By Eric Parker
If you have a successful business that has expansion potential, you could consider various options to achieve your expansion objectives.
You have 3 expansion options:
- Develop a branch network.
- Develop a franchise network.
- Develop a Joint Venture network.
You could have a combination of all three, however, for the purpose of this article, we will concentrate on developing a franchise network.
There Are Some Advantages of Going the Franchise Route:
- An owner-operator franchisee will significantly outperform an employee because they have “skin in the game”.
- The franchisor will not need to invest/risk large amounts of development capital.
- The franchisor can grow at a quicker rate as the brand is expanding with third-party capital.
- The franchisor will have a reduced staff complement with less but high quality and experienced staff. The franchisor spends less time concerned about the day to day running of the outlets as the franchisee will be managing the outlet and will look after those problems, including staff.
- The franchisor’s task will be different because they will be responsible for the bigger picture i.e. strategic planning, procurement, marketing, franchise management, etc.. A good analogy for this is that the franchisor gives the franchisee the recipe and the franchisee bakes the cake.
- The franchisees all contribute to a marketing fund that allows for major brand-building potential.
- A local franchisee has an advantage because they are well known and established in an area and local residents like to support local franchises, especially in outlying areas.
Apart from the many benefits, there are some negatives, the major one being the cash flow needed to develop a franchise.
Estimated setup costs
To get started in franchising, you will need a minimum of R460 000* excluding VAT to set it up.
The setup cost consists of the following:
|Operations and Procedure Manual – content only, excludes online electronic platforms||R180 000|
|Disclosure Document||R30 000|
|Franchise Agreement||R45 000|
* Payable monthly over 6 months
The total amount is not required upfront and can be paid in 6 monthly installments between R76 000 and R100 000 excluding VAT.
This should be seen as a cash flow investment to be recovered over a period of time as illustrated below. The development cost is recouped from initial franchise fees charged when franchisees join the system. Most franchises will recover the franchise development cost after having awarded the first five franchises. In addition to that, the royalty income will also build over time and contribute to franchisor profitability. Franchising works on a multiplier effect and most franchises become profitable after ten to twenty franchises have been awarded.
It is important to note:
- The franchisor makes a profit from monthly royalties/management service fees. This system is highly attractive because of the return on capital invested. Part of our service is to compile these profit projections for both franchisor and franchisee, ensuring that franchise fees are realistic and contribute to a return on investment for both franchisor and franchisee.
- Some franchisors have tried to set up for franchising on the cheap, and have cut corners. From our experience, this always results in problems and giving franchising a bad name due to the conflict it creates between franchisors and franchisees.
We always say that you only get a clean piece of paper once, so make sure you do it right.