Last month we posed the question, “Will Your Franchisor Grant You A Franchise Again?” looking at it from the franchisor’s perspective. This month we are putting the shoe on the other foot and asking the question, “Will Your Franchisees Invest In Your Brand Again?” looking at it from the franchisees’ perspective.
Remember when you granted your first franchise and the excitement that followed confirming that a franchisee was willing to invest in your concept, your brand! The enthusiasm, so many ideas, the opportunity, being a true franchisor and probably many more positives.
Unfortunately for some franchisors this honeymoon period ends and for some sooner than others. As a franchisor, you need to constantly be asking yourself:
Do I consistently provide the back-up support that I promised my franchisees?
Do I have systems in place to know what’s happening in my franchise network?
Do I consistently advertise and market my brand for my benefit and for the benefit of my franchisees?
Do I provide effective initial and on-going training?
Are my franchisees getting value for their Management Services Fees?
Do I utilise the Marketing Contribution Fees effectively to build the brand?
Do I live the philosophy – “My franchise network is only as good as my worst performing franchisee”?
Am I assisting my franchisees to build their franchises into valuable assets?
Am I constantly being innovative to maximising the opportunity?
In hindsight – do you think that your franchisees will invest in your brand again?
Remember your franchisees are your best salespeople – or your worst nightmare!
Entrepreneurs venturing into new business opportunities continue being attracted to the tried and tested franchising concept, which can withstand the harshest economic circumstances.
Andre Beck, Sector Head: Fast Food and Restaurants at FNB Business, says amongst all the franchise sectors, restaurants and fast foods continue to dominate market share due to increasing demand from consumers.
That said, despite the significantly lower failure rate of fast food franchises compared to other businesses, there are important factors that entrepreneurs should consider to increase their chances of success.
He unpacks essential questions an entrepreneur should ask when investing in a food franchise:
Is the brand widely recognised? – competition for market share amongst fast food franchises remains high, with some brands outperforming others. Well-known and established brands are more likely to guarantee success, with the only barrier to entry being premium franchise costs.
Is it a healthy brand? – consumers have become conscious about adopting healthier lifestyles, and prefer to support outlets that promote healthy food choices in their stores.
Are the products affordable? – while food franchises often perform well in tough times, they also tend to experience a decline in sales as some consumers cut back on luxuries and eating out when disposable income is under pressure. As a result, entrepreneurs should consider the location of the franchise and whether their target audience will afford their products.
Can the business survive seasonal lows? – some franchise brands experience seasonal lows and peaks, as certain periods of the year are busier than others, such as the festive season. The common challenge for entrepreneurs starting out is ensuring that operations continue, despite potential cash flow hurdles during quiet periods.
Is there enough support from the franchisor? – executing a franchise concept can be challenging without adequate support, guidance and mentorship from the franchisor. As part of the due-diligence process, it would be worthwhile establishing what type of support the business would receive as part of the franchise agreement.
“Doing your homework and thorough research is essential to successfully execute a franchise model and grow your business. Furthermore, speaking to various franchisees about their personal experiences can significantly increase your chances of success,” concludes Beck.
So you think you want to buy a franchise, but you’re not so sure it would be the right choice. After all, why should you spend a premium on a big name when you can just duplicate their efforts? Think again. There are a few good reasons why copycatting doesn‘t work, and in hard economic times, these reasons make even more sense. We can’t say enough about the security factor of choosing to invest in a franchise as opposed to a new start-up. Below are 5 advantages of franchising.
01 The Power of the Franchisor’s Brand
The first thing franchises offer franchisees is a strategic identity that is not only effective, but it also has a cumulative market impact. Corporate brand identities have proven success in the marketplace. Mega-brands like McDonald’s and Dunkin’ Donuts have spent millions on their branding and logos, and the franchisee gets to take full advantage of this market image.
Most established franchisors have already survived decades in their respective industries and are easily identifiable to the public. A successful brand is one that is remembered, and franchised businesses have some of the most successful brand identities in the world.
The name recognition that comes with an established brand, as well as the franchisor’s system standards that all franchisees must follow, assures the customer that they can enjoy the same quality of experience and products in your location as in any other location. This consistency benefits all franchisees in the system.
You get to take advantage of the fact that a family from out-of-state, for example, that has previously enjoyed the franchise system’s products and services will seek out your business because of their past positive experiences with the brand. In fact, like an old friend, they are counting on you to be there.
