Impact Partner Content: Absa
By James Noble, Head of Wholesale, Retail and Franchising - Absa Business Banking
Absa’s Wholesale, Retail and Franchise Sector always strive to exceed the need of our franchise customers. Therefore, we display leadership in the industry by providing market leading solutions that will give you the opportunity to focus on your business.
Our in house research team not only analyses the franchise industry but the economy as a whole to identify trends, opportunities and risks. We focus on various business categories that include consumer services, retail, restaurants, quick service restaurants, automotive and service stations to mention a few.
Each business category has its own challenges and therefore we analyse the different franchise brands to ensure that we offer you the best solution. This information is also shared and discussed with franchisors to ensure that all stakeholders benefit.
The risks of starting a franchise business can be less than a brand new independent business because you are likely to be running a proven business concept with the backing of a recognised brand name (although some franchises may be no more than good ideas). For those who take on a franchise, the advantages of the enhanced support should outweigh the ongoing fees to the franchisor and the need to run the business in line with the franchise agreement.
The past few years we’ve seen a lot of change that affected the SME market causing financial institutions to look differently at franchise finance. We’ve seen that businesses take longer to break even putting a lot of pressure on the cash flow. Therefore the banks require bigger own contribution to make it viable.
To assess your general commitment to franchising you should have:
Personal commitment
Family support
Good health
The required skills and experience
The ability to work alone
As potential franchisee you should also:
Choose a business that you will enjoy, especially since the hours may be long and unsociable.
Consider all the costs involved. How much unencumbered cash do you have? Will you need to borrow the remainder? Can the business afford the repayments and the owner’s remuneration?
Consider the support from the franchisor for training, setup of the store, exposure to product suppliers, ongoing marketing and business management support.
Not to be in a hurry to part with your money until you have done the necessary checks and homework on the franchisor of your choice. It is important to speak to existing franchisees and get their opinion about what the franchisor promised and actually deliver on.
The franchisor will have a standard agreement that you must sign. To protect the integrity of the franchise, the contract may not be negotiable. Ask your lawyer to study the agreement before you sign it. If necessary, insist on changes that will offer you more protection.
Nothing in the agreement should depend on a friendly relationship between yourself and the franchisor. Remember that the franchisor could sell the business, leaving you to deal with someone else.
While you must protect yourself when applying for a franchise, the franchisor will also seek protection. Because of its complexity, a franchise agreement can run to fifty or even a hundred typed pages. Do not rush through it. Study every page of the agreement.
It is therefore also very important to make sure that you get value for your money when you set up a new franchise. You should ensure that you are not paying too much. Question the franchisor on the set up cost and see where you can save. What is included in the initial fee? Is there a high minimum monthly fee? Is there a renewal fee?
We’ve seen businesses liquidated within 6 months where the equipment was worth less than 15% of the initial cost. This equipment can be used to set up a new business for much less.
What marketing support will you receive at the opening and on an ongoing basis? This is very important to ensure awareness. Don’t assume that customers will know where you are. Marketing is an ongoing investment in your business that will make the difference between success and failure.
One of the biggest reasons why businesses fail is because of the financial management. Make sure that you have a qualified accountant that understands your franchise. He/ she must be able to provide financial advice that will ensure turnover growth, how to cut cost and minimise expenses that will have a positive effect on the profit margins.
The following disadvantages of franchising should also be considered:
Lack of independence – you are not entirely your own boss
Lack of individuality - you will be part of a larger concern
Restrictive business conditions - you will be bound by a legal agreement
Poor reputation by association - 'one bad apple' in a network of franchisees could have an impact on your business
It is possible to avoid getting involved with franchise businesses that promise more than they are able to deliver. Watch out for the following:
Resistance to disclosing information about the business is a warning sign. You will rely heavily on the franchisor in future, so do not allow him or her to hide the financial situation. Reject arguments that the franchise is not a public company and therefore does not have to reveal financial information to you. You are not an ordinary member of the public. The Franchisor owes you full disclosure.
Watch out for claims that you can make large amounts of money for a few hours work. Any success is going to take hard work.
Beware of the hustler who tells you that the territories are nearly all occupied, so if you do not act soon you are going to lose the opportunity. Obtain a complete list of existing territories from the franchisor.
The sales representative who attempts to impress you with his or her own material success is probably selling something of little or no value.
Be careful of the franchisor that is too anxious to get money from you at an early stage of negotiations. If the franchisor wants cash only, do not proceed with the deal.
Absa has a good understanding of the industry from franchisor, franchisee and banking perspective. Therefore we can provide you with the best solutions that will contribute to your business success. If you'd like to talk to us about your business plans and dreams, we'll gladly listen.
We've worked with many entrepreneurs in the past and we have the knowledge and financial products and services to help you make your business dreams a reality. For more information please contact Absa at 011 350 8000 or franchising@absa.co.za.
