Connect with us

Researching a Franchise

Researching Franchises by Numbers

How to understand and use a franchise’s financial statements to make a well informed investment decision.

Entrepreneur

Published

on

ResearchFranchiseByNumbers

Many individuals, when they first consider making an investment into a franchise, assume that every franchisor must meet stringent financial requirements before they can market their franchise opportunity. To the contrary: With the exception of those franchisors who are members of the Franchise Association of South Africa (FASA) and adhere to its best practice code of ethics, no government entity regulates franchising in South Africa, therefore opportunities on offer to prospective investors go unchecked. This means that financially weak companies may still be able to offer franchises.

In other words, you need help. For the unsophisticated investor or the person who does not engage the services of a chartered accountant as part of their franchise opportunity review team, the lack of any fiscal quality control over the offering of franchises could cause significant problems. When you invest in a franchise, naturally you hope the franchisor will remain in business for as long as you are a franchisee and quite a bit longer. The franchisor promises to provide you with services that help you get the business up and running, as well as those you need throughout the life of your franchise. These promises were part of the written bargain contained in the franchise agreement. Often the franchisor will exceed its written obligations; in fact, many franchisors do. Some of the most satisfied franchisees are those of systems where the franchisor under-promises and over-delivers. These franchisees often cite the additional services as the reason they recommend the franchise to others.

Unless the franchisor is financially sound, continually growing the number of domestic locations in the system each year, improving profits at the franchisor level and increasing unit sales and profitability of the franchisees, it may not be able to meet either its written obligations or provide some of those other services franchisees have come to depend on. Indeed, unless the franchisor is profitable and growing, they might not be there for the long haul, and the entire system – including your investment – will suffer. Keep in mind that the system is really only healthy when the franchisor is financially strong. Therefore, you must look closely at the franchisor’s financial statements and get an understanding of whether the franchisor can provide the services you’ll require.

Before making an investment it is advisable to request the following financial information on the company, including:

  • A balance sheet for the past two years
  • A statement of earnings for the past three years
  • A statement of cash flows for the past three years
  • A statement of stockholders’ equity

The financial statements should be audited by an accounting firm and contain extensive notes that provide explanations about the franchisor and its financial condition. When you examine the financial statements and notes in conjunction with the disclosure document and other information you obtained during your due diligence, you’ll start to get a clear picture of the strength of the franchisor and your risk in becoming a franchisee in that system. The first thing you should look for in the financial statements is the opinion letter from the auditors. Does the letter indicate any ongoing concern or other issues? Look at the balance sheet – what is the franchisor’s net worth? Can it meet its obligations? Are its liquid assets sufficient to meet not only its current obligations but, more important, those obligations it’s making to you?

Look at the franchisor’s statement of earnings. Even if the company is profitable and has improved earnings over the three years shown, look closely at where it’s getting its income. If the majority of its earnings are coming from franchise sales, verify that the locations generating those franchise fees are actually opening as scheduled. Look at the income from royalty and other continuing fees. Are they increasing each year? If the locations that generated the franchise fees are not opening, and the royalty income is not increasing, you have a clear indication that something may be amiss or that the company’s long-term viability is questionable. Is a significant portion of the revenue coming from the sale of franchises locally or overseas?

Frequently, franchisors don’t break out the details of where their revenue comes from and may simply list the information as “Franchise Fees.” Ask the franchisor for a breakdown of that figure. It’s important that you see a progression of increasing revenue from royalties and other continuing sources of income.

Some franchisors can readily provide the breakdown to you. If they can’t or won’t, you or your accountant should estimate that information by multiplying the franchise fee by the number of new locations in the system, adjusted for any changes in the deferred income from the balance sheet. When that product is subtracted from the Franchise Fees line on the income statement, you’re generally left with a rough estimate of the continuing royalty income. The notes to the financial statements will generally provide you with additional information about various line items in the financial statements. Knowing what to look for is key to identifying whether the franchisor will be there for the long haul.

Do you need an accountant to work in conjunction with you and your lawyer in examining the franchise opportunity? The short answer is yes. Most important, you need an accountant who understands how to examine a franchise system’s financial statement. Some may not understand the nuances of a franchisor’s financial statements, as much of the value in the assets of a franchisor don’t appear on their balance sheet. Why? Because the bricks-and-mortar assets are on the franchisee’s balance sheets. The franchisor’s asset is the future royalty and other income streams that will occur as the franchisees prosper and send their payments to the franchisor.

Even mature franchisors occasionally get into financial difficulties; some have even failed. If you take your time and do a thorough review of a franchisor’s financial and other information, you can limit your risk considerably.

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

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

Published

on

By

grosvenor-crossing-hiq

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

Continue Reading

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

Published

on

property-franchising

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?

Continue Reading

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

Published

on

benefits-of-the-franchise-model

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.

Continue Reading
Advertisement

SPOTLIGHT

Advertisement

Recent Posts

Follow Us

Entrepreneur-Newsletters
*
We respect your privacy. 
* indicates required.
Advertisement

Trending