02 Advertising Programs
Advertising can be one of the biggest expenses for any new business and for a good reason. You can’t survive without effective advertising, and effective advertising is expensive. These days, even if you have a prime location, if customers are unfamiliar with what you have to offer they won’t come in.
Franchise systems offer national advertising campaigns that are included in your franchise fee. This is a huge benefit when considering a franchise. Franchisees are typically also required to invest a certain amount in local marketing and advertising, with the franchisor approving the materials before they are run to ensure they conform to the brand standards and promise.
03 Opening and Operating Experience
The process of opening a privately owned business is complicated and daunting, especially for anyone getting into business for themselves for the first time. But a franchisee can immediately benefit from the franchisor’s experience and tested operating system for opening that specific type of store, from advanced training, documented standards and procedures, to opening inventory levels and grand opening marketing strategies. Additionally, the franchisee can network with other franchisees in the system, who have gone through the process of opening one or multiple locations and can offer their advice.
A franchise system also provides multiple advantages related to operating experience once the franchisee’s location is up and running:
The multiple franchised locations in the system create increased purchasing power, which can result in lower costs for supplies, inventory, and other goods.
Regional or national ad campaigns help draw in a bigger customer base to each individual location.
A franchise system can be flexible in trying new products or services by test-marketing in a few locations to see the impact on a limited scale before rolling it out to the entire franchise network.
A franchisee enjoys the protected reputation of the franchisor. “Protected,” because there are designated legal departments that take care of the inevitable issues like lawsuits, accidents, and difficulties with labor. The reputation of the franchise is important enough – it is what breeds positive expectations that keep patrons loyal – but this benefit coupled with a built-in umbrella of legal protection is an incredible bonus and one you cannot get as an independent.
Unless you were raised in the specific business you are trying to start you will need special training. Franchise headquarters can provide training in everything from the technology involved in the accounting, to the transaction and cash handling procedures. Ongoing and online support is typically available, as well as special alerts and continuing education.
Franchisors want you to be successful, and to do that they make themselves available every step of the way. After all, they want to keep expanding their system, and high success ratios allow them to keep bringing potential franchisees in the door.
Source: The Balance Small Business – www.thebalancesmb.com
Local entrepreneurs are behind some of the country’s most iconic franchise brands in the country. The good news is 92% of all franchise concepts in South Africa are home grown, this includes popular Portuguese restaurant Nandos, braaied meat fast-food restaurant, Chesanyama, and even the luxury spa shop Sorbet.
Many brands have embraced the franchise model strategy, and many have tried and failed. To find out the secrets of those that have succeeded, we turn to the founders of some of the country’s most successful franchise brands.
Here are some of our favourite quotes from franchising leaders.
Ian Fuhr – Sorbet
Find the right reasons – “You don’t go into business to make money. You go into business to serve people and if you can then serve them well you will make lots and lots of money.”
Grant Brady – Car Service City
No quick money – “People (potential franchisees) have to buy into the business concept from the word go. The franchisees who are in it to make a “quick buck” always do your brand more damage than good, and one then has to work twice as hard to fix it.”
A shared vision – “Taking the slower approach, waiting for the “right” franchisee who shares in your vision, always results in success. We are now much stricter with regards to potential franchisees. We ensure a culture and business fit before anyone signs on.”
Choose carefully – “Be very selective in your franchisees. Only let people join your business who are as passionate as you are – teach them and invest in them. Don’t be tempted to grow too quickly. The old saying “easy come, easy go” is very relevant in franchising. Take the “tortoise” approach, rather than the “hare”, as I can guarantee it will be more rewarding that way.”
Stelio Nathanael – Chesanyama
Import potential – “There [are] so many new things coming out in South Africa everyday, but also there is so much happening in the rest of the world that hasn’t yet been done in South Africa.”
For the love – “For some people it’s a money-making scheme, but you have to love your businessenough to see it work and see yourself working hard for it”.
Never give up – “Business opportunities are like buses, there’s always another one coming”.
Robert Brozin – Nandos
Start small – “We never got tons of money to start Nando’s … it was done trench by trench, we had to duck and dive.”
Miles Kubheka – Vuyo’s
Don’t fear failure – “More often than not people are not afraid of failing itself, it’s actually what comes with it – the negative stigma, the loss of income. But we need to fail more – if you do more, the chance of failure is more but the chance of success is more as well.”
Global focus – “We need to think global but act local, because those are where the opportunities lie.”
You are the brand – “As an entrepreneur every single time you open your mouth, you are presenting yourself, your brand, your company, your ideas, your vision.”
Brian Altriche – Rocomama
Embrace failure – “I think my many failures in the past really assisted me in fine-tuning the vision I had.”
