The Prerequisites to Buy a Franchise
The most commonly asked question regarding franchising is, “What is required of me to become a franchisee?” We are talking here of the prerequisites – things you will be required to show even before you may be considered as a franchisee.
If you want to buy a franchise, there are minimum requirements. You’ll need to be able to show three things:
If you’re thinking of buying a franchise, you’ll need to have sufficient collateral to get the operation up and running. If you don’t know where you stand financially, you can waste a lot of research time on franchise opportunities that are out of range of your pocket.
Here’s a simple way to find out your financial position before you start your franchise search. It’s a simple net worth calculation:
- Add up your assets (what you own, for example a house)
- Add up your liabilities (what you owe, for example a home loan)
- Subtract liabilities from your assets
- The difference is your net worth Assets – Liabilities = Net Worth
- Compare this to the minimum capital requirement of the franchise. This will usually be 50% of the total investment.
This capital requirement varies considerably from franchise to franchise. The single biggest complaint one hears from aspiring franchisees is that there isn’t loan capital available. Actually there’s plenty capital about – but it comes with lending conditions, the purpose of which is to spread the risk by making sure the borrower has ‘skin in the game’ to incentivise the franchisee to put all his or her energy into the business to make certain it succeeds.
Many franchisors will have special arrangements with lenders, and this can be helpful. But there is no getting around the fact that in most cases a financier will only provide a maximum 50% of the capital required and will expect you to personally stump up the remaining 50%. Most lenders will not accept the 50% balance being another loan (as there would still be no skin in the game) and the business would in any case drown in debt repayments.
It therefore has to be unencumbered cash sourced from a combination of:
- your own funds
- family and friends capital
Consequently, there’s little point in looking to become a franchisee unless you’re confident you have a spare R200 000 – R500 000 lying around for your 50%. One way of getting started, if you’re short, is to form a joint venture with family and friends whereby you can pool your available cash.
A good franchise system will provide all the systems training you need, and indeed many systems prefer you to have no technical experience – so you can learn from a clean slate. Nonetheless, if you’re going to be running a business with staff it would be expected you start with some management experience and financial skills. Before you attempt to buy a franchise, you should sharpen your management skills by working for someone else in a related field.
Most franchisors – and lenders – will look closely at your work history and experience and would likely reject anyone without the right credentials. The skills most typically lacking among aspiring franchisees is the full responsibility for developing and implementing a business plan, and the ongoing management of profit & loss and cash flow.
Lenders in particular will inspect the person or people they are lending to, and his/her management team. They will want to see whether the team has the skills and experience required to make a success of the business. So make sure you have management experience that will count, and in your business plan outline the expertise of your proposed team.
One of the most common reasons why applicants are declined finance, is they do not know how to draft a formal business plan for a small business loan. Without such basic financial knowledge, you will neither get finance nor likely make a success of the business. A business plan must contain your revenue projections and your marketing story. There’s business plan software readily available that can help you create one.
There may be mandatory regulatory requirements in a franchise: for instance an estate agency or financial advisor require educational qualifications. You need to satisfy these educational qualifications before approaching the franchisor. Sometimes it can be less obvious, or as simple as acquiring a lease or getting business permits before you can begin operations.
Finally, franchising isn’t for everybody as it involves a particular mindset and attitude. Franchising doesn’t necessarily suit highly entrepreneurial people, but rather those willing to follow the rules. Our diagnostic tool, which you can use to test yourself in this regard, has been developed to help you identify whether you have the necessary mindset.
The following 10 questions will help identify whether franchising is the right way into self-employment for you and will find the best type of franchise match for you:
- Can I cope with the isolation of self-employment?
- Can I exercise self-discipline?
- Can I work long hours under pressure?
- Can I think about what effects of working for myself will have on my future?
- Can I handle being unsure at times?
- Can I accept advice?
- Am I able to generate enough money to meet payments to run a business and pay off debt commitments?
- Can I rely on the support of my spouse/partner?
- Can I demonstrate the willingness to understand and deal with a business situation in a manner that is likely to lead to a good outcome?
- Am I motivated to make a profit?