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Researching a Franchise

Researching Franchises by Numbers

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

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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.

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Choose A Job You Love, And You Will Never Have To Work A Day In Your Life

Join Col’Cacchio’s 26-year-long love story.

Col'Cacchio

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colcacchio-pizza-franchise-food

Vital Stats

  • Joining fee: R125 000
  • Monthly management fee: 6% of turnover
  • Monthly marketing fee: 2% of turnover
  • Total investment: approx. R2.5m to R4.2m (turnkey) Size: 140m2 to 350m2
  • Unencumbered cash (before loan): 50% of total investment

(Above figures exclude VAT) 

“Owning your own restaurant is like owning your own future.” – Dominic Dempers, Franchisee Durbanville, Belvedere & Meadowridge Cape Town

We’re looking for passionate franchisees who will love our brand as much as we do.

Why you should join this delicious success story

colcacchio-pizza-franchise-dessert

  • Assistance with site selection & lease negotiation
  • Store design & build
  • Full training provided for management and staff
  • Marketing & operational support
  • Product innovation & menu development
  • Efficiency in all systems
  • Healthy margins.

Related: 300 Business Ideas To Inspire You Into Entrepreneurship

#FoodwithaStory

“Our journey started with a single restaurant on the foreshore with the aim to serve the very best pizza around” – Greg Mommsen, Business Developer Director

“Watching this brand grow and empowering people has been immensely rewarding. We have staff that have been with us for over 20 years. It’s like a family, we work hard, we laugh, we cry, we celebrate and of course, we eat a lot of pizza.” – Michael Terespolsky, Founder and Managing Director

“Becoming a franchisee is an amazing opportunity to join the family and become part of the Col’Cacchio success story. We’re 100% behind out franchises at every step, making sure that we all continue to learn and flourish” – Greg Mommsen, Business Developer Director 

“It has been filled with challenges along the way, but all the rewards have made every moment worth it.” – Michael Terespolsky, Founder and Managing Director

Related: Got An Awesome New Business Idea? Here’s What To Do Next

Visit www.colcacchio.co.za or call Tarryn Godley on 084 800 7264 and let’s get this adventure going.

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Smoothie Franchise Opportunity: Puré Frooty Is A One-Of-A-Kind Smoothie Franchise Business

Looking for the next greatest franchise opportunity? Puré Frooty Smoothie is a highly perfected Australian business model launching in the South African market that doesn’t require extensive shop fitting or a large workforce.

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.

An Innovative Franchising Concept

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.

Why Consider This Franchising Opportunity

healthy-smoothie-franchise

Extensive research into the business model and market

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.

Simplified process for setting up a business

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:

  • Free-standing machines: The business model revolves around a free-standing vending machine which needs to be visited to refill and maintenance.
  • No shop-fitting required: 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.
  • Minimal human resources needed: 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.
  • Cashless business: 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.
  • Easy tracking of stock and performance: 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.
  • Efficient handling of maintenance: 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.
  • Human error is eliminated: Everything is done with a computer which leaves little to no room for errors. It is self-order and very user friendly.

Related: SA Fast Food Franchising On The Rise

Why Will Customers Love It

Puré Frooty Smoothie offers a vending machine that 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.

Interested in Becoming A Franchisee?

Visit our Franchise Info Page for everything you need to know about how to become information a Puré Frooty Smoothie Franchisee owner.

You can also call or write to us:

Phone / 012-942 6360
Email / info@purefrooty.co.za 

Want to know more about this franchise? Watch the video below for more.

 

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Researching a Franchise

4 Top Tips To Find Your Best Franchise Opportunity

The President’s recent Job Summit highlighted the critical need to reduce unemployment. The franchise sector employs 369 573 people, 93 percent employed by individual franchisees rather than franchisors.

Richard Mukheibir

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Several years of strong sectoral growth combined with business opportunities that are often backed by an investor safety net is making franchising the top choice for many who want to own their own business.  This assessment is based on the strong foundations of my own experience of establishing Cash Converters nearly a quarter century ago and the recent results of Franchise Association of South Africa (FASA) annual industry survey.

These figures show that the SA franchise industry has grown its turnover by 55 percent from R465 billion in 2014, when FASA conducted its first survey, to R721 billion in 2017. Alongside this, the sector’s contribution to South Africa’s GDP has expanded by 62 percent, from 9.7 percent in 2014 to 15.7 percent in 2017.

The President’s recent Job Summit highlighted the critical need to reduce unemployment and boost the national economy by growing business and stimulating job creation. The franchise sector employs 369 573 people, 93 percent employed by individual franchisees rather than franchisors.

Franchising can be a win-win for franchisees. It enables you to make your dream of running your own business come true as well as contributing to providing much-needed new jobs.

These factors make franchising a particularly attractive option for those wishing to start their own business. But with 865 different franchise systems active in the country last year, the huge range of choice can be confusing.

Related: Key Phases Of The Franchising Relationship

To prevent analysis paralysis and ensure you can get set to make the most of franchising, I can offer four top tips for selecting the best franchise opportunity for you:

1. Choose a credible brand

As you shortlist franchisors that appeal to you, go beyond what they tell you about themselves and find out about what people are saying about them. Do social media searches to find out how consumers are reacting to the product or service offered, pricing and customer service. Your franchise fee should buy you a halo effect thanks to your franchisor’s good reputation. Too much negativity around the brand will affect the potential success of your franchise, from your ability to attract customers and the turnover and profit you can hope to generate.

2. Look for a proven business model

A worthwhile franchise shares with franchisees the intellectual property it has developed over the years. It has created and grown this business model over time, knocking off rough edges and fine-tuning systems for mistakes as they become apparent. Check the brand’s news history online as well as its own sales material. Be wary of any franchise that claims to be perfect or invincible.

Nobody is – so either it has something to hide or it is fooling itself. Either way, such a brand is not keeping its eyes open to navigate the brand and its franchisees through the changing fortunes of business.

Related: Thinking Of Going Into Franchising?

3. Check the support systems

Getting relationships and systems right is vital in business success. They have become even more important since we founded Cash Converters nearly 25 years ago because the volume of legal compliance has mushroomed. Make sure that the franchises you shortlist offer you support in coping with this and that those running the brand are in touch with what happens on the ground in the franchisees’ stores. At Cash Converters, for example, our front-end support staff are in stores every day and the directors devote three days each month to visiting stores. This ensures that our expertise is available to guide the franchisees through any business issues they face.

4. Follow the recipe

When you sign up with a franchisor, you receive access to its business model, including the “recipe” for running your franchise. This forms a kind of safety net so you do not need to reinvent a wheel when setting up your business. But you cannot complain that the business model does not work if you do not implement it. This is one of those times when you must follow the recipe to bake the cake successfully. If you are not the kind of person who wants to do that, then think again about whether franchising is for you.

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