It’s about the people – “You have to value the people around you, mentor them, learn from them, be inspired by those below you, because that is part of the journey and that’s what should be more important than money, because when you have those values, you start appreciating different aspects of being an entrepreneur and a business person, and the business becomes more successful. The only part that you have to fixate on with regards to the money side of business is balancing the books.”
Ina Paarman – Ina Paarman’s Kitchen
Quality matters – “Okay is not good enough. In business, you’re either the best or you can get out. You really need to live quality.”
Listen to your customers – “Many brands ignore that customers want healthy products and they’re focused on what they put into their bodies. Customers are not stupid.”
Sebastian Schneider – Motherland Coffee Company
Get your culture right – “If I [had to choose] a personal claim to fame going forward, I would definitely like to be known for creating a great culture in the company. That I think to me would be something I could be really proud of.”
Choose the right partners – [It’s important to] have a big growth vision to partner with people who do not just put the money in, but also facilitate the platform for you to grow. It’s not an easy thing. The right partnerships and growth [is key].”
Dayne Levinrad – The Grind Coffee Company
Share the pie – “I’d rather own one percent of a massive thing than a 100 percent of something very small. For me, I know my product is bigger than me, I know I don’t have all the tools to expand internationally so I need to rely heavily on people who have done it in the past, while I’m still growing and learning.”
Take care of yourself – “I think having an outlet is important, whether that’s screaming in a dark room in a fetal position. No, an outlet like a sport or a type of physical activity. Routine is very important too, have a specific routine that you do everyday. I’m terrible at it. I am working hard [at it], but routine is very important. Third thing is wake up before everyone else so you have more time in a day to perfect what you want to perfect in that industry.”
Derek Smith – Hot Dog Cafe
A working model – “Franchising is a fantastic method for raising capital and employing dedicated, passionate and motivated management (franchisees) to grow a business concept quickly and effectively.”
Source: SME South Africa – www.smesouthafrica.co.za
One of the most important factors which has a vital effect on the growth of your franchise, is SERVICE DELIVERY.
Service delivery starts with communication because by communicating you are delivering a service. When customers experience great service they feel that you care about developing a long-term relationship and that it means more than just making a sale.
Your franchise will benefit by consistently providing a WOW service delivery in the following ways:
Excellent service delivery will be a factor that differentiates your business and in time may even become a unique selling point that sets your business apart from your competitors.
When your customers experience excellent service delivery, you will retain your customers and it will create repeat business.
Positive word-of-mouth will result in additional advertising at no cost to you and will boost your business by attracting new customers.
Service delivery must be consistently high and is only as good as it is perceived!
Customers go where they are invited but stay where they are looked after.
We asked Vera Valasis, FASA’s Executive Director to give some tips to aspiring franchisors/franchisees – and this is what she advises …
Not every single business concept or idea is franchisable.
Don’t franchise your business unless you have a good financial track record of the performance of the business in a number of different locations and markets i.e. locations in a high street, a shopping mall, in a city and rural applications.
Test the business with a few franchisees in the early stages that are willing to be ‘test sites’ in order to hone and fine-tune every aspect of the business model.
Don’t franchise your business unless you have the financial independence to support franchised outlets adequately especially in terms of marketing.
Do not invest in a franchise unless it is an accredited franchisor (if things go wrong as they sometimes do, you are ‘on your own’).
Do your market research very thoroughly – meet with existing franchisees and learn what they have experienced in respect of promises made by the franchisors, marketing, guidance, training and support and most importantly ask them if they would buy another business from the franchisor.
What do you think are the main benefits of being involved in a franchise as opposed to running your own business?
Franchisors are expected to provide franchisees with:
Support – starting with selecting the right franchisee for the business, site selection, staff selection and training, establishing the business, marketing, lease negotiations, financial controls and management, HR issues, supply and price input – the list goes on.
Having a Big Brother – There is no comparison being on your own in your own business especially if you are a new or inexperienced business owner as you have access to none of the above services franchisors usually offer. In some cases it may also be easier to secure funding for a franchise than one’s own business.
Akhona Qengqe, transformation director, KFC and chairperson of FASA
New FASA chair, Akhona Qengqe says growing and empowering the SME and franchise sector will be at the centre of her tenure as chair of the Franchise Association for 2019 and 2020.
In line with results from South Africa’s first study on the SMME landscape by The CEO Initiative, which shows that whilst 98,5% of registered businesses in SA are SMMEs, they only create 28% of jobs and that to achieve the NDP target of 6% unemployment and 11-million jobs by 2030, SA needs 49,000 SMEs growing at a rate of 20% per annum.
