Past Q&A: from existing Franchisees & Franchisors


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Past Q&A – Existing Franchisors and Franchisees

Below is a sample of some of the questions sent into our Ask the Expert section from exisiting franchisors and franchisees, as well as from those with an existing business and looking to franchise it.

SHOULD WE FRANCHISE?

My business provides a service to truck manufacturers and transport companies. We are in business for eight years and currently operate company-owned units in several centres throughout South Africa. Our branches are profitable but staff problems at manager level prompted us to consider franchising for further expansion. Is such a business franchiseable, and are we big enough to take this step now?

Just about any business that operates in a growing market and can be standardised can be franchised. Seeing that you have been in business for eight years, you are certainly ready for this step. However, franchising a business is a mammoth undertaking, and careful planning is essential. We suggest that you start by finding out all there is to know about franchising. Our website – www.whichfranchise.co.za – contains some information and will guide you towards other sources.

I operate a well-established and profitable business in a niche market in the automotive sector. Can it be franchised?

On the face of it, the answer is a resounding “yes” but you have lots of homework ahead of you before you are ready to bank cheques from franchisees. To give details would fill a substantial book, clearly beyond the capacity of this newsletter. We suggest that you start by answering Eric Parker’s questionnaire headed “Is my business franchiseable?” You will find it on www.whichfranchise.co.za.

Other essential steps, in this order, are:

  1. Appoint a franchise champion and decide who will do most of the work. Even if you appoint consultants, someone in your company must focus on the project or it will not get anywhere.
  2. Undertake a viability study – unless the market can accommodate a reasonable number of units, franchising may not be optimally suited for your expansion.
  3. Draw up a franchise plan; this is a business plan with its focus on the franchise operation.
  4. Set up a pilot store. (Although you have operated a company-owned unit, it would be advisable to operate another unit at arm’s length. This will help you to uncover – and iron out – possible problems before your future franchisees are affected.)
  5. Compile an operations manual, essentially a step-by-step record of how to operate the business. It will become the bible of your future franchisees, and can also double up as training manual.
  6. Draft a disclosure document.
  7. Prepare input for the franchise agreement.
  8. Develop the profile of the ideal franchisee.
  9. Create marketing material for the franchise.
  10. Prepare for the launch.

While in theory, it is possible to do most of the work yourself, this approach is not recommended. The assistance of an experienced consultant will prove invaluable, and help to complete the project much faster than would otherwise be the case. Even if you decide to do most of the work in-house, you will definitely need to appoint an attorney with expertise in franchising to draft the franchise agreement. This is not a job for the uninitiated.

We operate a service business and currently have three branches, all located in and around Pretoria and operating profitably. We frequently receive calls for our service from other centres but are unable to accept the work because of the logistics involved. Should we expand through franchising or should we sell independent business owners a licence to perform the service under our supervision?

To provide someone with a licence to perform your service is essentially the same as franchising the concept, with one extremely important difference. A licence will not give you the degree of control over the licensee’s contact which a franchise agreement provides. To grow the brand, you would want your business partners to operate under your name, perform the service and conduct the business exactly as prescribed by you. Only a properly drafted franchise agreement will give you the necessary power to reign in reckless operators whose actions may damage the brand.

My mother has taught me how to cook the best wors roll anyone has ever eaten and I want to franchise the concept. What is the quickest way to attract franchisees?

Slowly now! From what you are saying, you know how to make the mother of all wors rolls, but you don’t say that you have converted this knowledge into a tried and tested business concept. If this is indeed the case then you are not ready to roll out a franchise just yet.

A franchise is a blueprint to business success; this implies that if your franchisees follow your guidelines to the letter they should be able to emulate your success. It also means that you have to operate a business for a reasonable period. This will enable you to fine-tune the concept, create and register a brand and prove profit potential. Once this is done, you need to investigate market potential, prepare the franchise package and have the legal documentation drawn up.

Then, and only then, are you ready to start looking for franchisees.

I have developed a product that will be an absolute winner when it hits the market. I don’t have the money needed to fund its manufacture and the bank turned down my request for a loan. I am now considering franchising. What does this entail?

To fund your project by “selling” franchises would border on fraud. A franchise is deemed to be a tried and tested blueprint for business success, not a source of speculative capital. We recommend that you read up on franchising on www.whichfranchise.co.za. This will help you realise that you are not ready to think about franchising.

