Over the past five decades, franchising in South Africa has grown in leaps and bounds. Initially, opportunities existed primarily in the fast food and restaurant sectors but this has changed. Franchises are now offered in more than 30 different industry sectors and new concepts emerge all the time. The target audience for this article are individuals who find the idea of becoming entrepreneurs without going it alone appealing and want to know more.
The principles of franchising
To fully understand the concept of franchising, newcomers need to familiarise themselves with the following key terms.
- The franchisor
The franchisor is usually an individual who has operated a business successfully and is now ready to expand it by granting franchise rights. In some instances, existing branch networks go the same route.
- The franchisee
The typical franchisee is an individual who is prepared to forgo some of the independence that comes with entrepreneurship in exchange for access to a tried and tested business concept.
- The franchise package
A franchise is a blueprint for business success. The franchisor has developed the concept and honed it to perfection before packaging the resulting know-how and other intellectual property into the franchise package. The franchise package should be sufficiently comprehensive to enable an individual without prior experience in the sector to replicate the franchisor’s business success.
The franchise package should come with a registered trademark and be linked to the necessary infrastructure to recruit and train new franchisees and offer them ongoing support.
- Benefits flowing from brand recognition
Franchisees operating under a well-known brand will find it easier to get their new business off the ground than those starting under an unknown name because the brand awareness exists and there may even be a pool of established customers. This shortens the period leading up to break-even.
- The importance of a credible track record
The franchisor’s track record is important. However, everyone has to start somewhere and a franchise offered by a relatively new company is not necessarily a bad option, subject to one very important proviso. The new franchisor must have proven the business’s viability by operating it for a reasonable period, and the necessary support infrastructure must be in place. Experts agree that to offer an unproven concept as a franchise borders on fraud.
Prospective franchisees face two sets of financial obligations, namely initial and ongoing. Most of them will also need to borrow money.
Initial financial obligations
- The franchisor will levy an initial fee; it pays for initial training and set-up support.
- The franchisee is responsible for all establishment costs and needs to provide working capital.
Ongoing financial obligations
- The management services fee, usually calculated as a percentage of sales, falls due weekly or monthly. It pays for ongoing support and contains an element of profit for the franchisor. This structure is beneficial because it incentivises the franchisor to provide meaningful ongoing support.
- The contribution to the network’s marketing or advertising fund is either a percentage of sales or a fixed monthly payment.
Up to a point, the Consumer Protection Act (CPA) regulates franchisees’ financial obligations – see Legal issues below.
South Africa’s main banks recognise that a franchisee operating with a professional franchisor’s support stands a better chance of success than an independent. For this reason, banks are franchise-friendly; they even operate dedicated franchise funding departments. This notwithstanding, they will insist on borrowers making an investment from their own funds. This is reasonable because to fund the full cost of operating a new business with loan capital would cause it to drown in debt. Depending on the borrower’s circumstances, banks will usually expect a contribution of 50 to 60% from own unencumbered resources.
The CPA regulates the franchise relationship. Among other things, the CPA:
- Obliges franchisors to make a comprehensive disclosure document available to qualified prospects;
- Prescribes the minimum information the disclosure document and the franchise agreement must contain;
- Regulates the administration of initial deposits; and
- Makes provision for two sets of cooling-off periods of two weeks each.
Is a franchise right for you?
If you want to enhance your chances of earning solid profits while at reduced risk then becoming a franchisee makes perfect sense. As a franchisee, you enjoy immediate brand recognition. You also have access to bulk deals and a formidable support infrastructure. Your success is not guaranteed but your success chances are obviously higher. On the downside, you will be obliged to adhere to the network’s proven blueprint. Should you rate the freedom to act as you please above sound commercial realities then a franchise is not for you.
Investigating franchise offers
Franchise opportunities abound; in fact, it is a buyer’s market. Focus on sectors you have a passion for, investigate thoroughly and ask questions. Investing in a franchise is a serious undertaking. Making the decision that’s right for you will take time and assistance by an attorney with franchise experience will be invaluable.
This website contains a host of useful information. There are also several exhibitions, with the most important the IFE, the largest franchise and small business opportunities expo on the African continent. The IFE, presented by FASA, takes place during May of each year. FASA’s members adhere to a stringent Code of Ethics that protects franchisees. However, although FASA membership provides additional comfort to prospective franchisees, it does not remove the need for careful investigation of the opportunity. FASA’s publication How to evaluate a franchise provides guidelines and checklists, making it recommended reading for all prospective franchisees.