You only have to drive down the main road in any South African town to see that franchises are big business in the country. And that’s understandable – you can buy one in almost any industry, from funeral parlours to fast food, beauty salons to automotive services.
The idea is that the franchisor, such as McDonald’s, Nando’s or Debonairs – which already has a strong brand and customer base – enters into an agreement with you, the franchisee, so that you can open and own a branch, too. In exchange, you will pay certain fees.
While these fees are a big consideration, they shouldn’t be where you start. Rather begin by taking all the time you need to research different franchisors. Figure out which market you want to work in, and which brand and business model will be the best fit for you.
Importantly, check if the franchisor belongs to the Franchising Association of South Africa (FASA) so that you know the brand has committed to an internationally recognised industry body and sound ethics.
A Debonairs franchise owner, Mohamed Valiallah of Durban, stresses the importance of doing this groundwork.
‘There are many franchises out there and you wouldn’t want to invest in the wrong one, or one that is not entirely above board. You want a reputable brand that has been around for a while, so that you know that your investment is safe.’
Understanding the buy-in fee
The buy-in fee is the capital you need to buy an existing franchise, or to start a new one. The buy-in fee includes the right to use the brand, training by the franchisor, as well as the cost of fitting out a new store if you choose to start from scratch.
If you’re buying an existing store, the buy-in fee will typically be higher because someone else has put in the work required to establish a successful business. If you’re opening a new outlet, you will be the one taking on more risk – hence the lower buy-in fee.
Either way, the costs can be significant. For example, the total investment to start a Cash Converters franchise is R4 million. For a Nando’s outlet, the average total investment ranges between R5.25 million and R7 million, depending on factors such as whether it will feature a drive-through or not.
Buy-in fees typically include the initial owner’s and staff members’ training, assistance with site selection and evaluation, legal work, help with lease negotiations, and the actual launch of your business.
Some franchisors also charge an application fee. For instance, Nando’s is R35 000. This serves to filter serious applicants from those who are just playing with the idea, and covers costs like psychometric testing, interviews and in-store assessments.
The amount is partially refunded if you choose to withdraw during the application process.
The minimum a bank needs to grant financing
- An approved application from the franchisor accepting you as a franchisee;
- Your identity document and proof of marital status;
- Proof of address;
- The parent company’s registration documents;
- Your CV or career background; and
- A comprehensive business plan.
The all-important fine print
The paperwork and fine print are where many first-time franchise owners trip up, only to discover a few months after opening that there are more fees to pay than they had thought – or, worse, that the company isn’t everything it had claimed it would to be.
Read through the terms and conditions of your agreement carefully. These documents can sometimes be 100 pages long or more, but you should know exactly what you are committing yourself to.
Before signing, ask for the relevant disclosure document. Both FASA and the Consumer Protection Act require franchisors to provide one upfront, with details such as:
- the company’s track record and details of directors and key executives;
- a description of the franchise and the franchisor’s financial data, with a certificate from an auditor or accountant;
- confirmation from the directors on viability, the cooling-off period, termination, renewal and goodwill terms;
- the number of existing franchisees and their success rates;
- the initial investment cost, a breakdown of ongoing payments, the total investment required and financial information about pilot operations; and
- details of the training and support guaranteed to the franchisee.
Give yourself a reality check
As with any other type of business, you have to be prepared to put in the hours if you want the business to succeed.
Speaking at a GIBS webinar on the future of franchising, Richard Mukheibir, CEO of Cash Converters, reiterated this when explaining what they look at when evaluating franchisee applications – this includes their work history for evidence of reliability, passion, and some type of relevant experience.
‘There’s a common misperception that you can buy a franchise, hand it over to a manager, and go off and play golf on a Friday,' he says. 'That typically doesn’t work.’
Funding and the risk of gearing
Not every entrepreneur starts a new business with a large cash capital injection at hand, and you may have to approach a bank for funding. Laurette Pienaar, a franchising specialist at Capitec Bank, says it all comes down to affordability.
‘The other factors are the balance sheet, business solvency, and the brand’s regulations. Remember: the more you gear the business, the greater the risk of closure. Franchisors are also aware of this. The higher the gearing and the more we load on the business, the more risk it is for the brand. As a bank, we are bound to certain things in terms of what the business can afford, and also what the franchisor dictates to us,’ Pienaar says.
What you should expect to give and get from the brand
These are the regular fees that you pay to the franchisor, over and above the initial buy-in fee. Royalties are usually a percentage of your gross turnover, and are mostly calculated on a sliding scale. For example, a Cash Converters franchisee would pay 5% on the first R300 000, 4% on the next R300 000, and 3% on anything over R600 000 in turnover.
Tanya Woker, author of The Franchise Relationship under South African Law (Juta Legal and Academic Publishers), points out that one of the most important responsibilities of franchisors is to protect and maintain their brand.
Therefore, she advises: ‘Franchisors will place relatively onerous burdens on franchisees, to ensure there are sufficient checks and balances in the contract. They will control matters such as work hours, appearance of the outlet, quality of goods, and end location. They will also retain the right to monitor franchisee performance by means of regular checks, audits and reports.’
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