This does not mean that you should abandon your plans. You could, for example, seek assistance from the dti – they operate a fund that supports product innovation, or you could present your idea to a gathering of venture capitalists.

 

LEGAL

At the time I signed my franchise agreement, my lawyer advised me against it because, as he put it, the agreement was hopelessly one-sided in the franchisor’s favour.

When I related my lawyer’s concerns to the franchisor, he suggested that I should sign anyway, just to get the paperwork out of the way. “Once you have signed, we sit down like reasonable men and sort out our differences” he said, so I signed.

We did discuss the issues that worried my lawyer but nothing changed. A year down the line, I stare bankruptcy in the face and my franchisor claims that no binding oral amendments to the agreement were made. Where does this leave me?”]

There is no nice way of saying this, so we might as well be blunt about it: “It leaves you in the lurch.” In principle, oral amendments to any agreement are binding. The difficulty lies in proving what has been said. It is precisely for this reason that most franchise agreements contain a clause to the effect that “no amendments are binding unless reduced to writing and signed by both parties.”

You are in an extremely weak position and we can only advise you to salvage what you can. Given what you have told us, it is safe to assume that the franchisor is not a member of FASA, so mediation by FASA is not an option. If you cannot negotiate a realistic settlement, get the best legal advice you can afford. Should the agreement be totally one-sided, it may just be possible to have it set aside, but be warned – it’s a long shot.

Six months ago, I signed a franchise agreement that is valid for three years. I am not too happy with the way things are going and am looking forward to the day when the agreement ends. Given this scenario, you’ll understand my dismay when the franchisor asked me to sign a modified agreement that would be valid for five years. Am I compelled to sign?

No, you are not! Changes to a franchise agreement, or any other formal agreement for that matter, take effect only if both parties willingly agree to these changes. Signing the revised agreement expresses this acceptance – if you don’t sign, you are not bound by it. The franchisor has no right to force you into signing. Stand your ground, and if the franchisor reacts negatively in some way, you may have a valid reason to terminate the agreement before it expires. Should you wish to do that, we would advise you to consult with an attorney with proven experience in franchise agreements.

At the time I signed my franchise agreement, my lawyer advised me against it because, as he put it, the agreement was hopelessly one-sided in the franchisor’s favour.

When I related my lawyer’s concerns to the franchisor, he suggested that I should sign anyway, just to get the paperwork out of the way. “Once you have signed, we sit down like reasonable men and sort out our differences” he said, so I signed.

We did discuss the issues that worried my lawyer but nothing changed. A year down the line, I stare bankruptcy in the face and my franchisor claims that no binding oral amendments to the agreement were made. Where does this leave me?”]

There is no nice way of saying this, so we might as well be blunt about it: “It leaves you in the lurch.” In principle, oral amendments to any agreement are binding. The difficulty lies in proving what has been said. It is precisely for this reason that most franchise agreements contain a clause to the effect that “no amendments are binding unless reduced to writing and signed by both parties.”

You are in an extremely weak position and we can only advise you to salvage what you can. Given what you have told us, it is safe to assume that the franchisor is not a member of FASA, so mediation by FASA is not an option. If you cannot negotiate a realistic settlement, get the best legal advice you can afford. Should the agreement be totally one-sided, it may just be possible to have it set aside, but be warned – it’s a long shot.

How often is it necessary to update the operations manual?

It depends on the dynamics in your business sector. The manual must always reflect the current status of product know-how, systems and procedures used in the network. If significant changes occur, an update should be issued immediately. Otherwise, the manual should be reviewed at least once or twice a year, failing which it will become obsolete.

I operate a franchise of a national brand and the business does reasonably well. There is one thing that irks me, though. Every month, the franchisor sends a representative to check up on me. I resent that, and cannot see why it is necessary. After all, I financed the business from my own resources and pay all fees on time, so why can’t they leave me alone? The same goes for regional/national meetings – I have a busy store to run and consider them a total waste of my time. Can you suggest a way out?

Like it or not, in a franchise, you are never alone. The franchisor has an obligation to protect the brand and the interests of the other franchisees within the network by ensuring adherence to standards. Moreover, the franchisor is obliged to help you maximize business results. Most franchisees welcome that, and would not want it any other way.

