• Thu. Nov 24th, 2022

Buying a franchise: what you need to know

ByStephanie M. Akbar

Oct 8, 2022

COMPANY


Like many people, Sanet and Marius saw owning a franchise as a way to earn some extra money. “We bought a food truck waffle franchise to make some extra money. We hoped that over time we could turn it into a full-time business,” says Sanet.

Numbers provided by the franchisor claimed they could make money, and friends who had eaten the waffles at a local market attested that it was a great product. Based on this, the couple took out a personal loan of R200,000 to buy the food truck, with a monthly repayment of R7,000. The contract committed them to a monthly franchise fee of R5,000. This meant that the first R12,000 of the food truck’s turnover went directly to the franchisor and to repayment of the loan.

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The couple were selling the waffles at R60 per waffle – they had to sell 200 waffles just to fulfill their obligations. This is before they pay for actions or for their time. Most weekends they could only sell 30-40 waffles.

When Absa’s financial adviser, Pieter Myburgh, and Absa’s country business development manager for consumer goods and consumer services, Abigail Makhubele, reviewed the business, it was clear the couple could not realistically meet the required numbers.

Myburg said:

Looking at the revenue generated by the franchise, there simply wasn’t enough revenue to cover the operations.

In the contractual agreement, the franchisor took no responsibility for the validity of the numbers it provided. Moreover, the contract restricted them to a specific area, which included only one market in which they could operate. There just weren’t enough places to sell their waffles.

“He’s not the first person I’ve met who blindly entered into a franchise agreement,” Myburgh said, adding that many people get excited about an idea without asking the right questions or asking a legal expert. to review the contract or an accountant to review the contract. assess financial viability.

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Although the couple had been committed to the contract for several years, Myburgh and Makhubele helped write a letter to the franchisor, raising the list of issues and broken promises. The franchisor agreed to release them from their franchise agreement and a monthly franchise fee of R5,000. The couple are now in the process of selling the food truck to help settle the loan. They are lucky that the franchisor did not go the legal route, which would have resulted in additional expense.

“It’s a problem we see all the time,” says Makhubele, who adds that franchise agreements are often heavily in favor of the franchisor, with little recourse for the franchisee. “The franchisor generally has much heavier pockets than the franchisee, who is already struggling to make ends meet. They can’t afford to go the legal route and incur legal fees.

Sanet says:

It was a hard and costly lesson. If we decide to buy a franchise in the future, we’ll make sure to follow the right channels, do our homework, and meet with professionals to guide and help us through the process.

A good franchise can be a great business, but you need to do your homework and understand the commitment required.

“Not everyone is cut out to be a franchisee. It takes hard work and commitment,” says Abigail Makhubele, Absa’s Country Business Development Manager for Fast Moving Consumer Goods and Consumer Services. Many franchise stores will be located in malls that are open seven days a week. You will need to operate during mall hours, as well as holidays.

“It’s not a business for someone who wants to be with their family on the weekends,” says Makhubele, who adds that as a franchisee, you have to follow the rules of the franchisor and maintain the standards.

Even if a good franchisor will be there to support you, you must have your own team and be motivated: “It’s not a franchisor’s job to keep you.

Benefits

. A franchise offers a proven concept and therefore reduced capital requirements. When the franchisee acquires a point of sale, he only invests in his point of sale.

. Acceleration of growth due to increased purchasing power and marketing influence formed by the franchise system.

. Franchisees become brand ambassadors and create a support network among themselves. Franchisees become collectors of information on what works and what doesn’t, and help the franchisor fine-tune franchise operations.

. Franchisees in the field are the advocates for underperforming branches and have resurrected underperforming stores.

Challenges

. Setup Costs: There are significant setup costs to comply with the brand appearance and standards set by the franchisor.

. Long time to break even: Due to set-up costs and the time it takes to grow your market, initial operating losses are unavoidable. Makhubele says a franchisee should have enough cash to sustain the business for the first six to 12 months. Borrowing money cannot be relied upon to fund this shortfall, as this will eat away at profits and make the business unsustainable.

. Unrealistic projections: Franchisors may exaggerate the potential financial performance of the business. They may not take into account the specific market in which you operate. Different income groups will result in different profit margins. Not all slots are worth the same amount.

. Unfair contracts: Makhubele says many franchise agreements are heavily in favor of the franchisor. Any exit clause generally obliges the franchisee to pay the unpaid franchise fees for the duration of the contract. The agreement also protects the franchisor from liability in the forecast figures.

Financing your franchise

Makhubele says banks will likely finance only 50% of the purchase price. The bank wants the franchisee to commit its own equity. She also advises applying for a business term loan rather than a personal loan, as it has lower interest rates.

If Sanet and Marius had taken out a business loan, their interest rate would have been capped at prime plus 10%. Since they had taken out a personal loan, the interest rate was much higher. The bank will also require you to make a formal business plan, which brings discipline to the process.

“While we expect franchisees to have done their own homework and be certain of their investment, we will always do our own viability assessment,” says Makhubele, who uses a recent example in which a client applied for a loan. 10 million rand to buy a franchise. .

We knew this store had been in the market for a long time and the area was in decline. It wasn’t worth what he was paying and we declined the loan.

Being turned down for a loan is a warning sign to check your numbers.

Assess the area: “A quick calculation of the revenue potential in the region against the sales projections provided by the franchisor can reveal whether the numbers are realistic or not,” says Abigail Makhubele, Absa’s country business development manager for consumer goods and fast-turnaround consumer services, which advises accessing the local municipality’s integrated development plan.

This will provide the different revenue segments and your potential target segment, so you can conservatively target the percentage of the population that will buy your products.

Talk to other Frenchchiselled: Any good franchisor will share contact information for their franchisees and encourage you to meet them.

Beware of “too much good to be true » Makhubele says you should be wary if the franchise offers unrealistic returns or makes unrealistic promises.



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