In view of franchising’s growth in popularity, new concepts appear in the market all the time, and those that have at least one unit operational, profitable, and running for a reasonable period of time are considering franchising as a mechanism for potential growth.
Launching a franchise initiative has got to be one of the most challenging yet rewarding mechanisms any business can take on.
The franchise concept may be new and unknown to independent business owners wanting to utilise this expansion mechanism, and it is important to understand franchising and what it entails.
As Franchise Consultants We Have Combined the 15 Most Frequently Asked Questions Within Our Environment:
1. How do I Franchise my Business?
- Step 1: Develop a proven, successful business operation – the concept must be proven, sustainable, and profitable.
- Step 2: Assess the viability of franchising your business by considering several critical success factors before you commence with preparing the business for franchising
- Step 3: Prepare the business for franchising, this includes understanding what franchising a business entails, reviewing your current business model and developing a franchise expansion plan
- Step 4: Get the business franchise ready by developing the necessary documentation compliant with South African legislation as well as ensuring that you have the necessary infrastructure and resources in place.
- Step 5: Once you have the above in place you can start advertising your franchise and recruit franchisees
2. What is the Financial Impact of Franchising my Business?
To financially develop your franchise we estimate that a business would need approximately R400 000 – R500 000 ex Vat over a period of 6 months and this will include the following:
- Consulting fees for franchise development experts
- Development of your franchise package (disclosure document, operations and procedures manual, franchise agreement and recruitment pack)
- Trademark registration in the relevant categories
This should be seen as a cash flow investment that will be recovered over a period of time, once you’ve signed on approximately 5 franchises.
3. What Basic Legal Considerations do I Need to be Aware of?
Franchising itself is not legislated, however certain regulations do apply in the development of franchised operations and management thereof through an owner-operator. This includes the following:
1. The Consumer Protection Act
The definition of a franchise agreement as well as all franchise relationships in South Africa are now governed by the Consumer Protection Act. Consumer rights are bestowed on franchisees; therefore it is essential to avoid misrepresentation and ensure that all documentation is complaint.
2. The Competitions Act
- A franchisor cannot force a franchisee to use a certain supplier, but they can prescribe product range and standards.
- A franchisor cannot engage in price-fixing but can make use of recommended prices.
- Territories cannot be enforced but most franchises work on “gentleman’s agreement”.
3. The POPI Act
The Protection of Personal Information governs how to collect and manage personal information.
4. Why Should I Franchise my Business?
There are various advantages when franchising your business, which include the following:
- Developing and growing your network
- Reducing capital outlay
- Enhancing buying power
- Group marketing
- Improved Operational efficiencies
- Having an owner operator with skin in the game
- Having a well-controlled and standardised business mechanism
- Potential to generate good returns
- Having a proven business concept i.e. the risk is limited for a potential franchisee
5.What is a Disclosure Document and Why do I Need One?
A disclosure document is a comprehensive, transparent and reliable information document that allows the potential franchisee to make an informed decision about the franchise opportunity. The Consumer Protection Act, as well as the Franchise Association of South Africa, have prepared mandatory information as well as guidelines that need to be adhered to, to ensure full compliance and ethical franchising
6. What is ‘The Cooling Off Period’?
When signing on a potential franchisee, a full 14 calendar days must lapse between the date on which a prospective franchisee receives a copy of the franchise agreement and disclosure document before the agreement can be signed and the monies are paid over. Once the franchise agreement has been signed, the franchisee is within their rights to cancel the agreement, with no penalties, within 10 business days. So it is important to wait for the cooling periods to lapse before any franchise-related operations commence.
7. What Are The Different Franchise Fees?
All franchisees are expected to pay for using the franchisor’s brand name and continuous support. Franchise Fees are divided into once-off/initial fees and ongoing fees.
- Initial franchise fee – is effectively a joining fee that grants the franchisee access to the network and its intellectual property, as well as initial training and assistance in setting up the business. The franchisor does not really make money from this fee and it varies from industry to industry and franchisor to franchisor. The initial franchise fee needs to be competitive to those of similar franchises
- Establishment cost – the capital needed to set up the franchise e.g. fixtures and fittings, signage, equipment, shopfitting, rental deposits, start-up stock, systems and software, marketing material, uniforms, etc
- Working capital – a franchisee will not be profitable from the first day that they start trading, therefore working capital needs to be provided to cover the operational expenses until the business reaches a break-even stage
- Ongoing management service/royalty fees – to ensure ongoing support to the franchise network (generally done through field service consultants). This is generally calculated as a percentage of turnover and is payable to the franchisor monthly
- Ongoing marketing fees – monthly marketing contributions are paid into a separate account and used for national marketing awareness and brand building initiatives. Franchisors may not use these fees for franchisee recruitment. Marketing fees are charged as a percentage of turnover.
