Creating a Franchise Business in South Africa

Having a concept that has been working well over a reasonable period as a freestanding business is the first step to the creation of a successful franchise. Moreover, the franchisor must understand how the business operates and what systems, procedures, expertise etc are at the roots of its success.

This development period eases the franchisor into the task of entering a new business – to franchise a concept to others. During this period, the franchisor will also have had an opportunity to bring the market research up to date and correct any problems that may have manifested themselves, be they linked to the product range or operational issues.

The importance of a company owned operation

In addition to the core business, the franchisor should operate at least one unit at arm’s length before franchising commences in earnest.  This means testing the concept as a franchise, perhaps in the form of a joint venture with a trusted staff member or outsider. At this point, problems that manifest themselves can be addressed. It may emerge, for example, that new franchisees require a longer training period than originally thought, or instructions given in the operations and procedures manual may prove inadequate.

Retaining a company owned outlet helps the franchisor to generate income to fund ongoing operations.  It also forms the ideal base for providing training and testing new products and/or services.

________________________________________________________________________________

Operations and procedures manual

The operations and procedures manual needs to be prepared with care. This is the blueprint for how franchisees should run their businesses and must contain a detailed explanation of the business system and how the business must operate. Keep in mind that the franchise agreement will contain numerous references to the manual, therefore, it should be prepared before a lawyer is instructed to draw up the agreement.

Drafting a good operations and procedures manual is a time consuming task that should not be underestimated. Assistance by consultants will ease the burden considerably. Once in place, however, the manual can be used for a multitude of purposes including:

  • As a day-to-day reference tool for use by the franchisee and his/her employees. (The more comprehensive the manual, the less likely it is that the franchisee has to call head office at every turn or, worse still, develops his/her own solutions to problems.)
  • As a training tool by the franchisor when training franchisees.
  • As a training tool by the franchisee when training employees.
  • It also forms a framework for the further development of the brand and the network.

________________________________________________________________________________

Franchise agreement

The franchise agreement governs the relationship between the franchisor and each individual franchisee. It should protect the interests of the network as well as those of the franchisee, and covers the following:

  • Duration of the initial agreement and renewal rights if applicable. (On occasion, franchise agreements are open-ended, but the majority of them are entered into for a fixed period.)
  • Rights and obligations of both parties.
  • Termination provisions and what happens in the event of illness, death or incapacity of the franchisee.

Franchise agreements are governed by the Consumer Protection Act (CPA) and should comply with its requirements.  It is important to consult with an attorney with proven experience in franchise matters to ensure that the franchise agreement is compliant. Click here to get in touch with a competent attorney.

________________________________________________________________________________

Disclosure document

The disclosure document must contain everything a prospective franchisee needs to know to make an informed decision regarding the opportunity. In addition to a run-down of the nature of the business, details of the people behind it and the work franchisees are expected to carry out, it is especially important to provide meaningful financial projections. In terms of the guidelines issued by the Franchise Association of Southern Africa (FASA), the franchise agreement will make reference to the disclosure document.  Also, the CPA has certain requirements of disclosure documents and these must be met to ensure legal compliance.

This implies legal consequences, therefore, the franchisor should consult with a competent consultant and/or attorney before issuing a disclosure document.

________________________________________________________________________________

Franchisee profile

Deciding who will make an ideal franchisee is an essential step. Good franchisees help to build the network into the leader in its sector, bad ones can bring it down. Franchise fees notwithstanding, franchisors make a huge investment in their franchisees and depend on them to help them grow the business. It follows that choosing the right franchisees is vital, especially but not only during the early stages as the initial franchisees form the backbone of the network.

The franchisor needs to identify what skills, experience and characteristics are essential for success, develop a profile around these findings and strictly adhere to it.  Next, the franchisor should consider tools such as psychometric assessments to assess whether the potential franchisee fits the profile required.

________________________________________________________________________________

Training

The franchisor needs to decide what training franchisees require, its duration, where it will be presented and who will deliver the training.  The franchisor should develop both an initial and ongoing training programme for franchisees.

________________________________________________________________________________

Franchise fees

Setting the correct franchise fees is a vital success factor. If fees are set too low, franchisee support will suffer, if fees are set too high, franchisees will be unable to make ends meet.

  • Initial fee – Although there is no law governing this, it is accepted good practice that the initial fee should not contain a significant profit component for the franchisor. The franchisor’s return should come from ongoing management services fees.  The purpose of the initial fee is to compensate the franchisor for costs incurred during start-up assistance to a franchisee.
  • Management services fee – Set it at a level that ensures that the franchisor’s operation becomes financially viable over time, keeping in mind that the franchisee must have a chance to earn adequate returns on his/her investment and labour. The fee should be market related when benchmarking against other franchises in the category.
  • Marketing fee – Marketing is an investment and not an expense. One of the benefits of joining a franchise is the access to an existing brand and national marketing campaigns.  The marketing fee should also be market related. According to the CPA, marketing contributions must be paid into a separate bank account and franchisees must receive feedback on the use of the funds.  Ideally, the franchisor should match franchisee contributions to have a marketing budget that is substantial enough to make an impact.

________________________________________________________________________________

Recruiting franchisees

There are numerous ways of doing this. Leading the way is online portals such as the whichfranchise website, then there are exhibitions, advertisements in business publications and so on. The franchisor will need to create literature that outlines the structure and nature of your franchise and what’s involved in becoming a franchisee of the network.

________________________________________________________________________________

Management and support staff

The franchise management team plays a key role in a franchised network. They are usually responsible for selecting franchisees and providing initial and ongoing support. Moreover, they also monitor franchisee performance and reporting and provide technical assistance to franchisees. As these are key staff members, relied upon to recruit, manage and support franchisees, they should be top calibre people and employed in sufficient numbers to ensure adequate coverage of the network and should be trained on the intricacies of maintaining good franchise relationships.

Franchising PlusFor help and advice on franchising your business find out more about Franchising Plus