Highest business failure rate
“Measured against similar emerging economies such as Brazil, Malaysia, India etc., South Africa is said to have the highest business failure rate,” says Qengqe. “What is even more concerning is, despite the government’s efforts to encourage entrepreneurship, South Africa still has a relatively low number of people involved in a startup or established businesses.”
One of the biggest benefits of encouraging SME development is the employment and job creation the franchise sector has created and the role it can play in encouraging entrepreneurship, skills development and job creation. FASA’s 2017/2018 survey showed that the sector contributed R721bn equivalent to 15,7% of the total South Africa GDP through its 865 franchise systems, 45,000 franchise outlets employing close to 400,000 people.
“It has been proved that, as a franchised SME grows it has the potential to employ even more people. For South Africa, with unemployment sitting at 27.5% in the last quarter of 2018 and also having the highest Gini coefficient in the world, any opportunity that creates employment is most welcome.”
Big brother role and accessing funding
“When I look at the franchise sector, and specifically the franchise business model,” says Qengqe, what encourages me is that it deals directly with the two biggest problems faced by start-ups in our country.”
Firstly, because of the amount of time and effort that has gone into developing a replicable business model, franchisees or would-be franchisees generally receive more support from their franchisors, where they play a ‘big brother role’, ensuring the success of both franchisee and franchisor in the process.
Secondly, while there is a plethora of funding vehicles available both from government and other institutions, accessing funding for an independent start-up is probably twice as difficult as it is for a franchise business. Because of its proven track record, funders find it easier to back a franchise business.
“I also look forward to the contribution that the Franchise Association of South Africa will make in supporting up-and-coming franchisors and ensuring that they uphold the highest ethical standards in their business dealings. FASA is celebrating 40 years this year and I would like to congratulate every one of the founding members who are still in business today. Starting a business is easy, but running a successful business for over four decades is truly remarkable.”
What to buy? An established brand name or an unknown startup? Do you take the safe road or do you take the short-cut – it’s riskier but it might get you where you want to go faster? Or would you rather toe the line, follow the cautious route and opt for tried and tested franchise opportunities?
Like the McDonald’s, the PostNets and the Nando’s; those who have hit the big time; they have hundreds of stores, are well-established, with good reputations.
The Start Ups
The new and not-so-new franchise concepts that are either just starting, have just taken off or are on their way to becoming recognized brands. They say franchising is the stone that is thrown which starts the ripple effect of a new trend.
Whether it’s the trend in gourmet burgers or a new body-shaping workout gym or a franchise that is harnessing solar, franchising has always been in the forefront of breakthrough trends.
The Franchise Dilemma
Finding out whether it is better to buy into a new franchise concept or opting for the well established, is like the chicken and egg scenario.
In talking to franchise consultants and experts, and considering the strict international guidelines adopted by FASA (Franchise Association of South Africa) on assessing and acquiring a franchise, one tends to forget that every franchise concept started with that one big idea, that first pilot operation, the first franchisee who acted as a guinea pig, the ten more who also took the risk before the franchise picked up momentum to become a recognized brand.
Which personality are you?
The answer to this dilemma may lie with whether you are the type of personality that is suited to taking the higher risk or whether your reasons for wanting to buy a franchise lie in the tried-and-tested business format that well-established brands have to offer. Eric Parker of Franchising Plus believes that there are two categories of franchisees:
Appetite for risk – those that suit the “developmental” stage of a franchise – i.e. they are franchisees that have a greater entrepreneurial flair and are prepared to take a higher risk, with the promise of higher rewards. This is the person who gets as excited by a new franchise concept as the developer, is keen to roll up his sleeves and help make it work, whatever it takes and above all, understands and is prepared to take the initial risk. These are the franchisees that are, in effect, helping to build the brand.
Risk averse – those that suit the “maintenance” stage of a franchise – i.e franchisees who join a well-established franchise because they want the security of a sound business format and are happy to follow the tried-and-tested formula laid down by the franchisor. These franchisees are, in effect, helping to maintain and sustain the brand, for their benefit and that of their franchisor.
Advice for each type
Established franchise – talk to as many franchisees as possible to get a feel of whether they enjoy what they are doing and above all whether they are profitable.
New concept – don’t even consider getting involved if the franchisor doesn’t have pilot operation that’s been in existence for at least one year, preferable two or three as well as having at least one or more separate company stores, joint-ventures or franchisees.
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.