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 Frequently Asked Questions

Generally speaking, the contrary would be true. In this day and age of 24-hour satellite TV, easy intercontinental travel and high mobility, people are becoming increasingly brand conscious and draw comfort from brand recognition. Even if they are new in town, they recognise their favourite outlets, know exactly what type of product or service they will be offered and how much it will cost them. And from the franchisee¼s point of view, there is yet another advantage: equipment and decor have been well tried and tested, largely eliminating the risk of costly errors in design or specifications.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

By doing your homework. You are entitled to expect that the disclosure document contains all the information you need to make an informed decision regarding the viability of the franchise offer. This would include the history of the business and its office bearers, the activities of the franchise and the level of investment you are expected to make, the extent support you can expect to receive, comprehensive details regarding your legal and ongoing financial obligations, the franchisor¼s business references and a letter by its auditors. Moreover, a list of existing franchisees, complete with contact details, as well as a list of past franchisees who have left the network and why, should be included.

Armed with this information, you can carry out an in-depth investigation that, once concluded, should leave you in no doubt regarding the bona fides of the franchisor. Lastly, an important tip: make sure that your franchise agreement contains a clear reference to the disclosure document. This way, should it emerge at a later stage that the disclosure document was incomplete or less than truthful, the franchise agreement could be set aside by a competent court. Depending on the circumstances surrounding the case, it is even conceivable that the franchisor could face fraud charges.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

You can't! Whilst franchising is the safest way of going into a business of your own, an element of risk remains. No franchisor in his right mind will guarantee the success of your business, one who does should be treated with suspicion. You can draw comfort from the fact, however, that in a properly structured franchise, the franchisor will not make any money unless the vast majority of his franchisees are successful. Your best insurance against business failure is a combination of: -

  • An in-depth understanding of the way franchising works;
  • A thorough evaluation of the opportunity before you commit yourself;
  • The provision of adequate finance;

and

  • A willingness to work hard, attention to constructive criticism and readiness to utilise the services offered by the franchisor to the greatest possible extent.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

Franchising has taken the world by storm. In the United States, widely seen as the home of modern-day franchising, about 50% of all retail business is conducted through franchised outlets. Closer to home, franchising has made great strides as well, although the sector is far from saturation point.

A survey carried out by Johannesburg-based Franchize Directions during 2000 reveals that South Africa had 478 active business format franchise systems that operated through a total of 23 625 outlets. The sector employed 293 000 people and notched up a combined turnover of 58.97 billion Rand, or 12% of retail turnover. This is far lower than the market share franchising enjoys in other parts of the world, and indicates significant potential for growth.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

  • Initial and ongoing costs;
  • An obligation to operate in accordance with the prescribed systems and procedures;
  • Lack of flexibility to react to changing local market conditions as you see fit;
  • You could suffer losses due to poor decision-making by the franchisor;
  • Errant members of the network, if not reigned in by the franchisor, could bring the brand into disrepute, to the detriment of your business.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

Membership of the Franchise Association of Southern Africa is open to practising franchisors, franchises and professional organisations servicing the franchising industry, On request, you will receive detailed information valid at the time of your enquiry, together with the subscription details.

The following membership criteria are merely general guidelines, and should be understood as such. Because franchisor members could be subject to public and official scrutiny (for example, by the Business Practices Committee or the Competition Board), the formalities for franchisor membership are greatest and confidentiality of all information provided by applicants for membership will be protected. To qualify for full membership, franchisors will have to provide proof that they have been running a pilot operation for at least one (1) year.
 
They will also be required to present FASA's Membership Committee with copies of their disclosure document and franchise agreement, as well as their operations and procedures manual. Detailed membership criteria can be obtained from the FASA secretariat.
 
Details to be included in the Disclosure Document and can be obtained from the FASA secretariat. A book to assist on how to prepare an operations Procedure Manual can be bought from FASA. In addition to the above, a joining fee together with the membership fee must be submitted to FASA together with the application. The joining fee does not apply to organisations joining as affiliate members.
 
