Everything you need to know if you plan on buying a franchise in 2
The results of the Franchise Association of South Africa (FASA) franchise survey released last year revealed that the franchise sector continues to be a major player in the South African economy with steady growth shown despite tough trading conditions.
It is for this reason and many others including the model being considered a lower risk model as well as the additional support offered that the sector considered to be sought after.
While franchising may have its advantages, there are still some key factors to consider before taking the leap.
We take a look at 6 key lessons you should know if you considering buying a franchise this year.
A key first step to buying a franchise is to understand the capital outlay required as well as ongoing franchising fees.
The capital investment for setting up a new store can range from a few hundred thousand Rand to millions, depending on the franchise you wish to enter into, this is according to Jeremy Lang, regional manager at Business Partners Limited.
“This investment would go towards buying assets such as equipment, furniture and fittings, as well as the franchise fee which is generally a once off cost,” says Lang.
Wouter Fourie, The Financial Planning Institute‘s financial planner of the year for 2015/2016 cautions potential franchisees to look out for clauses that might require them to remodel or refurbish the kitchen or front store every five years.
“The franchise agreement should also contain clauses indicating if the franchisee or franchisor is responsible for entering into the rental contract for the premises,” he says.
It’s also important that franchisees be aware of the ongoing costs and how would this impact on profitability. These may include “Labour, rent, franchise fees (royalties and marketing) and finance costs make up the major expenses in a franchisee’s business,” says Wouter.
Every new franchise enterprise will require specific equipment, which can contribute greatly to startup costs. Even established franchises may find themselves needing new equipment if the existing one breaks down.
Buying equipment can place a major burden on a business’ cash flow, says Toni Fritz, head of Vehicle and Asset Finance Business at Standard Bank, which is crucial for a business’ survival.
“When times are tough, paying out hard-earned cash for operational necessities is often not an option. Financing is then, the only realistic solution. However, how you raise the money and what the final cost will be to you, should be carefully considered before you commit yourself to a loan,” says Fritz.
See also: Movable asset finance in a nutshell
Fritz offers advice for franchise owners to secure that much needed asset financing, includes considering the value the equipment will bring, checking the projected lifespan of the equipment and scrutinizing the repayment conditions carefully among others.
While franchisees may have limited scope to implement innovation – it is still possible says Morne Cronje, head of FNB Franchise.
“One way to set yourself apart from the pack and to always stay ahead is to innovate. If you stagnate, your business will fall behind and will most probably not be a success,” he says.
Despite franchisees often being required by their franchisors to follow specific policies and procedures, Cronje offers some ideas for franchisees to still be innovative within their limitations.
Cronje suggests marketing and the use of technology as some of the areas in which franchisees can implement innovative solutions. However, he cautions franchise owners to ensure that they get a return on investment to compensate for their efforts and the additional risk.
In the current economic climate, there is no guarantee that your franchise will succeed even if you are buying into a trusted and well-known franchise brands.
“The days of buying into the right brand and expecting automatic success are long gone; franchising is an active investment and should be owner operated with the franchisee committed to achieving profitability by growing the business personally,” says Cronje in the article, 5 basic franchising know-hows.
To succeed, franchisees must use all the personal tools available to them, says Cronje from ensuring that you are doing what they love, evaluating the reasons why they want to buy the franchise, practising patience and being realistic about the associated costs of establishing a franchise.
Prepare for the hybrid customer, that is customers who shops both online and offline. It is critical that businesses in the franchising sector fully understand the hybrid customer, says Cronje in the article How franchise brands can bridge the gap between their online and offline customers.
“To service a hybrid customer is like having two companies at the same time because you’ve got to run a virtual and a physical store, which in the end could be costly for the franchisee and franchisor. Retailers could be reluctant to service hybrid consumers who shop both online and offline, but if we fully understand these customers, it could be a profitable experience,” says Cronje.
Cronje says franchisees must connect with their customers on social media and their website offerings. He however cautions that it is important to ensure that franchisees are delivering a consistent message on both platforms.
In Absa Bank’s new franchising book, Principles of Franchising: A step by step guide to the world of franchising, industry expert Kurt Illetschko explains how franchise owners should put together an exit strategy.
This advice is for franchisees who at some point may want to leave franchising to explore different business opportunities or even retire. Having a succession and a viable exit plan before setting up the business can help franchisees to avoid problems later on, he says.
The main factor to consider is a smooth transfer of the business to ensure minimal operational disruption, says Illetschoko.
One of the key considerations is for the exiting franchisee to determine if they are going “to appoint a manager, hand control of the business over to your children, or sell the business and make a capital profit. Setting a timeline is also helpful for everyone involved,” he says.