From what you tell us, we have a hard time accepting that “checking up on you” is the franchisor representative’s only role. Doesn’t he/she also keep you informed of developments in the sector and familiarize you with new methods and procedures? If you “want to be left alone” as you put it, you should not be a franchisee. Think about this carefully, and if you can’t learn to enjoy being part of a team, you’d be well advised to sell the business and start something on your own.

I want to start franchising my business but need assistance with the drafting of a franchise agreement. Can you perhaps send me an example of a standard franchise agreement which I can modify?

There is no such thing as a standard franchise agreement. Every franchise agreement needs to be tailored to the specific needs of the business to be franchised. Once a franchise agreement has been drawn up, however, it becomes “standard” for the franchisor’s operation. Not only is it OK to enter into the same agreement with all franchisees, this is in fact highly recommended. It follows that the cost of drafting the agreement is incurred only once, and can be amortised over 3-5 years.

I have made the decision to franchise my business. I need advice on how to set this up correctly to observe legal requirements while ensuring tax efficiency.

Franchising is a process. While legal advice is indispensable, it should generally not be the first step. We assume that you have done the necessary groundwork? This means that you have tested your product and its acceptance in the market and have registered a trademark. Next, you need to establish whether franchising is the best route for expansion. If so, you need to draw up a franchise plan and create an operations and procedures manual. Only then are you ready to discuss legalities with a franchise attorney.

You will find some information about franchising a business on our website. It is also advisable to discuss your plans with an experienced consultant. Reputable consultants and attorneys are listed on our website.

Is there a law in South Africa that outlines exactly what the Marketing Fund can be spent on? Can it be used to pay for exhibition costs, for example?

No, there is no law that governs how advertising monies are being spent but strongly entrenched conventions exist. It is generally accepted that advertising funds should be treated by the franchisor not as income but as money administered on behalf of the network to fund product advertising. Franchisees should be consulted, and at the end of the financial period, the franchisor should present franchisees with detailed accounts.

If the franchisor operates company-owned branches, these should contribute to the Marketing Fund in the same way as franchisees do, after all, they stand to benefit equally.

Expenses incurred in attending tradeshows may qualify if the tradeshow promotes the business of the franchise. Franchise exhibitions, and any other promotional activities intended to attract franchisees rather than to promote product sales, do not qualify.

I want to franchise my business but the prices lawyers quote me to draft a franchise agreement are horrendous. Where can I get a standard franchise agreement?

There is no such thing as a standard franchise agreement. For such an agreement to be workable, it needs to be drafted taking the specifics of your industry sector, and even the corporate culture within your business, into account. In any event, the franchise agreement is the last thing you need.

Assuming that you have a tried and tested business concept, you need to assess whether franchising is indeed the best route to expansion, draft a franchise plan and create the necessary documentation and infrastructure to launch the franchise, recruit and support your franchisees. This is a massive exercise, best undertaken with the assistance of an experienced consultant. If you want to do the job yourself, read up about franchising on our website and also visit www.fasa.co.za.

Is there a franchise ombudsman in South Africa? If so, please let us have contact details.

At this point in time, this function is handled by the Franchise Association of South Africa (FASA). Unfortunately, FASA will only deal with complaints lodged against one of its members. However, moves are afoot to broaden FASA’s role in the not too distant future. You can contact FASA by visiting www.fasa.co.za, calling 011 615-0359 or writing to vera.valasis@fasa.co.za.

Is it better to operate a franchise as a sole proprietor or as a Pty. or what? We have acquired a franchise in Durban and while we know the business we are a little clueless on these matters.

We are surprised that your franchisor didn’t provide guidance before you signed the franchise agreement. Unless the business is extremely small, operating it as a sole proprietorship is not recommended. It is usually best to form a company or, if you are quick, you can form a CC. (CCs are cheaper to set up but the moment the new Companies Act takes effect, no new CCs will be registered. Existing ones can, however, continue trading, probably for at least ten years into the future.)

A registered entity like a company is a legal personality in its own right. Its shareholders own the shares in the company but the company owns the business’s assets, trades under the registered name, pays taxes and can be sold as a going concern. A company is also responsible for its own debts. On the face of it, this would mean that should the business fail the company could be liquidated, with its shareholders getting off scot-free. In practice, it usually doesn’t work this way because the company’s creditors will insist on its shareholders signing surety.

A number of individuals including myself have recently invested into a franchise that does not seem to exist. We were promised user rights to business software and a registered trademark but nothing has materialized. What recourse do we have?

