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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.

Franchising is a business concept that is highly adaptable to the needs of its proponents. In South Africa at present, franchising, with Government's active encouragement and support, is evolving into a promising vehicle for the introduction of formerly disadvantaged members of society into the economic mainstream.

An increasing number of well-established companies are beginning to see franchising as a vehicle for further expansion, be it through the sale of franchises or the conversion of existing branches. It is pleasing to see that in many instances, such deals have a high empowerment component.

Interaction with foreign business bodies and franchisors is at an all-time high, and this is expected to enhance the number of franchise opportunities that is available to South Africa¼s entrepreneur-hopefuls.

The number of South African companies that are exporting their franchise opportunities, either through company-owned offices or master license arrangements, is growing rapidly. This is ample proof that South Africa¼s franchise fraternity has the know-how and the infrastructure to hold its own against the rest of the world.

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.

Take note, from the very beginning, how the franchisor deals with your enquiry. Should you have to wait a long time for a reply to an initial enquiry, or be forced to initiate follow up, ask yourself: If they treat me like this during what is essentially the "wooing stage", what is the level of cooperation likely to be once I have signed up.

By the same token, a franchisor who just wants you to sign up and hand over your money, without investigating your background deserves to be treated with suspicion. Don't just talk to the franchisor but insist on meeting all staffers you would be dealing with in future. Personal chemistry is an important element of successful franchise relations.

Talk to other franchisees, by appointment and on your own. This way, franchisees will have time to spend with you, and will not feel constrained by the presence of a franchisor representative.

Ask your banker what he knows about the network. All the major banks maintain a specialist department at head office level that collects information; if your banker appears to be reluctant to give an opinion, he might know something that should set warning bells ringing.

Confirm with the Franchise Association of Southern Africa that the franchisor is a member in good standing. If the answer is negative, ask the franchisor to explain ‚ the answer should give you valuable insights.

Request permission to work in one of the franchisor's company-owned stores for a day or two. This gives you an excellent opportunity to experience the business, and if the franchisor has nothing to hide, he is bound to welcome your initiative. As a matter of fact, some leading franchisors insist that you work in their stores before they are prepared to open serious negotiations.

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.

The owners of a profitable business that is well established and has a sound track record in its field conclude that they are ready for national expansion. Mindful of the massive investment the establishment of company-owned branches would necessitate and the management problems this step could create, the owners opt for franchising instead. They offer suitable individuals the opportunity to make an investment into a business of their own that they will operate according to the proven blueprint and a common name whilst enjoying ongoing assistance from the franchisor.

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.

Decide which field you wish to go into, and how much money you can afford to invest. Based on these perimeters, find out what opportunities are available. Several web sites, the Franchise Book of Southern Africa published by FASA, franchise and small business exhibitions, small business magazines and newspapers offer franchise opportunities. You should also look around you, if you see a business you like and it appears to be a franchise, ask the owner to put you in touch with the franchisor.

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.

The "Franchise Factor", Franchize Direction's research project into franchising, identifies 'Building, office and home services' and 'Retail' as major growth sectors. Business-to-business services, Telecommunications, Industrial and Financial services can be added to this list. And although some people might feel that the food sector has become overtraded, reality does not bear this out. This has been documented by the massive inroads made by a recent arrival into the highly competitive pizza market, who managed to establish 29 stores within 18 months; all are trading successfully and the company expects to operate 90 stores and achieve sales of R100 million before the year 2004 is out.

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 franchise offers access to a range of intellectual property, systems and services that no small company can hope to match. Examples of this would be:

Use of an established brand.
Proven systems and procedures that are not only properly documented, usually within the framework of an operations and procedures manual, but also reassessed on an ongoing basis to ensure that "current best practice" is adhered to. The owner of a small business simply does not have the time to do this effectively.

Bulk purchasing.
Because the franchisor acts on behalf of a large network, purchase prices for goods and services are usually lower than those a single operator will qualify for.

Group advertising.
Whilst say, R10 000 per month a small operator may be able to spend on advertising will make scant impact, R10 000 each, paid by 75 franchisees, add up to R750 000. Add to this the contribution from the franchisor¼s company-owned stores and an advertising war chest of R10 million per annum becomes a distinct possibility.

