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Researching a Franchise

The Search For An Opportunity

Ready to become a franchisee? Here’s what you need to know.

GG van Rooyen

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If buying an existing business doesn’t sound right for you, but starting from scratch sounds a bit intimidating, you could be suited for franchise ownership. What is a franchise — and how do you know if you’re right for one? Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor.

In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor’s system of doing business and sell its products or services.

Related: Franchising Mistakes You Need To Avoid

In addition to a well-known brand name, buying a franchise offers many other advantages that aren’t available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training on how to use it.

New franchisees can avoid a lot of the mistakes start-up entrepreneurs typically make because the franchisor has already perfected daily operations through trial and error.

Reputable franchisors conduct market research before selling a new outlet, so you’ll feel greater confidence that there is a demand for the product or service.

Failing to do adequate market research is one of the biggest mistakes independent entrepreneurs typically make; as a franchisee, it’s done for you. The franchisor also provides you with a clear picture of the competition, and the ability to differentiate yourself from them.

Finally, franchisees enjoy the benefit of strength in numbers. You’ll gain from economics of scale in buying materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms.

By comparison, independent operators have to negotiate on their own, usually getting less favourable terms. Some suppliers won’t deal with new businesses or will reject your business because your account isn’t big enough.

Franchise or Business Opportunity?

Business opportunities are less structured than franchises, so the definition of what constitutes a business opportunity isn’t easy to pin down.

In essence, a business opportunity is any package of goods or services that enables the purchaser to begin a business and in which the seller indicates that they will provide a marketing or sales plan, that a market exists for the product or service, and that the venture will be profitable.

Here are other key factors:

  • A business opportunity doesn’t generally feature the seller’s trademark; a buyer will operate under his or her own name.
  • Business opportunities tend to be less expensive than franchises and generally don’t charge ongoing royalty fees.
  • Business opportunities allow buyers to proceed with no restrictions on geographic market and operations.
  • Most business opportunity ventures have no continuing supportive relationship between the seller and the buyer; after the initial package is sold, buyers are on their own.

The Pros

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The greatest strength of franchising is its ability to bring independent retailers together using a single trademark and business concept. The benefits of this affiliation are many: Brand awareness, uniformity in meeting customer expectations, the power of pooled advertising and the efficiencies of group purchasing.

For the individual owner, there are several advantages to franchising. The ever-present risk of business failure is reduced when the business programme has already proved to be successful in the marketplace; the use of an established trademark saves the business owner the cost of creating and advertising a name that customers will recognise; and the advantages of group advertising and purchasing make operations more profitable.

Related: Alternatives To Franchising

In addition, ongoing training creates an instant operational expertise that would otherwise need to be acquired through trial and error. Also, with franchising, expansion seems to come more naturally.

Operating a successful franchise may quickly lead to building a second and then a third business, and so on. Fortunes have been built this way.

The Benefits

  • Reduction of risk
  • Turnkey operation
  • Standardised products and systems
  • Standardised financial and accounting systems
  • Collective buying power
  • Supervision and consulting readily available
  • National and local advertising programmes
  • Point-of-sale advertising
  • Uniform packaging
  • Ongoing research and development
  • Financial assistance
  • Site selection guidance
  • Operations manual provided
  • Sales and marketing assistance.

The Cons

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Franchising, however, is not for everyone. Fiercely independent entrepreneurial types (you know who you are) may chafe under the strict operational requirements and specifications of a franchised business. If things have to be done their way, you may want to head in another direction.

Also know that some franchise systems are better than others. A weak franchise programme will not train you well to handle the challenges of the business, will not do a good job of assisting you when problems arise, and will not make the best use of your advertising dollars.

The Downside

  • Loss of control
  • A binding contract
  • The franchisor’s problems are also your problems.

If you’re considering buying a franchise, don’t let wild expectations influence your decision. While franchising is designed to put people into business who have never owned a business before, the excitement of ownership can create an impulse to move forward without proper planning.

If you rush headlong into buying a franchise expecting to boost your current working salary, but the earnings don’t allow you to pull out more than half your former salary, you will be one unhappy camper.

Work with a good accountant to prepare a cash-flow projection for the business before you take the plunge. Know how long it will take to break even and turn a profit, as well as the amount you’ll realistically be able to pay yourself.

Associated Costs

In terms of capital investment, your franchise fee will be determined by the profitability of the business. Most companies have a scale when it comes to franchise fees. They can have varying ranges, anywhere from R10 000 to R500 000+, depending on the size of the system.

Related: Signing Up With An Emerging Franchise

In addition to this front-end franchise fee there is, the one-time fee that a franchisor charges you for the privilege of using the business concept, attending their training programme, and learning the entire business. There will also be an ongoing royalty fee, typically ranging from 2% to 10%, or a monthly figure.

Some of the other costs associated with a franchise include:

Facility/Location

In some cases, you may also have to buy land or a building, or you may have to rent a building. If you rent a building, you’ll be responsible for not only the monthly lease but for the one-time deposit as well. In addition, you’ll have to pay for leasehold improvements. In some cases, the owner of the building will put these in and factor them into your rental, probably charging you a small additional fee.

Equipment

Different types of businesses will need various pieces of equipment. There are generally long-term payments available for most equipment purchases. Fortunately, most banks will provide loans for equipment because it also serves as collateral.

Signs

Outside signage can be very expensive for the small-business owner. Most franchisors have developed a sign package that the franchisee is obligated to purchase.

Opening Inventory

This will usually consist of at least a two-week supply, unless you’re in a business that requires a much more complicated inventory. Most franchisors will tell you what their opening inventory requirements are.

Related: How To Choose The Right Franchise

Working Capital

For rent, you may be required to deposit the first and last months’ payments as well as a security fee. You’ll need some working capital and money in the cash drawer to make change.

You’ll need money to pay your employees. You’ll need money just to operate until there’s a cash flow. If you’re buying a franchise that relies on charge accounts, you’re going to have to allow yourself some additional capital before the bills are paid by the customers and returned to you.

Advertising Fees

There is usually a fee for advertising on a regional or national basis. Larger franchisors often require their franchisees to pay a certain amount into a national fund used to advance the concept. The upside is the benefits are quite substantial in terms of the visibility you get with the type of advertising that most franchisors do.

GG van Rooyen is the deputy editor for Entrepreneur Magazine South Africa. Follow him on Twitter.

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Company Posts

How To Become A Hi-Q Franchisee

Are you looking at investing in a tyre replacement and service industry? Look no further than the Hi-Q franchise.

HI-Q

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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.

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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.

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

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.

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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

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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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