Factors to consider when buying a franchise in South Africa – and how to choose wisely

  • Buying a turn-key franchise operation is a relatively safe way to start a business in South Africa.
  • But it’s not cheap, nor is it without some risks.
  • These are the key factors to consider when picking out and committing to a franchise.

Opening a franchise may be one of the safest and easiest ways to start your own business, but it’s not for everyone and without risks.

Buying a franchise will likely involve extensive decision-making, reams of paperwork, obtaining legal advice, and then paying upwards of R1 million to buy into an established business model and name.

In return, says Fred Makgato, CEO of the Franchise Association of South Africa (FASA), you are essentially buying into a club that will guide you through much of the process. As with a club, though, this also means you’ll have to pay upfront and recurring costs.

“You pay the franchise fee for the right to join the club. As with most clubs, you won’t be allowed to use the club facilities if you haven’t paid the initial upfront fee. To remain part of the club and reap the benefits of what they have to offer, you have to pay ongoing fees, and you have to adhere to the rules of the club to remain a bonafide member,” says Makgato.

FASA, who counts several of the country’s leading franchises as members, says franchising is a great way to start a small business. However, it still takes a specific type of person to run a successful franchise business – and there are several steps to take before committing.

Tick these boxes before buying a franchise

You must be familiar with the nuances of franchising.

FASA recommends that prospective franchises familiarise themselves with the terminology used in franchising and the responsibilities that each party has. The association says “this will ensure that you know precisely what it is all about, so there should be no unwelcome surprises at a later stage”.

Do your research

“Don’t just opt for the first franchise that catches your eye or buy a franchise simply because you like the product,” Makgato says. “Investigate options over the full range of business sectors – you may find opportunities in business areas you hadn’t thought of before.”

Conduct due diligence 

Although buying a reputable franchise may be one of the safer ways to start a business, especially for first-timers, it’s not without risks. And it also comes at a considerable cost – most established franchises in South Africa cost well over R1 million. FASA recommends that prospective franchisees conduct extensive due diligence before signing up.

“Remember, a franchise is a long-term arrangement, so you’d better make sure you can live with it and thrive!” says Makgato.

Be prepared to play by the franchisor’s rules.

After you’ve chosen a franchise, it’s essential to scrutinise the specifics of the agreement. As with joining a club, you’ll need to adhere to various rules, even if you don’t agree with them or consider them counterproductive to your franchise’s growth.

“As with any club, there are rules and regulations that form the basis of the franchise formula and its success, and you need to understand, accept and be prepared to adhere to all the requirements that you will be committing to when signing up,” Makgato says.

Make sure you have enough cash.

Buying a franchise may be safer and more predictable than launching an entirely new business from scratch, but it’s seldom a cheap operation. There are extensive costs involved with applying, buying, and then maintaining a franchise – and that’s before your working expenses. FASA highlights that it’s crucial to establish that you have adequate resources and plan a financial contingency for unforeseen expenses.

Be committed to the franchise.

Franchises don’t run themselves – they require a full-time commitment and long hours. Although some franchises offer turn-key business solutions, that’s only for the setup phase. Once the franchisor puts the basics in place, it will be up to you to ensure that you are wholly focused on making the business a success and positively contributing to the franchisor’s plans. 

“If you have other interests that distract you from operating the business, tension may arise, and you could even find yourself in breach of the franchise contract,” says Makgato.

Be a team player

Makgato says franchisees must accept that they are team players.

“The interests of the brand and the network are not in competition with your own interests but actually complement each other. You will also be expected to make a meaningful contribution to the ongoing growth of the network and share your ideas, successes and failures freely with the franchisor’s team and your peers.”

If you aren’t willing to participate productively with the franchisor and other franchisees, it’s easy to become isolated. Makgato says you’ll also be missing out on one of the core reasons many franchisees succeed, that of a combined effort among many role-players.

Choosing a franchise in South Africa

FASA recommends that anyone interested in opening a franchise follows these steps before committing.

  1. Shortlist choices

Write a short list of industries that interest you and play to your strengths. Find out how much it will cost to buy a franchise in this market sector, and then reach out to franchisors who offer businesses that interest you and that you can afford. Take your time to investigate all the options available and compare their franchisee support system, training procedures, and administration systems, and request meetings with the franchisor teams to establish if there’s a good rapport.

Once you’ve followed this process, FASA says you need to ask yourself: “Can I see myself doing this day-in and day-out with enthusiasm for five, seven or even ten years?”

If your answer is yes, then you may have found the right franchise fit.

  1. Buying in

Once you’ve decided to go with a specific franchise, there’s a dual commitment required from both you and the franchisor. Just as you need to ensure you’ve made the right choice, so too the franchisor will need to do the same.

“It is vital that you as the prospective franchisee is comfortable with the people you will be working with, so don’t be content to just talking to the franchisor himself or one of his representatives; insist on meeting the support staff as well and above all talk to existing franchisees,” says Makgato.

It’s also worth spending some time at an existing franchise to get an idea of its day-to-day running. Most franchisors, says Makgato, will welcome a request by a severious prospect to spend a day at a company-owned or franchised unit.

  1. The paperwork

Once you’ve identified which franchise you would like to buy, you’ll have to face extensive paperwork and some legal processes specific to franchising.

FASA says you must insist on a disclosure document, which details everything a franchisee needs to know about the franchise – its owners, financial projections, track record, and specifics of the business opportunity.

“Ask the franchisor to explain these documents to you and also have them scrutinised by your professional advisors. Listen to their comments and clarify any queries you may have with the franchisor before you sign the deal,” says Makgato.

Makgato says you should not enter into any commitment or pay any fees until you are confident that this is the franchise and business opportunity that you want.

The Consumer Protection Act oversees the agreement between franchisees and franchisors. It also incorporates a cooling-off period should you change your mind after checking the franchisor’s figures and the contract details.

  1. The delivery

The core reason many buy into a franchise is to feel as if they are part of an established franchise system. This is particularly true in the early days of purchasing and setting up a new franchise branch.

“The ‘bonding’ period, when the franchise is in the start-up phase, must continue with the franchisor keeping up the momentum of support to ensure that the franchisee gets his business off the ground and into the success phase,” says Makgato. “This includes giving support on procedures, software, policy, and personnel.”

Likewise, franchisees also have a commitment to make – they must contribute to the brand by following reasonable business practices and ensuring customer satisfaction.

“The one commonality in both parties is their desire to be financially successful,” says Makgato. “If both parties can acknowledge that fact and work towards that goal, the relationship between franchisor and franchisee will be a mutually successful and financially viable one.”

Source: www.businessinsider.co.za

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