[Opinion Piece] The challenges of starting a franchise
Richard Mukheibir, Managing Director of Cash Converters.
Many aspiring franchisees run into the problem of not being able to secure sufficient capital. Cash Converters, the most successful second hand good franchise in South Africa, says it is important for franchisees to ensure they have a strong business plan and security in place – “both of which have a significantly higher chance of being accepted if backed by a successful brand,” says Richard Mukheibir, Managing Director of Cash Converters.
He says if the plan is based on an established model with a good track record there’s more chance of securing the finances needed. The plan starts with comprehensive research and Mukheibir says that this is where a franchise solution really makes sense. At Cash Converters for example we will assist the potential franchisee with the business plan that can then be presented to the banks to secure a loan.
“The business plan is a document that needs to encapsulate what the business owner currently has and the execution of a plan to get a desired result. It’s important that it includes where things currently are, where they are going and the resources needed to get there. It needs to be realistic and achievable with the right skills on hand. In essence it’s the foundation of the business, a combination of a map, binoculars and compass, so to speak,” says Mukheibir.
The reality is that according to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months – a whopping 80% crash and burn. Cash Converters say that realistically then if you don’t have enough collateral, you need to rethink your business proposition. “It is unwise to start a business with more than 50% debt. Ideally you need to be able to put down at least 50% in cash and borrow the other half. It’s then viable to be able to pay back the debt and your application will generally be successful,” says Mukheibir.
It is also advisable to limit ones risk so rather start on a smaller scale and then in three to five years you may be able to sell the business for two to three times what you initially invested in it and now have the collateral and business experience to start something bigger.
It is very rare, almost unheard of, that banks will lend to ‘the guy with nothing but a good idea’. Giving people money without surety and experience is a recipe for failure. It is also very rare that businesses that are given hand outs become successful. A pre-requisite for success is getting through the hard times. “It also helps if the business you started has multiple revenue streams to buffer you from the bad times,” says Mukheiber.
Finally, be prepared to stay involved. At Cash Converters we look for a specific profile of franchisee. “To be a Cash Converters owner you need to understand that the business needs to be run on a full-time basis – our stores are owner-operated businesses. You need to interact with customers and staff continuously. Understanding the clients’ needs and providing solutions as well as motivating staff to meet these needs is paramount. We are also traders so our franchisees need to be motivated to trade in household goods. We always ask the question, ‘Does this character fit with our business model?’ If not, there’s very little chance of success and we won’t encourage or back this type of applicant,“ concludes Mukheibir.