BUYING A FRANCHISE IN SOUTH AFRICA
Things to consider before buying a franchise in South Africa
Franchisors are normally good sales people. This does not take away that buying a viable franchise has some distinct advantages.
Ask the franchisor the following:
- What training will be provided;
- What obligation does the franchisor have for ongoing support;
- What obligations does the franchisor have in case the business starts making a loss;
- What equipment, décor and other fixed assets are included in the initial franchise fee;
- What business manuals are provided;
- What business systems are provided;
- To speak to other successful franchise holders;
- What experience does the franchisor have;
- What are the expansion plans for the future of the franchise.
The most important fact to verify
Confirm that other franchise stores are profitable and the yield on investment of those stores. Figures may also be verified from product supplies by the franchisor or from franchise fees payable.
Where this information is not available we recommend to walk away for the following reasons:
- The franchisor does not have the numbers to substantiate the representations made to you in terms of other franchises or profitability projections; and
- Not making such numbers available does not make business sense. When you have an established business concept to sell it must be provable. When the business concept is not provable but has not been established, you are buying a business opportunity and not a franchise; and
- There will almost always be confidentiality agreements to be signed before disclosure of certain information is made. With these agreements in place, there should be no issue with appropriate disclosure.
Some questions to ask yourself:
- Will the franchise be a business that you will really enjoy;
- Can you manage the financial commitments;
- Will the profit be sufficient to cover your financial commitments and / or provide sufficient return on investment and / or give you sufficient income;
- Are you willing to work the hours;
- Will you be able to keep to the franchise agreement and live with the restraint thereafter?
More initial financial questions:
- What is the initial fee;
- What is the advertising contribution;
- What is any ongoing franchise fees;
- Do you obtain products or service materials at costs and, if not, what is the mark-up of the franchisor;
- Will the franchisor be the sole source of these goods and / or materials;
- How was the financial projections arrived at and are these realistic;
Initial contractual questions:
- Will you have an exclusive territory;
- How long is the franchise contract period;
- Can you freely sell or dispose of the franchise;
The franchise product or franchise service:
- What is the market like for the franchise product or franchise service;
- Consider whether the market is growing or declining.
- Is there repeat business.
- What are the special features or unique selling proposition of your product or service.
- Can this be copied easily by others;
- Is this a short-term fashion;
- What is the competition like?
- Is your business or product protected by patent or any license arrangements;
- How protected is your cost of the franchise products or services to ensure that competitors can not undercut you.
- Consider especially where your delivery cost is in hard currency and you sell in Rand.
- Consider the selling price sensitivity of the product or service;
Advantages and disadvantages of buying a franchise
Below are some of the advantages and disadvantages to consider before buying a franchise in South Africa
Advantages of buying a franchise:
- The Franchise Business Concept in established and proven
- The franchise product and / or service are proven. This means that the test of market viability has been passed. The franchisee also benefits from a known and established trade name and brand.
- Franchise Business and Risk
- Investment in any business or business opportunity involves risk of failure or being disappointed with the return on investment. With a franchise the risk is reduced albeit not completely eliminated. The lower risk is mostly attributable to the proven franchise concept and the expertise of the franchisor.
- Franchise Business and Costs
- The franchisor will normally have negotiated lower cost of acquiring capital assets necessary for the business. The cost of products of materials used to render services will also normally be much less than the franchisee may negotiate in private capacity.
- Business Finance for your Franchise
- Financial institutions are normally prepared to finance a franchise more easily and on better terms. Tell us should you wish to finance a franchise.
- Experience
- Franchises contribute greatly to self-employment in South Africa by allowing people with no previous experience to enter the market of owning their own business. The franchisee will become part of a larger business group that collectively benefit from business strategy and operational best practice.
- Exclusivity
- The franchisee will normally be granted exclusivity in a certain geographical area. This offers protection from competition by other franchisees of the same group, albeit not protection from other franchisee groups or small businesses.
- Independence
- Franchisees enjoy some degree of independence. You work for yourself but you are not in business by yourself.
Disadvantages of buying a franchise
Capital outlay
The capital outlay is immediate and often includes area license fees and / or exclusivity rights. Getting a return on this investment takes time. This is also one of the reasons to make sure that the franchise is well-established and a proven franchise concept. There are many non-viable franchises offerings out there or franchises sold on projected numbers that are in reality unattainable.
Limited Freedom
A franchisee is the legal owner of the franchise. The ownership is limited by the terms and conditions of the franchise agreement. Franchisors normally retain control over the way the presentation and selling of the franchise product as well as over the manner in which the business is run.
Service charges
Care should be taken before signature of the franchise master agreement of all services and other charges payable to the franchisor. This is seldom initially a problem but become an issue for most mature franchise holders.
Limited flexibility
The business systems imposed by most franchisors are normally not very flexible. On the one side, these systems are often part of the reason for the business success of a franchise. It may, however, hamper the ability of the franchise business to adapt to changes in the business environment.
Restrictions on termination
The master franchise agreement will almost always restrict your abilities to compete freely on termination of the franchise.