Unless the “franchisor” is a member of the Franchise Association of South Africa (FASA), which is unlikely, your practical options are limited. FASA will mediate between its members and franchisees but will not become involved with non-members.

You could (and should) file a complaint with the South African Police Service but, given the crime situation in this country, they have other priorities. You could also hire an attorney who could institute a civil claim on your behalf.

In reality, your chances of recouping your investments are very low. We advise you not to throw good money after bad by retaining legal representation. Laying a charge with SAP costs nothing and would be the right thing to do.

Editor’s comment: Without wishing to rub salts into wounds, this incident highlights the dangers of dealing with unproven franchise concepts. A listing on Whichfranchise and/or membership of FASA indicates that a company is of reasonable standing. This does not mean, however, that you should not make your own investigation into the opportunity. The website www.whichfranchise.co.za provides guidelines.

I am, ready to franchise my business and need a franchise agreement. Can you send me a sample agreement so that I can save on lawyer’s fees?

Unfortunately, the answer has to be “no”. A franchise agreement is a complex document that needs to take a myriad of laws as well as guidelines for ethical franchising into account. To complicate matters further, it must be tailored to the needs of your specific industry sector, so a “standard agreement” wouldn’t cut it. Drafting a franchise agreement is definitely not a DIY-job. You can save money by preparing a detailed brief for your attorney. This brief should list everything the attorney needs to know before he/she can draft an effective franchise agreement.

Where can I locate the best legal document covering the sale of franchises? I need to add that I am not prepared to pay the exorbitant legal fees lawyers charge.

The franchise agreement is the document that regulates the relationship between the franchisor and its franchisees. It must take the interests, rights and obligations of both parties into account. It is virtually impossible to draft a franchise agreement that will stand the test of time before the franchise package is complete. More specifically, the operations manual must be in place.

“standard franchise agreement” that can be used by franchisors active in different industry sectors does not exist. You need to prepare a lawyer’s brief that sets out the needs of your organisation and your own expectations. Give this document to a legal practitioner with franchise experience and ask him or her to draft the agreement. The resulting professional fee is simply part of becoming a professional franchisor and can be amortised over many franchise transactions. If you don’t think that this legal fee is justified then we are afraid you shouldn’t be franchising.

A client of mine wants to franchise her business; she has asked me to draw up a franchise agreement for her. I know that there are specialists in this field but I don’t want to refer her to them because I might lose the client. Unfortunately, I have no idea how franchising works. Can you help?

Precisely because South Africa does not have specific franchise legislation, the drafting of franchise agreements is a highly specialised task that requires years of practical experience in this field. We fully understand your reasons for not wanting to refer your client to another attorney but why not accept the assignment and ask a specialist to assist you in completing it? Given the costs involved, you might not make much money from the deal but you protect your client’s interests as well as your own.

I want to franchise my business but do not know where I can obtain a good franchise agreement. Consulting a lawyer is out of the question because they are too expensive. Can you help?

In a word, “no!” Without wanting to sound harsh, we can’t, and we wouldn’t. For a franchise agreement to withstand the challenges that may arise at a later stage, it needs to be drafted by an attorney with franchise experience. Not only that, but it must also be tailored to the circumstances of the particular business.

Attorneys’ fees may appear to be high but this must be seen as a necessary investment when setting up a franchise. Keep in mind that once you have an agreement drawn up, you can (and in fact should) use it again and again.

Tip: To keep the cost of the franchise agreement in check, you can prepare a comprehensive “lawyer’s brief”, a document that contains all the information your lawyer will need to draft the agreement.

 

THINGS TO CONSIDER BEFORE FRANCHISING

I am the junior partner in a very successful family business and would like to take the business to the next level by way of franchising. What are the steps I need to take?

Franchising is an ideal mechanism for the expansion of a well-established business. For a franchise to be successful, however, you need to lay the proper foundations first.

Start by finding out all there is to know about franchising. Our website – www.whichfranchise.co.za – contains some material, for more in-depth information, you may wish to obtain a book on the topic, for example How to Franchise a Business, published by the Franchise Association of Southern Africa (FASA).

Once you are ready to move forward, it will be advisable to call in an experienced franchise consultant. The consultant will help you to assess the viability of your project and advise you on the steps you should take. Franchising Plus CC is one of South Africa’s foremost franchise consultancies – you’ll find them through our website or in the telephone directory.