- Other ongoing fees may include – special services and or administration fees
- Possible renewal costs for refurbishment and a franchise fee once the initial 5-year agreement term needs to be renewed
8. What is Trademark Registration?
Business owners tend to get confused between business/entity registration and trademark registration. Business registration is your ABC (Pty) Ltd that allows you to operate, whereas a trademark protects your intellectual property i.e. brand name and logo. When you franchise your business, you pass on the right to use your intellectual property and trademarks to the franchise network, therefore it needs to be protected. The trademark registration process can take up to 18-24 months, however, once you have applied for the trademark, you as the owner will assume priority over the trademark which means you are protected in the interim and no one else can register the same brand and trademarks.
9. Where Does the Franchisor’s Profit Come From?
- The franchisor makes profit from monthly royalties/management services fees
- The initial franchise fee is not seen as a profitable income as this is used to recoup franchise development cost and to cover the initial expenses for assisting a franchisee in setting up their business
- The national marketing fee is also not seen as an income for the franchisor as this needs to be spent on marketing initiatives for the franchise network
- Franchisors can take a small competitive mark-up on the supply of products to cover the supply chain and distribution expenses
10. Will I Find Franchisees?
Bear in mind, franchise consultants or industry experts cannot ever guarantee franchisees to any brand once they embark on their franchise journey, however from experience we know that if the franchise is the following, they do get franchisee traction:
- a great concept
- a franchisee can achieve a good return of investment within 3 to perhaps 4 years in the current economy
- the model is sustainable and profitable
- the franchise is reasonably priced
In the current economic environment, people are looking for opportunities and they need to buy employment due to retrenchments and so forth brought on by the COVID-19 pandemic (2020). Various brands are still selling franchises and franchise experts are receiving enquiries from businesses that want to franchise their entire business model or a specific division within the group. So the franchise mechanism is a popular way to expand in the current environmentCOVID-19 pandemic (2020)
When it comes to a person selecting a franchise, well-established brands with a proven track record tend to be given preference as this is perceived as the safest option. At times, it might take a bit longer than expected for new franchisors to find franchisees, and it would require marketing initiatives to create awareness and convince potential franchisees that your exciting opportunity deserves their attention
Potential franchisees want to hear from other people who are already operating and working with you, that it is a good franchise venture and partnership. When you are a new franchisor, this will not be possible as they would need to rely on and trust the information that you disclose to them. There is no doubt that being the first franchisee of an emerging network increases the level of risk. Therefore selecting the first few pioneer franchisees and getting their business operational will be critical.
11. Why do Some Franchises Fail?
We have seen franchises fail and disappear due to:
- Unproven business and financial model
- Relationship issues (franchising needs to be a win : win relationship)
- Lack of trust and commitment from both parties
- Poor franchisee selection
- The wrong location and site
- Insufficient support
- Unethical practices
12. How do I Select Franchisees?
The franchisee selection and recruitment process is one of the most important factors in developing a sustainable franchise network. There are tools available to assist you such as the E test (a psychometric assessment for potential franchisees). It is essential to review and verify references and ensure the franchisee will be hands-on in the outlet and that your business has his full-time attention and commitment. Here are 14 steps to successfully recruit and select franchisees.
13. How do I Control Franchisees?
Franchising is a very standardised and controlled mechanism for expansion where franchisees can be controlled by:
- The franchise agreement – this includes clauses with regards to operating the franchise in accordance with your prescribed guidelines and standards and includes the potential recourse if the franchisee or franchisor had to step out of line
- The operations and procedures manual – This is seen as the blueprint for running the business and contains operational guidelines. In the franchise agreement, it clearly states that franchisees agree to adhere to its policies and procedures which may change from time to time
- Creating a solid and effective franchise support structure
- Measure and monitor progress and results
- Ongoing training and support
- Centralised and standardised systems and controls
14. Can I Force a Franchisee to Purchase from Me and can I Take a Mark-Up?
If you give it to them at the right quality and at a market related/competitive price, you can let franchisees purchase from you. However, you cannot force franchisees, according to the Competitions Act law, if they can source the exact same product at a cheaper rate, franchisees are within their right to purchase elsewhere.
A franchisor can make a reasonable mark-up on the supply of products to cover your distribution expenses, however you cannot profiteer from product supply due to the fact that you are receiving a royalty.
15. What Training Should I Give to Franchisees?
Franchisors need to develop a training programme to ensure that franchisees are equipped to run the business successfully. Initial training inducts franchisees into the business and trains them on how to operate the business according to the franchisor’s guidelines. Training should also include basic business skills and financial management
Franchisees require continuous and ongoing training to ensure that standards are maintained, and the franchisees are familiar with the latest operational procedures and processes available.