Looking into Turnkey Franchise Opportunities

Date AddedMay 26, 2010 02:48:44 AM

Author

Category

Survey: Franchising
Mar 28, 2010 12:00 AM | By Brendan Peacock

Franchises can be great - or money pits: Business franchise models have become the preferred method of expansion in many industries across the world, allowing business concepts to spread quickly while sharing in the intellectual property and quality control that go along with tried and tested products and services.

South Africa remains Africa's most vibrant franchising territory, with a host of local and international brands represented. Since the success of megabrands like McDonald's, franchising's lure has grown among potential first-time business owners, but the local industry - and a true appreciation of what franchising really means - still has to mature.

"The development of a strong franchising sector is key to addressing South Africa's two most pressing needs, namely the promotion of entrepreneurship and job creation, but raising start-up finance for franchise purchase remains a stumbling block for potential franchisees," said Pieter Scholtz, the master licensee for the Action Coach franchise in South Africa.

"We saw a decline in new store openings in 2009 as franchisors stopped rolling out as aggressively; it has been a period of consolidation, with more revamp requests as franchises prepare for the upswing. The forecast is conservative for all brands in 2010. An additional concern is electricity cost - the effect this will have is as yet unknown. Moreover, higher lease costs, as landlords look to raise rentals, will play their part in the market. In the food sector, for franchisees whose lease is 10% or more of their turnover, business is about to become very tight. As a potential franchisee, consider sustainability in the future and be aware," said Mark Rose, head of new business development for Nedbank Business Banking.

"Proven experience in candidates gets them more attention. In applications for funding, we need potential franchisees to contribute sufficiently to the financial component - 40% to 50% in cash. In addition, candidates should have at least six months' of working capital reserves," said Rose.

"As guidance to candidates, I'd advise against taking too much money out of the business for the first two years. Keep the business sustainable until it is properly established. Watch your cost line carefully. Also, stay clear of franchisors who leave franchisees out in the cold if they get into a state of distress. A proven record, history of performance, low result of failure, support, training and guidance are important to look for. However, none of this is a guarantee - you still get around 5% failures in even the most successful brands," said Rose.

"We require that the various business models are put together in conjunction with the franchisor's knowledge of the local industry and business. Having said this, the responsibility and accountability of the business plan is that of the franchisee. It is critically important for the franchisor to provide substantial input to the franchisee and business plan, whether it is for a financial institution, or to minimise the franchisee's risks from own capital input," said Pierre van Tonder, managing director of the Spur Group.

"We do our own viability study on potential sites. We also provide projected financials based on this study. We do, however, make it clear to all franchisees that they should feel free to investigate further. It is in our interest to find viable sites that work as we derive our income from franchisees' sales. Further to this, store closures cause a great deal of damage to a brand, so poor site selection or franchisee selection is critical," said Michael Terespolsky, director of Col'Cacchio pizzeria.

"Some franchisors may have pre-approved funding from an institution which could make it easier for the franchisee. We have a pre-approved facility with the IDC which comes with certain requirements in order to be accepted for the loan," said Terespolsky.

"Any business requires full-time commitment, and it is a mistake to think that signing up with an established brand will give you a licence to print money," said Ian Jacobsberg, partner at Eversheds. "Support varies from brand to brand. However, a franchisee cannot expect that the franchisor will micro-manage the business."

"Franchising involves research and finding the best fit. The Franchise Association of South Africa represents 19 business categories, so there is quite a wide choice. In the current absence of regulation and legislation in the market, franchisee candidates need to do a lot of homework. You can still be sold a lemon at the moment," said Vera Valasis, executive director of the franchise association.