Alternatively, and assuming that you are able to focus on the project exclusively, you can do most of the work yourself, using the book mentioned above as a guide. One notable exception is the drafting of the franchise agreement – you will be well advised to leave this to an attorney with proven experience in this field.

I have a great idea for a franchise but I need someone to streamline and market it. I know that my idea has the potential to make me lots of money but I need to sell franchises so that I can purchase the necessary equipment. Who can help?

It appears to us that you are getting a little ahead of yourself. It’s good to think big but to franchise an idea is simply not on. As a first step, you need to find investors so that you can set up a pilot operation and test the idea. Assuming that it is successful, and once you have ironed out all the wrinkles, you can start thinking about franchising it. It appears to us that this is at least 2-3 years off. No need to give up, however. Find investors, prepare the business, operate it and all the while, prepare it for franchising. To learn more about franchising, read up about it on our website. You may want to visit www.fasa.co.za as well, they sell a book entitled How to franchise a business, which provides step-by-step guidelines.

I would like to set up my business as a franchise from the outset. What do I have to consider and what are the likely costs?

Setting up your business with a view to expand it via franchising later is an excellent idea. Franchising, in a nutshell, means that you offer your future franchisees a blueprint to business success. This means that you need to operate the business for a reasonable period, say 1-2 years. This will enable you to iron out all the kinks in the product range and the systems you use. Next, you need to document everything so that franchisees can follow your blueprint; this is done by creating an operations manual. You will also need marketing materials, a disclosure document and a franchise agreement.

Most importantly, you need to take a medium to long term view towards financial returns. The reason for this is that during the start-up phase, all your franchisees will be new. They will require much hand-holding whilst returns in the form of management services fees will be limited. On the upside, as the network evolves, returns from franchising can become extremely lucrative.

It is extremely difficult to provide meaningful cost estimates at this stage as this depends on sector needs and the extent to which you have managed to fine-tune your systems, procedures and processes. As a guide, the total package, if created by a reputable consultant with extensive input from yourself, will cost between R300 000 and R500 000. Subject to the necessary expertise and capacity being available in-house, you could do much of the work yourself, with the exception of drafting the franchise agreement; this requires the services of an experienced franchise attorney. We would also advise you to have a reputable consultant at least review your material before you launch the franchise in earnest.

What are the benefits of franchising my business?

  • Rapid national expansion; because franchisees invest their own money and manage their own businesses, the franchisor can focus on brand-building and market development.
  • Higher service levels; because franchisees make a substantial investment, they are generally fully committed to the business’s success.
  • Increased national market share resulting in improved economies of scale.

Who is the first professional person I need to speak to if I am sure that my business can be franchised?

Not so fast! We could refer you to any number of professional advisors but we feel that it is in your interest to study the articles we enclose on our website before you do anything else. The information they contain will help you decide, firstly, whether your business is ready to be franchised and if so, whether franchising is indeed the best option. Once satisfied that this is indeed the case, let us know and we will offer you various options for moving forward.

I have a business in the pre-primary education sector and currently operate through three branches, all profitable. Can this business be franchised, and if so, what is the process to be followed?

On the face of it, seeing that you operate three profitable branches already, franchising should be a suitable route for expansion. This is a big step, however, and one that cannot easily be reversed. You do not say how much you already know about franchising so we have to start with the basics. We recommend that you proceed as follows:

  1. Print out the two articles we enclose and read them carefully*. This will give you a basic understanding of what is involved in franchising a business, and whether it is the optimal solution for you.
  2. Using the guidelines contained in the table Is My Business Franchiseable? which were developed by franchise guru Eric J. Parker for exactly this purpose, assess your business and what needs to be done to make it franchise-ready.
  3. If ready to move forward, seek additional information on franchising a business. You will find that the website www.whichfranchise.co.za is a good starting point. (Remember to subscribe to the free newsletter – it’s packed with useful information!)
  4. Discuss your plans with a few trusted advisors. They will offer you sound advice long before the question of funding can be addressed.
  5. Develop the franchise package and pilot it extensively. At this point, the assistance of an attorney with franchise experience is essential. Input from a reputable consultant would be invaluable. Our website lists both.
  6. Launch your franchise and watch your brand grow!

* Note for readers: These articles are available from us free of charge; just drop us an email and we’ll send them to you. Editor.