Franchise Association of Southern Africa
 
Peter Thuto Mkhize
Project Coordinator
 
Tel: (011)615-0359(office)
0723582258(cell)
peter.mkhize@fasa.co.za
 
Eastgate office park
1st floor,block A
Southrand Boulevard
Bruma
A business format franchise is a comprehensive blueprint for success. It grants aspirant franchisees the right to initial training and set-up assistance, access to a trademark and a set of systems and procedures that helps them to emulate the franchisor¼s success. In appropriate circumstances, it will also enable them to participate in joint purchasing and promotional programmes, thus enjoying large company benefits whilst operating a small business of their own.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

There are those who claim that any type of business can be franchised, but this might be something of an overstatement. To enhance the success chances of a concept, it should meet most, if not all, of the following requirements.
  • Operate in a well established and growing market with the potential to set up a large number of outlets over time ‚ a top end retail store, even if successful in one upmarket shopping centre, may not necessarily succeed as a franchise.
  • Be easy to teach ‚ most franchisors prefer prospective franchisees with no industry experience, as this facilitates compliance with the proven system. Exceptions do exist, however, and some franchised concepts that require professionals to operate the outlets are very successful.
  • Have the potential to build a memorable brand. The most successful franchises worldwide have brands that have become household names.
  • There should be some barrier to entry. If copycat operators find it all too easy to enter the industry, it often results in price-cutting and a franchised network might struggle to succeed.
  • The product or service should command a price premium ‚ it is expensive to operate a franchised network and the concept must deliver adequate returns for the franchisor and all franchisees.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

No legally binding definition of the word "franchise" exists and various permutations of the concept are possible. In practice, franchising has become synonymous with two specific ways of doing business, namely product franchising and business format franchising.

A product franchise, as the name suggests, focuses almost exclusively on a product or service. The franchisor offers the product and some corporate identity, but in conducting the business, the franchisee is largely left to its own devices.

In stark contrast, a business format franchise, although it is based on a product or service, revolves around the way the business is conducted. The franchisor will have developed a comprehensive blueprint for the successful operation of the business. The franchisee will receive initial and ongoing training and strict adherence to the blueprint will be mandatory, so much so that the franchisor will carry out regular inspections to ensure that all facets of product and service delivery conform to prescribed standards. The franchisor's close ongoing involvement enhances the franchisee's success chances considerably and today, when people talk about a franchise, they almost always mean a business format franchise. Indeed, membership to the Franchise Association of Southern Africa is open only to bona fide business format franchises. Furthermore, an increasing number of product franchises have recognised that business format franchising is the better way, and are converting to this concept.

In response to business realities, owners of franchise concepts with a strong trademark but where the underlying business or service is very simple to implement, have found that regular franchisee audits are cumbersome and costly. This has led to the development of a sub-concept known as "trademark franchising". Under such a franchise, the franchisor has the right to exercise control over the way the franchisee conducts day-to-day operations, but will ordinarily enforce this right only if the franchisee's conduct has the potential to put the reputation of the brand at risk.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

The Franchise Association of Southern Africa¼s publication entitled "The Franchise Book of Southern Africa", various web sites, franchise and small business exhibitions as well as advertisements in business magazines and newspapers create interest in franchises. But the strongest source of franchise sales by far is "word of mouth", happy franchisees who tell their friends, acquaintances and even customers about opportunities that arise within the network.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.

Ordinarily, no. From the franchisor's viewpoint, the fact that franchisees bring their own finance to the party is an important motivator to franchise in the first place. The decision to franchise effectively means that the franchisor puts a cap on his ability to generate profits in future, so why should he provide finance as well? But whilst this is a time-honoured credo of franchising worldwide, the South African situation, in view of our history, is somewhat different and yes, there are some franchisors that will render assistance. Bankers, too, are supportive of franchising and various schemes, including the Khula Loan Guarantee scheme, are available to deserving individuals who can convince the lender of their ability to operate a franchise successfully.

Information supplied by Kurt Illetschko, in the book, SA Guide to Franchising.