Is that franchise going to be around for the long haul?

Is that franchise going to be around for the long haul?

There are plenty of franchise systems out there and many of them may seem to fit your requirements. But which ones will be around 10 years from now and which are simply get-rich-quick schemes? It’s up to you to find out before signing on the dotted line…

Franchising is a good formula; this we know. But there are systems that are better than others, and there are those that are destined to fold no matter how valiantly the franchisor battles to keep the network afloat. And then there are the fl y-by-nights out to make a quick buck.

The experts tell us that a franchise system needs to be tried and tested, have a strong brand, successful formula and distinctive offering – from the products and services they offer to the look of the stores. Franchisees will benefi t from the established franchisor’s buying power, ongoing support in the form of research, development, new ideas, market analysis, marketing and the creation of new products.

And as long as you do your homework properly, you should be able to spot these franchises and steer clear of those that are destined to run out of steam or were not suitable for franchising in the first place. Watch out for would-be franchisors that have made the mistake of rushing their concept to market before properly testing the system and putting the necessary infrastructure and support structures in place.

And while one restaurant owner may be extremely successful and pack customers into his steakhouse every night; this won’t guarantee success in other parts of the country. In this example long-term success would rely on the restaurant having a distinguishing attribute, one that can be replicated by franchisees, but not easily copied by competitors. It would be crucial to differentiate this system from the many other steak restaurants and franchises out there. If the segment is already heavily franchised, it may be very difficult for franchisees to make their mark.

Where to start

The search for a system in which you will fi nd your feet, however starts closer to home, advises Nedbank’s head of New Business Development for Business Banking Mark Rose. “The question to ask from start is do you have the right personality for franchising.”

Rose says prospects should think seriously about the impact that running a franchise will have on their lives and the attributes that it requires. “In the corporate sector you may be used to a 9am to 5pm day, but a franchise is a 24-hour job. It’s also a radical shift in terms of responsibility and will have a massive impact on family life. Little things like not living close to your store can cause huge problems down the line.”

Employee relationships is another area in which franchisees tend to struggle, so be sure you are up for this; from hiring to training and maybe even firing. If you decide that you do have the right attributes, it is time to start narrowing your focus to look at specific sectors. Fuel, food and retail are the dominant sectors and will probably represent the formats that you are most familiar with. “There has to be a fit,” advises Rose. “If you’ve got the right passion to run a franchise in the food sector then focus on that, don’t try and get into the fuel sector. There would be a disconnect straightaway and you will struggle to align your thought processes towards that system.”

What can you expect from the franchisor?

Making contact with a prospective franchisor early on and asking the right questions should help guide you towards the right system, says Rose. A good franchisor should willingly provide prospective franchisees with a disclosure document containing all the pertinent information around that brand. “If they don’t have that, they should be in a position to provide some substance around the brand in writing. If a franchisor is not prepared to give you anything, then you need to start asking why not. If they have confidence in their brand, a strong track record and a concept that’s working well, they should be happy to provide it. This would be an immediate warning signal, if the franchisor is not willing to provide this information, is he hiding something?”

The disclosure document will help franchisees evaluate the strength of the brand, what kind of a track record it has, how many outlets there are, how strong the support system is and what the training component is like. All of these areas need to be thoroughly examined and where there are gaps or additional questions, these should be taken to the franchisor.

“Prospective franchisees seem to be hesitant to approach existing franchisees,” says Rose. But he describes these interviews as the best way of fi nding out what is going right with the brand and where the franchisor is falling short. Prospects should rigorously interrogate existing store owners about the support given to franchisees and whether or not the fi nancial projections have proven accurate. While franchisors are normally happy to provide a list of franchisees for you to approach, you may want to extend your research to franchisees not on the list and even those that have left the system. But remember franchisees that have left the system may have their own agendas, so consider their answers carefully.

Viable full business format systems should plan to get to a point where they have a minimum of 30 outlets in Rose’s view. “Franchising is a numbers game,” he explains. “For a business owner to decide to franchise his concept it’s got to be ‘franchisable’. And in my view this means at least 30 stores. If the franchisor is serious about franchising, he will be spending a lot on infrastructure and support systems to give back to franchisees, and that’s all got to pay for itself.

“If you’re only taking 5% of a management fee from six stores, you’re not really going to be able to afford the necessary infrastructure and support. But when you start taking a 5% fee from 50 or 60 stores, you can afford it and offer ‘value-add’ to franchisees.” The level of training on offer is another indicator of the viability of a system. Solid systems will provide in-depth training around the concept, product, layout etc. Some also provide financial management training, an essential element for franchisee success.

Franchisees who don’t have this kind of knowledge can get out there and obtain it themselves. In response to this gap in training at many of the franchise systems, Nedbank now offers clients that open business banking accounts a free two-day fully-accredited financial management training programme. “The more financial competency and acumen the prospective franchisee has the better for all of us – franchisee, franchisor and funder,” Rose explains.

Is that franchisor ethical?

According to Rose, talk in the market should provide some indicator of franchisors that have demonstrated unethical behaviour in the past. Franchisees and suppliers, even the banks, may be able to guide you here. Nedbank, for instance, accredits and provides pre-approved funding guidelines for particular brands, which involves a thorough examination of that particular system. “We can pick up very quickly where there are unethical practices being displayed. While we’ve mainly targeted the reputable brands with track records, we also do in some cases offer finance for new, emerging and up-and-coming brands. We’re happy to tell prospective franchisees that we’re not able to provide pre-approved funding guidelines customised for a particular franchise because information has not been forthcoming or because we haven’t been satisfied with the information disclosed to us. This should automatically alert franchisees that the bank has not been able to ascertain the true strength of the franchise system. We obviously won’t provide them with total details, but we will say we’re not in a position to provide any pre-approved lending packages for a particular franchise system.”

Prospective franchisees can also approach FASA (Franchise Association of Southern Africa) to find out more. FASA members are compelled to provide a disclosure document, a copy of the franchise agreement, as well as their operations and procedure manual. FASA can also step in, if called upon to do so, to help remedy conflict situations between franchisees and franchisors. Franchising consultants such as Franchising Plus and Franchise Directions are also worth exploring as they have intimate knowledge of the industry.

“The banking industry can also play a role here,” says Rose. “We can pick up very early on where there are signs of distress through the trading on our clients’ business accounts. In this case we would be on the phone asking if there is some form of assistance we can provide. By obtaining consent from the franchisee we are very happy to then work in tandem with the franchisor to try and remedy the situation. This has worked particularly well over the last few months in a number of examples where all parties (franchisor, franchisee and bank) have cooperated together in seeking a positive resolution to those stores that are in distress, due to a weakening as the economy.”

The fact that franchising is still in its infancy in South Africa and that there are not thousands of systems out there works in franchisees’ favour, explains Rose. This makes it easier to spot unethical franchisors. What is against local operators is that the industry isn’t regulated as it is overseas. “This means that you’re always going to have people who see franchising as a quick way of making money and because it’s unregulated they take the chance. We, however, haven’t come across a massive amount of concepts that have proven unethical. We normally find that the one’s that do show signs early on disappear fairly quickly. It’s not to say that it doesn’t happen, and as long as the industry is unregulated I think it will happen, but it’s not on a massive scale.”

Selecting a franchise is a business decision and not one to be entered into lightly. And like any business, whatever its nature, franchising involves risks. Dedicated research can, however, eliminate some of them.