What are the steps to franchising an idea? Is it wise to ask no franchise fees but to just sell your idea to other people?

An idea cannot be franchised! It can form the basis for the development of a franchise but it is up to the franchisor to go through the growing pains. This will be costly and time-consuming but it is the only way we know to build a brand.

As it happens, the steps to be followed in developing a franchise are set out above. If you don’t want to go through this process, you can offer your idea to others under a licence agreement. Unless your idea is truly mind-blowing and protected by watertight patents, you are unlikely to find many takers.

Remember, too, that as a licensor, you will have little control over the way your licensees conduct business. Quite clearly, this is not conducive to the building of a strong brand but only you can decide which route is the better one for you.

I have been working in a business for several years and know the systems and procedures inside out. Now I want to set up a business of my own as a franchisor. The concept will essentially be the same, so, given my background, do I really need to bother operating a pilot store?

Yes, yes, yes! Operating a pilot isn’t just about testing the product but also the entire business package. It is safe to assume, for example, that you will have your own brand and corporate identity. How would you know whether it works unless you test it? The same could be said for systems and procedures; you will surely want to introduce some ideas of your own there? You will also need a “laboratory” for the testing of new ideas and a venue for hands-on training of your franchisees and their staff.

This aside, setting up a franchise is an expensive undertaking. After you have developed the package, hired your support team and set up the office, you will need to recruit, train and support your new franchisees, both at your office and in the field. Because their businesses are new, income from franchise fees will be low and you can expect to work at a loss at first. Income from one or more pilots can help you over this difficult period.

 

FRANCHISOR & FRANCHISEE RELATIONSHIP

Because my franchise is still small, I am able to visit all my franchisees on a regular basis. I always thought that I would be more effective if I make these visits unannounced but my franchisees resent that. Am I wrong?

There is no nice way to put this so we’ll say it outright: Yes, you are wrong. Don’t get us wrong, unannounced visits do have a place in the franchisor’s arsenal, but they should be the exception rather than the rule. If reasonable suspicion exists that a franchisee is doing funny things that could damage the brand but every time you visit everything appears to be “spick and span” you need to mount a raid to find out what’s really going on.

Generally speaking, however, the franchise relationship should be based on trust. By arriving unannounced, you signal to your franchisees that you don’t trust them and want to catch them out. Your approach is also bad for productivity – unless your franchisees know that you are coming, they won’t be properly prepared to raise potential problems.

We own a software company; our product is excellent and there is much demand for it but because we focussed all our energies on product development, sales took a back seat. To address this shortcoming, we would like to appoint franchisees in various territories to take care of sales. Is this feasible and what does it entail?

This is a broad question and comprehensive books have been written on the topic.  The best answer we can offer within the limitations of this column is “it depends”. This may seem like a cop-out to you so let us explain.

All you have at the moment is a good product and a possible target market. These are important prerequisites for franchising but insufficient. The best way forward would be for you to determine, firstly, that interest in your product is in fact widespread. Setting up a franchise operation is relatively expensive; unless the target market is big enough, it would not be a viable option.

You also need to review the status of your intellectual property (brand name, know-how etc.) and ensure that everything conforms to best practice and is properly protected.

Next, you need to define your franchisee profile. You will also have to accept that you will be entering a new business segment. You are no longer a developer of software but you will be in the business of putting other people into business. This means that you have to select, train and support them on an ongoing basis so that they can operate successfully under your brand, definitely a full time job. It also means that you have an important decision to make. Either pass on responsibility for the core business to someone you trust or appoint a suitable individual to become the brand’s franchise champion.

At around this time, you also need to document everything a newcomer to the sector would need to do to operate the business successfully. The end product will be your fledgling network’s operations manual. Moreover, you will need a franchise agreement, a disclosure document and some franchise marketing materials including application forms.

Only once all this is in place will you be ready to roll out the franchise. This takes time and you will be well advised to accept that the initial two to three years to be hard going. The good news is that as soon as the roll-out gains momentum, you will find that franchising is indeed the best business expansion model currently known.

I operate a home repair service as a franchise. The business is doing well enough but I have a problem. Almost as soon as I have trained a new franchisee, he thinks that he knows it all and looks for ways to break away from the network. This means that I am effectively training a growing number of competitors. Sooner or later, this must affect the viability of my core business. How can I put a stop to this?