Product development and market research are other facets of a franchised network's activities that are all but out of reach of the average small operator.

And then there is the meaningful exchange of ideas. Entrepreneurship is often seen as a lonely occupation, and with some justification. Individual operators have nobody to talk to, simply because the person who would understand their concerns best is likely to also be their competitor. Not so in a franchised chain. Everyone operates under the same brand, but in different territories. Their concerns are similar, but they are not in opposition with each other. This facilitates the exchange of ideas and adds significantly to the support structure franchisees can draw on.

Even finance is easier to access if an entrepreneur can prove that he has secured the blessing of a recognised franchisor.

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

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.

A franchise is an agreement between the franchisor (the grantor of the franchise) and its franchisees (those who acquire a franchise), granting the franchisee the right to operate under the name of the franchise and use its trademarks, know-how, methods and procedures. Moreover, the franchisee stands to gain from initial and ongoing training and advice offered by the franchisor, as well as having access to bulk deals and group marketing campaigns.
 
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.

The financial implications of purchasing a franchise extend over several distinct areas, namely:
  • Upfront fee ‚ this is the "joining fee" that entitles you to the use of the business package, initial training and set-up assistance. It does not pay for the business itself.
  • Capital expenditure ‚ this is the investment into the infrastructure of the business (equipment, shopfittings and stock).
  • Working capital - whilst expenses will accrue long before you open the doors of your business for the first time (premises rental, staff salaries during training, deposits etc.), it is likely that it will take at least several months, occasionally much longer, before the cashflow of your business will cover expenses and enable you to draw a salary.
  • Ongoing payments ‚ your franchise agreement will compel you to pay a management services fee to the franchisor, usually on a weekly or monthly basis. This fee, which will generally be calculated as a percentage of your sales, pays for ongoing support services and enables the franchisor to make a profit. In addition, most franchised networks operate a Marketing Fund or similar structure to which each franchisee is expected to contribute.
  • Product purchases ‚ in some instances, the franchisor acts as a supplier and franchisees are usually expected to settle their accounts within 30 days.
  • The disclosure document should detail all payments you are expected to make, both initially and on an ongoing basis.

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.

Understand how franchising works and do some soul searching. Not everyone is suited to entrepreneurship and of those who are, not everyone will be happy as a franchisee. If you seek to minimise exposure to risk, are prepared to follow a proven blueprint and willing to work with your franchisor for mutual benefit then franchising is for you.

Make sure that you can afford the franchise. In addition to the initial investment, you will also need money to sustain yourself, and the business, until it becomes cash positive. Remember, too, that projections may not be accurate. Market conditions can change and if it takes longer than originally anticipated for the new business to reach breakeven, you¼d better have some emergency funds set aside, or it could mean the demise of an inherently sound business.

Will you be happy operating the business? A franchise is a long-term commitment; don¼t enter into it unless you can be reasonably certain that you will enjoy the ride. It happens all too frequently that people go into a business they do not like, just because they expect to make lots of money. Making money from a franchise takes time, unless you enjoy yourself along the way, you are unlikely to perform at your peak and as a consequence, success may elude you.

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.

It is FASA's main objective to uphold ethics in franchising. Members are compelled to adhere to a strict Code of Ethics and Business Practices that is designed to protect franchisees against exploitation and other irresponsible conduct. Should a franchisee's relationship with a franchisor who is a member of FASA break down, FASA will mediate, in the interest of ethical franchising and at no charge.

Although at this point in time, FASA has no legal teeth, it has the power to discipline members and suspend or even terminate membership. This fact is communicated to the public and constitutes a powerful deterrent against misconduct by members.

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.

Only you can answer this. Some of the questions you should ask yourself, as well as some people that are close to you and know you well, are:
  • Can I afford the franchise?
  • Do I recognise the value of the brand and the benefits flowing from the support infrastructure offered by the franchisor and am I ambitious enough to make the best of the opportunity?
  • Am I a team player and prepared to conduct my business in accordance with the rules of the franchise?
  • Will I be happy in the business, and am I capable of managing it successfully?

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