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.
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.
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.
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: -
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.
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.
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.
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.
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.
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.
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.