By offering value! No matter how simple your concept may be, you must try to give it some unique aspects which break-away franchisees cannot take with them. The following are just some examples – you need to pick the ones that are relevant to your type of business.

  • In addition to providing the usual aspects of ongoing support, really listen to your franchisees’ concerns then go out of your way to help solve them.
  • Build the brand so that it really pulls customers; if you can link this to a customer loyalty scheme, the better.
  • Develop a business management system that is unique.
  • Enter into supply arrangements that give franchisees genuine benefits.
  • Help your franchisees to grow their businesses by introducing add-on products or services.
  • Help your franchisees to grow as individuals by giving them opportunities to expand. This could take the form of turning successful franchisees into multi-unit operators, or mean involvement with franchisee councils or other advisory bodies.
  • Set up group benefit schemes (insurance, medical aid, pension plan etc.)
  • Bring the human factor into the equation; operating a business in isolation can be lonely, offer your franchisees a shoulder to cry on.

 

FINANCE

I have an idea for a new fast food concept that is better than anything else currently on the market. Problem is, I do not have sufficient capital to develop it, so I plan to raise the money by selling franchises. How should I go about this?

We know that you don’t see it this way but what you plan to do actually borders on fraud. Let us explain: You are about to offer someone a franchise for something that does not exist. A franchise is a blueprint to business success and this blueprint must be backed by the franchisor’s proven experience and outstanding track record.

Even if your business were up and running, which it isn’t, and you were ready to franchise it, which you aren’t, you would still have to make a sizeable investment into the franchise infrastructure before you can expect returns.

If your concept really has merit, you should be able to attract venture capital, or you may have to start the business with a partner. Either way, you will share the risks and rewards with an organisation or an individual who will (or should) understand the risks involved in a start-up venture. Whatever you do, stay clear of franchising until your concept has been proven, and your business is profitable.

How is the income flowing from sub-franchisees normally divided between the franchisor and the regional master franchisee?

There is no hard and fast rule – it depends primarily on the division of labour. If the franchisor provides most of the franchisee support, including initial and ongoing training, and the sub-franchisee’s activities are limited to carrying out routine visits, fees will probably be split about 70:40 in favour of the franchisor.

On the other hand, if for all practical purposes the regional master franchisee assumes the role of the franchisor in the territory then the lion share of income will have to accrue to him or her. The overriding point is that for any such arrangement to be sustainable, both the franchisor and the regional master franchisee must have a realistic chance to make money. This must be done without killing the goose that lays the golden egg – the sub-franchisee. In other words, you cannot charge higher fees than those customarily charged in the sector.

I want to know how I can be sure that the franchise I invest in is profitable. Also, what share of the profits my franchise generates am I entitled to keep and what goes to the franchisor?

A franchise is a blueprint to business success but no bona fide franchisor will guarantee success. Assuming that you have chosen the right franchise, the profitability of your business will depend largely on your own aptitude and dedication. Being a member of a recognised franchise and operating under their brand will help you greatly but in the end, it’s up to you.

Regarding your second question, you keep all profits your franchise generates. The franchisor receives a percentage of sales which varies from one franchise to the next. You will find this information in every franchise’s disclosure document.

I have set up a service business in the home inspection field. I identified real estate agents as my target market and because most of these have a national presence, I considered it necessary to give priority to the roll-out of a national franchise network. Unfortunately, referrals from estate agents are not forthcoming, at least not in expected numbers, and my franchisees and I are struggling. I do not have the funding required to launch a national marketing campaign – what can I do to rectify the situation?

Rolling out a franchise without adequate funding and before the brand has built up some credibility in its market is a bad idea. As a general rule, a franchisor should budget for losses for the first two to three years. Given your circumstances, this realisation is of no use to you, so let’s look at alternatives.

Judging by developments overseas, notably in the USA, home inspection is a service with a great future. In South Africa, however, the need for this service is not yet widely recognised; it will take time and lots of money to change that. In this context, it is also unfortunate that the sector is fragmented and appears to suffer from a poor reputation.

You could seek a partner who sees the potential of the business and is prepared to inject capital but the realities outlined in the previous paragraph may place this option into the realm of wishful thinking.

You could create a pull effect by introducing your concept to the end user market. Almost every reader of magazines and newspapers is a potential home buyer. It should not be too difficult, therefore, to convince editors that their readers would be interested in your service. You need to position yourself as an expert in your field and point out that an investment of less than 0,005% of the cost of an average home ensures that there are no unwelcome surprises at a later stage. Brighten it up with overseas statistics and (preferably local) case studies and you should be up and away.

