How to Franchise – Step by Step Guide

Am I suited to going into business for myself?

• Can I commit myself to working hard and taking all the responsibilities of running a franchise business? Often when starting a business, you would have to commit yourself to working long hours and either manage or carry out various tasks in all areas of the business.
• Am I healthy and able to work hard and long hours?
• Can I address all the negative thoughts and worries that accompany being in business for yourself:
• Do I want to take a chance and invest my hard earned cash or capital into a business?
• Will I have the support of my family – will they put up with the level of commitment required to make my business a success? It may mean no holiday for a while!

Do I need to be an entrepreneur to become a franchisee?

The debate about whether you need to be an entrepreneur to become a franchisee or not, has raged in academic circles for some time now. Does a new Franchise need an Entrepreneur to make it successful, or has franchising become less needy of entrepreneurial spirit? Read more…

Check finance available to invest

Setting up a business is a risk although franchising should minimise it you must be aware that things can go wrong and whatever you invest could be in danger and if you borrow money you may well be left with debts to repay.

You therefore need to be very comfortable with how much you invest of your own money and how much you borrow.

• Research franchising as an optionDo I have any savings that I want to invest?
• Any capital invested in a property or elsewhere.
• Am I able to borrow?

Although buying a franchise in South Africa is not an easy way to owning your own business, in some cases it is a lot easier than starting from scratch. For a start you can see your potential business in operation before you invest a penny.

You will be starting your business using someone else’s know-how and expertise gained over the years of running a mirror image business and on top of it you don’t have to worry about developing the system.

• Understand how franchising works in South Africa – look at specialist franchise magazines and literature. It’s a great start to familiarising yourself with the South African franchise industry.
• Search franchising on the web – Take advantage of all the free information and services available to you through this medium.
• Attend franchise seminars
• Attend franchise exhibitions – there are franchise exhibitions throughout the year where you can see and meet franchisors promoting their opportunities.

Assess personal suitability and preferences for franchise type

It’s a question of matching the skills and type of experience required to run a franchise with what you like doing, and are good at.

In many cases it’s worth remembering that franchising can allow you to work in an industry where you’ve had no previous experience. So broadly it’s the type of work that you need to identify.

Once you have found the type of work that suits you best, you can then select the franchise type that suits you.

What to consider:

What type of experience do you have? – Identify the skills you have developed over the years in order to ensure the franchise opportunity you choose fits your skills and experiences.

Have you managed staff? – Many franchisees are geared to a franchise employing many staff with managed skills.

Have you been involved in administration? – Many franchise systems involve extensive administration work therefore it would be beneficial to have some experience in this area.

What would you like to do and what are your strengths?

• Do you want to work in a shop?
• Do you want to work in an office?
• Do you want to work on your own?

What do you enjoy the most?

• Talking on the phone?
• Motivating people?
• Working with your hands?
• Driving?

Identify suitable franchises within the right type and finance

Once you’ve decided on a particular franchise type, you can now narrow down the list of opportunities within that type by finance. The resultant list will show all opportunities within the categories you’ve selected. There will be several franchise opportunities in different industries for you to consider. You then can select the industry you prefer to work in.

This process will enable you to arrive at a shortlist of South African opportunities that you can start applying for.

Assess the Franchise/s

If you are buying a franchise buisness, you are going to be working, selling and promoting the product or service for a long period of time. You can’t change or develop the product or service, so make sure that the franchise has long term appeal and its market is not threatened in any way.

It is important that the franchisor can demonstrate a clear understanding of the future market for the product or service and that you both clearly understand the following:

• Is the market for this product / service expanding rapidly, growing slowly, static or declining?
• Does the product / service have special features which help it to sell? Does it warrant a premium price?
• Who would your competitors be and how competitive would your product or service be in relation to them?
• You have looked at the general market for your product, what do you know of the local market in which you will be operating?

 Check out the franchisors that you’ve selected

• Is the franchisor financially sound?
• What is the director’s background?
• What did they do previously and why did they go into franchising?
• Does a comprehensive operations manual support the training?
• Has the franchisor run outlets in similar areas to yours in South Africa?
• How successful is the franchisor and existing franchisees in South Africa and worldwide?
• How thorough is the training at the start-up stage and thereafter?
• How many franchises have they opened in the last 12 months in South Africa?
• How many applicants do they reject?

Confirm and arrange funding

It is a big step from deciding to start a franchise to actually opening your doors for business. For many, one of the biggest hurdles is approaching the bank for finance.

Banks have learnt that it can be safer to lend to franchisees of well-structured ethical franchise systems. The track record of the franchisor is most important.

For an established franchise, most of the major banks will lend up to 70% of the start up costs, for new franchises the figure will probably around 50%. Banks will normally expect the franchisee to contribute at least 30% of the highlighted ingoing cost of the franchise. This contribution should be unborrowed. With this in mind:

• How much will you be able to borrow? Prepare a full list of your personal expenditure mortgage, hire purchase, household bills, and so on. This will show how much money you will need to take out of the business in order to live.
• What security can you give to back up your loan? You might have a life policy with some value, or have equity in your home.
• Start preparing your business plan – this is a vital document to obtain finance from the bank. Your chosen franchisor will often help you with this.

As part of your business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure that you understand the figures, what are they based on, how much do you need to turnover in order to break even?

Your franchisor will normally help with setting out details of start up funds required and help with the preparation of cash flow forecasts.

Check legal agreements

In order to become a franchisee you will have to enter into a legal agreement with the franchisor, known as the franchise agreement.

 “The Franchise Agreement”

A franchise agreement should achieve three fundamental objectives:

FIRST – given the absence of specific franchise legislation, it should contractually bind the franchisor and the franchisee and accurately reflect the terms agreed upon.

SECOND – It should seek to protect for the benefit both of the franchisor and the franchisee and the franchisors intellectual property.

THIRD – It should clearly set out the rules to be observed by the parties.

As there is no specific legislation or regulation for franchising, the franchise agreement becomes all-important in determining the rights and obligations of the franchisor and the franchisee and the relationship between them. In this respect the franchise agreement can be said to form the ‘engine room’ of the whole transaction. If difficulties should arise between the franchisor and the franchisee they will need to turn to the contract to see what, if any, rights and obligations have been provided in the franchise agreement.

 Visit franchisees to confirm your choice

You should visit existing franchisees to learn from their experiences and to find out their opinions on the services provided by the franchisor. Good franchisors will always allow you free access to any franchisees in their network and, in most cases, existing franchisees will be happy to talk things over with you.

Some of the questions you should ask are:

• Is your franchise profitable now?
• Is the franchisor aware of changes in the marketplace and quick to adapt?
• If there is illness, does the franchisor offer to help?
• What kind of on-going support do you get?
• Did you get good training, systems and manuals?
• Is the franchisor keeping their end of the bargain?
• How long did it take to recoup your investment?
• Does the franchisor welcome suggestions from franchisees?

 Finalise legal agreement

The franchise transaction is complex and the franchise agreement must respect that complexity. To the franchisee, the franchise contract represents an investment. Your business depends upon it to the extent that the business may disappear should it terminate.

Once you and your franchise solicitor are comfortable with the terms in the franchise agreement you will arrange to sign the franchise agreement and make payment as required in the agreement.

 Final meeting with franchisor/sign agreement

• Both parties will sign franchise agreement and will be bound by it.
• Obtain training schedule as relevant.
• Introduction to the key people involved within the franchisors organisation.
• Arrange date for launch of business.