Opening A Franchise 101

Buying a franchise will be one of the largest investments of your life, says Anita du Toit, franchise development consultant and founder of Franchise Fundi. “So, do your research and consider all the aspects that may influence your new career.”

One of the most important things to research is which franchises are in demand. “Franchises in demand are well managed with good relationships between franchisors and franchisees,” says Steven Francis, CEO of Franchising Made Easy. “These businesses are progressive in operations, marketing, human resources, training and product innovation.”

Type and hours of work

Operating the franchise will become your new job. “This job should be fulfilling and enjoyable, so it’s critical to assess the type of work and whether or not it meets your needs,” says du Toit. She advises avoiding opportunities that appear lucrative but don’t suit your work preferences. “Fast-food and restaurant franchises can be cash positive quickly, but the work demands long hours and may not suit someone with a young family. Shadow an existing franchisee to get a sense of what is involved.”

Start by aligning your interests, skills and experience to an industry. “Choose a sector you love or are passionate about because you will be running the business full time, says Sasha-Lee de Bod, consultant and partner at Franchising Plus.

The initial investment

Make sure you have access to sufficient capital. “The initial investment is one of the main factors determining your choice of franchise,” says du Toit. “As a rule of thumb, franchisees should have at least half the initial investment in cash to qualify for bank financing. Consider the initial investment carefully and ensure the amount includes the total establishment cost in equipment and other expenses, initial fees payable to the franchisor, working capital and a landlord’s deposit.”

De Bod advises prospective franchisees to ask the franchisor for a breakdown of all costs they could incur to open the business.

Training

Franchisors generally offer training on the operation of the business. “Determine what initial and ongoing training and support you will receive,” says de Bod. “Ask up front what the training will consist of, how long it will last and whether these costs are included in the upfront fee.”

It is also worth asking existing franchisees in the network whether or not the training available is adequate, adds du Toit.

Marketing

Franchisors often do a lot of brand marketing, so franchisees should ask if they are expected to contribute to the advertising and promotional costs incurred, says de Bod. “Also check if you are obliged to undertake marketing at your own expense.”

Du Toit says most franchisors offer many marketing guidelines and tools. “However, some franchisees may not be comfortable with advertising, most of which now occurs digitally, so ask the franchisor what help they offer.”

Franchise agreement and disclosure document 

The franchisor is obliged to provide prospective franchisees with a franchise agreement and disclosure document. “You are allowed 14 days to consider the documents before signing,” says du Toit. “Go through these documents in detail and consider hiring an attorney to explain them to you.”

Francis advises ensuring the franchise agreement is aligned with the lease agreement of the intended premises and that landlord, franchisor and franchisee are all in agreement. “Seek opinion outside the brand if possible to ensure there are no hidden agendas between franchisor and landlord.”

Franchisor’s track record

“The business must have a good track record with investors, franchisees, landlords, customers and suppliers, as well as solid sales growth, measured by the number of new outlets opened annually,” says Francis. “Customer and media reviews are another tracking mechanism.”

Royalty and other ongoing fees

The legal documents should specify the ongoing fees payable to the franchisor. “Franchise arrangements usually include a monthly royalty or management service fee, which is charged as a percentage of sales,” says du Toit. “The marketing fee may also be charged as a percentage of sales. If the franchisor charges other fees, such as accounting services or IT licences, ensure you understand what these fees entail and that all fees payable are reflected in the financial projections included in the disclosure document.”

Investigate whether the royalty fee is market-related and what support you will get in return. De Bod says: “You need to be able to work out whether the franchise will give you a satisfactory return on investment and allow you to draw the salary you want.”

Francis notes that the hospitality sector is very popular, as well-managed food brands aligned to the franchise model often result in short-term return on investment and build cash flow much sooner than other franchise sectors. “If the franchisor operates a central distribution that supplies products relevant to the brand, establish the process, payment terms and policy if the central distribution is out of stock of what is termed in franchising ‘licensed products’.”

Competition in the market

Before investing in a franchise, it is vital to conduct thorough market research to analyse where your competition lies. De Bod suggests asking the franchisor the following:

Who are the business’s main competitors? What are their respective strengths and weaknesses and how can I outsmart them in my territory?

What are some of the threats your brand faces in the current marketplace?

Have any of your franchisees failed in the past, and if so, what were the reasons for these failures?

Some categories are at worst overtraded or at best highly competitive, advises du Toit. “As an example, there are many fast-food chicken franchises in the market. When considering such a franchise, look for what differentiates the franchise you are considering. Ask the franchisor what makes their franchise unique and how they market that uniqueness. The cheapest franchise is not necessarily the best option, so visit competitors to assess what they do differently.”