Unless you are a gifted writer, you might need to hire one, but this should be affordable and the resulting publicity invaluable.

 

 INTERNATIONAL (MASTER FRANCHISES)

We want to invest in a US-based franchise and operate it in South Africa under a master licence. What does this entail and what should we watch out for?

You need to realise that a franchise that depends on an overseas-based franchisor for support is generally not viable. By investing in an overseas concept, you’d have to assume the dual roles of master franchisee vis-à-vis the overseas franchisor and act as the local franchisor. The onus will be on you to ensure that the concept is viable.

Working closely with the overseas franchisor, you would need to take a hand in the adaptation of the product, systems and procedures to local market conditions. After operating a pilot unit for a reasonable period, you’d have to set up the necessary infrastructure to roll out the franchise and support your future franchisees.

It is impossible to deal with a project of this magnitude within the framework of this newsletter. We can only advise you to access all the information we have on our website – www.whichfranchise.co.za. Should you decide to move forward with your plans, you should seek competent legal and consulting advice before signing any binding agreement or paying over any monies.

Speaking of which, licence deals are subject to approval by the South African Reserve Bank. They generally frown upon excessive payments, be it for upfront fees or ongoing fees, especially if the latter are set in the form of fixed minimum payments. You’ll find an article dealing with this on our website.

I run a successful health and social care business in the UK and want to franchise it in South Africa. I have no idea what this entails – can you help?

The most common way of franchising into a foreign country is through a master licence arrangement. You would grant a local person in the target country, in this case South Africa, the right to operate a pilot unit and subsequently offer franchises to others. On the financial side, the deal involves a once-off master licence fee and a share of ongoing management services fee income.

The basics of franchising as practiced in the UK are identical to South African practices. Although you have most if not all of the material you need to give to the master franchisee in place, however, it will have to be adapted to local legal and statutory requirements. To have the franchise agreement adapted by an attorney with extensive local franchise experience is essential, and you will also need to prepare a disclosure document.

Once you are ready to proceed, keep in mind that Whichfranchise operates a section that advertises master licence opportunities. And as soon as the new master licensee is ready to roll out the franchise, Whichfranchise can help to generate inquiries from prospective franchisees. Our clients tell us that exposure on our website elicits excellent response.

Our business is located in the UK; we were approached by a South African entrepreneur who wants to acquire a master licence for South Africa. What are the problems we are likely to encounter, should we agree to this?

 South Africa has a robust franchise sector, with about 85% of concepts home-grown. This notwithstanding, there is a place for foreign concepts, with leading brands like KFC and MacDonald’s leading the charge. To ensure success as far as this is possible, the grantor of the licence must be prepared to provide extensive support and take a long-term view on returns. For example, our population figure stands at about 50 million yet the number of people with disposable income is closer to 10 million.

Taxation for companies, currently at 28%, is on par with most of the rest of the world and South Africa has a double-taxation treaty with the UK. The payment of licence fees is subject to exchange controls. At this time, exchange controls continue to be strictly enforced but they have been relaxed over time and there is an expectation that they will eventually fall away.

In the interim, permission to make such payments will usually be given provided that the fees are reasonable and the local master licensee can show that the transaction involves the transfer of meaningful know-how and creates realistic opportunities for the creation of new businesses and employment.

 

FRANCHISING & JOB CREATION

How has franchising helped to curb unemployment in South Africa and are we likely to see more people venturing into franchising? If so, what attracts them?

 It is in the nature of most franchises that their owners need to employ staff from day one. The reason for this is that the reputation of the brand will kick-start the business. On occasion, the new franchisee may even receive an established customer base as part of the deal. This happens primarily in the services sector where a company, the franchisor, may service a market in another town until the growing customer base justifies the establishment of a franchised outlet there.

It is also true that because franchises adhere to the requirements of labour legislation, more people may be employed at more favourable terms than would be the case with a small independent start-up. If taking a mid-term view, this is of benefit to the franchisee because staff will be better motivated to deliver excellent service at all times.

Regarding the future of franchising, we are confident that the sector is on an unstoppable growth trajectory. This is set out in detail on the website www.x2in5.com where we explain how a doubling of the sector can be achieved within five short years provided that certain support measures are put in place.

 

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