Everything You Need to Know About Starting a Business in the Franchising Sector
Where do you start if you want to be a franchisee?
The franchise sector continues to be a lucrative one in South Africa. The franchising sector has an estimated turnover of R721 billion equivalent to 15,7% of the total South African GDP with one in three franchisors claiming that their annual turnover exceeded R20 million, the recent survey of the Franchise Association of South Africa (Fasa) reveals.
Another finding in the Fasa survey says that within the first year of operations, it is expected that 47% of new franchises will break even.
If you are looking to take advantage of the opportunities this presents you have to do your research. What are the estimated costs to run a shop? How many people will you have to employ?
We answer these questions (and more) and tell you what you need to take into consideration if you are thinking about opening a franchise:
How to choose the right sector and franchise
Riaan Fouche, the Chief Operations Officer of Franchising at FNB Business, suggests that if you’re thinking about going into franchising, you should think about what your likes and dislikes are. “For instance, do you like working with people, would you consider working hours up to 4am in the morning to close shop? Also, what is available from your side in terms of skills.
“Once you are sure you’re going into a type of franchise industry, identify at least five franchises that you would like to be part of.”
According to Fouche, the most popular [franchise] industries they’ve seen are, firstly the retail market, secondly the fuel and oil, thirdly the restaurant and fast food industries. He says there is great potential in the health and beauty industry, as well as the communications industry.
Other sectors to consider include the automotive, education, eye care, building and building supplies.
According to the Franchise Association of South Africa’s latest franchise survey, sponsored by Sanlam, franchisees experience five main challenges, namely: the poor economy, creating good customer relationships, offering consistent good service, finding the right staff and growing the customer base.
Another challenge is facing franchisors is finding the right franchisees followed by the difficulty in getting finance to start a business.
Start the process with the franchisor
Fouche explains the process of interacting with the franchisor. “You will be interviewed by a franchisor and be required to provide information to the franchisor. Once they are happy with you, you’ll get a copy of a disclosure profile document from the franchisor.”
The disclosure document
Fouche explains that the disclosure profile document gives you the background of the franchise. “You’ll also get a list of franchisees who part of the franchise and you can call them up (as part of research) and ask questions about the franchise before deciding whether you’re going into this venture.
“Once you have the disclosure profile document, the franchisor cannot make contact with you for a certain amount of days, because this is the time you can do research about the franchise,” says Fouche.
Sealing the deal
Fouche explains that if you (the potential franchisee) is happy, you can get a franchise agreement from the franchisor. “This document will give you details of the site, it will give you a comprehensive cost and a cashflow projection, also the typical expenses of the franchise.
“This document is what we (the bank) will need. The bank will decide whether we want to be part of this.”
How to get a bank interested
According to Fouche, they (banks) look at affordability. This applies to how much is the client going to put into the business, and how much will you pay back. The franchisor agreement tells you what you are getting yourself into.
Fouche explains that to apply for a loan for the franchise at the bank, you need an approval letter from the franchisor, your personal details like the statement of assets and liabilities (or balance sheets), a business plan from their side, curriculum vitae of the individual (short), a comprehensive set up cost, and a cash flow projection for at least three years.
He adds: “Normally the franchisor assists the franchisee with all of the above. It’s also important for potential franchisees to show what their contribution will be – what will you bring within the business?”
What it takes to be viable
Fasa’s survey says that with most independent businesses having a 90% failure rate in the first two years of being in business, the average number of years franchisees are in business has remained consistent at 10 years – with 36% in business for more than 10 years and 67% for more than 5 years.
Fouche advises that to make your business viable, you should be directly involved in the franchise. “You should have the franchisor supporting you, manage your costs effectively, and marketing is also an important part in making a good turnover.”
He warns that mistakes he’s seen franchisees make when running their businesses include overcommitting themselves, not doing proper homework with what their brand is about, substituting salary – taking too much out of the business, and thinking that the cash in the till is the profit – you must pay salaries, rent and resources.
Another challenge is the owner not operating the business himself and putting a manager in place while he is working at another job.