Franchise Association of South Africa (FASA). “Whether a result of a need to inject some life into stagnant franchise brands or as a result of the new world order brought about by the recession, franchising is embracing alternative and options in a big way.”
You can do this by either devising innovative areas to franchise or allowing more flexible ways for franchisees to operate to help with their bottom line. FASA has earmarked these as some of the biggest franchising trends in 2018 and beyond:
Smaller, more cost-effective franchise models
When franchisees don’t have high franchise fees and start-up costs to worry about, they can focus more on what customers want, and deliver. The added benefit of smaller spaces include having fewer employees and reasonable rental.
Among the new frontiers in franchising are the food court losing its legacy as the preferred setting for food franchises, as service stations increase in popularity in the industry. A number of brands – like Steers, Debonairs and Mugg & Bean On-the-Go outlets – are co-locating with major fuel retailers to create fully-integrated accessible centres.
Niche markets are offering one-of-a-kind franchises
“The opportunity to get in on the ground floor of a new franchise trend is also on the rise,” notes FASA. This could be offering a unique gourmet food experience in your outlets or a ‘green’ space of energy saving technology in your operations.
“Consumers have gained control of what they want,” says Morné Cronjé, head of franchising at FNB Business. “It is no longer about what you have on the menu, but how your product or service can be tailor-made to what a customer really wants.”
Founded just five years ago (2013), RocoMamas boasts over 60 franchise outlets, clearly responding to the essence of this trend –allowing consumers to build their own burgers without having to pay for items they’d rather leave out.
Stay ahead of the game
For long-term success, franchisors who want to expand their business should start exploring beyond present circumstances and current predictions.
“2018 will no doubt bring its challenges, however for every challenge there is a window of opportunity to explore. We are advising franchisors to scrutinise these trends carefully, it can definitely give them a boost for 2018,” says Cronjé.
As Consumers’ Tastes Change Can Your Franchise Keep Up?
More of your customers are eating in, and if you’re not packaging, portioning and pricing your food accordingly, they’re heading to a retailer that does.
It’s generally believed that it’s cheaper to cook your own breakfast, lunch or supper than to go out and pay a much higher price for the same food in your fridge at home. But today’s consumer’s live fast-paced lifestyles – so food is becoming more about convenience.
31% of 6 022 middle-to-high income South African earners surveyed by BusinessTech, put eating out and entertainment at the top of their list of things they’re most willing to cut their spending on in 2018 to save money. Research by supermarket giant Pick n Pay correlates, reporting an increase in customers buying quality convenience food, not just to entertain at home, but for dining at home.
Consumers are empowered by variety
You’ve heard about the ‘fast casual generation’, aka Millennials? They are demanding healthy, affordable eating experiences. But do you know how this affects the future of the food industry, and your business in particular – because they’re not the only ones adapting their lifestyles.
An increasing number of food brands and chefs are compelled to create complete ranges of new, convenient meal options that are not only packaged, portioned and precooked attractively, but affordable too.
The fastest growing sector of retail foodservice for the past four years has been the convenience store sector. Non-traditional avenues of distribution are growing, gobbling market share while establishing new patterns of consumption, price points, and customer loyalty.
Shoppers are becoming value-focused
A savvy franchise would acknowledge that although pre-packaged and pre-cooked convenience food isn’t a new trend among consumers and supermarkets, it is gaining popularity. “Some of the most notable trends in 2017 were an increasing shift to convenience foods as customers looked for both value and convenience,” says Pick ‘n Pay’s Head of Marketing, John Bradshaw.
Value for money and healthier food choices will continue to be top of the convenience food list for consumer in 2018, as more shoppers cut down on luxuries.
“We’ve seen significant growth in the number of customers looking for an easy way to enjoy a good meal without the cost of eating out,” says Bradshaw.
But he cautions that South African shoppers have always been value-focused, and while the most significant shift Pick ‘n Pay has seen is how all its shoppers, no matter what their income levels, are watching their budgets.
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.
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.
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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