How to know if franchising is a good investment for you
Franchising is a relatively old concept in South Africa, having some Euro-American retail outlets owned by local businessmen for a while now. The likes of McDonalds or Wimpy are typical examples of this, but some within the country have started establishing their own franchises and exporting them. It is a business model that has proved itself viable over decades, with relatively reasonable success rates across the world.
A franchise is an agreement between the franchisor (the grantor of the franchise) and its franchisees (those who acquire a franchise), granting the franchisee the right to operate under the name of the franchise and use its trademarks, know-how, methods and procedures. Moreover, the franchisee stands to gain from initial and ongoing training and advice offered by the franchisor, as well as having access to bulk deals and group marketing campaigns. But the franchisee is still responsible for marketing in their own territory.
“The franchising motto is “you’re in business for yourself, but not by yourself”
Despite its popularity and relative ease to operate, franchise experts advise against rushing into such agreements if one lacks the necessary knowledge about the industry they want to operate in. They say it is advisable to read the franchise agreements before deciding to invest in a franchise. The franchising motto is “you’re in business for yourself, but not by yourself.”
Benefits of investing in a franchise:
- It’s the fastest growing industry in SA with more than 500 business concepts
- Creates a lot of employment opportunities when the outlet expands
- Increase of growth percentage in retail sales because the franchisee always enjoys the backing of the franchisor
- Safe investment risk because the franchisee is guided by a model that is tried and tested
- Full and free business training
- Capital contribution is equally shared between franchisee and franchisor
- Not difficult to get funding from financial institutions
- Not susceptible to global market shifts
Things to consider:
- Conduct background research on the successes and/or failures of a prospective franchisor.
- Refer the franchise agreement to an independent legal adviser
- Do feasibility studies, financial projections, and look at the franchisor’s marketing toolkits and training aspects
- Carefully consider site selection and know your competition
- Spend a lot of time on your business and be actively involved to learn and know more about it
- Rigid business processes which may not be flexible to specific target market
- Losing income if franchisee is not hands-on and unaware of daily trade
Head of Franchising at FNB Business Banking, Morne Cronje explains the state of franchise business in South Africa and services rendered by financial institutions to prospective franchisees.