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SECURING FINANCE IS CHALLENGING
Securing financing for a franchise can be tricky – even if it’s a “sure thing”. Here are the seven biggest challenges when seeking funding. By Trevor CrighTon
Buying into the world of franchising can seem like a safer bet in the current economic climate than striking out on your own. But, unless you’re flush with cash, you’re going to need financing – and banks are being more careful than ever when it comes to lending money.
1. OWN YOUR BUSINESS Plan
Absa Business Bank head: Wholesale, Retail and Franchise James Noble, says that a common challenge is that franchisees don’t necessarily have the business acumen to put together business plans as part of their funding proposals, so they turn to experts to draw them up. “There’s absolutely nothing wrong with that, but we find that once we start asking questions about elements of the plan or the projections, they don’t really understand it. They’ve had it prepared purely for the purposes of attempting to secure finance.”
2. UNDERSTAND BUSINESS FINANCE
“The reason so many businesses fail is because the operators have great ideas, but don’t possess the skills to understand the financial management side of the business,” says Noble. He believes that there is a general lack of those sorts of financial skills in the small and medium enterprise world because people aren’t taught basic financial skills. “Franchising associations, banks and government should be more proactive in providing platforms where prospective business owners can be upskilled.”
3. GET YOUR PROJECTIONS RIGHT
Eric Parker, partner at Franchising Plus, says that a good franchise will give an organised franchisee a return on their investment in three to three-and-a-half years. “That’s your check – do the figures and make sure you will make your money back,” he says. “That timeframe is also important because most franchise agreements state that you have to remodel your franchise after three to five years, so you need to ensure that you’re in a financial position to honour that.”
4. THINK AHEAD
If you’re financed for one franchise, it’s important to think ahead – are you looking to open more stores? Noble says that the bank considers the value of the brand when it comes to expansion. “We take into account the value of the existing store and can make a determination on whether a second store could be geared higher than 50 per cent, but with cross-surety from the existing one to help mitigate risk.”
James Noble
BUSINESS.” – JAMES NOBLE, ABSA BUSINESS BANK 5. BACK THE RIGHT HORSE
As with any investment, Parker says it is vital to look at the franchise and throughly do your homework – especially in terms of how it’s going to fit into the ecosystem of a much-changed world. “Consider what’s going to happen when we start beating COVID-19 and come back from lockdown. Even then there will be fewer people working from offices and less traffic on the roads. Shopping patterns and habits will be different,” he says. “With so many shopping centres built around business hubs, they’re going to have to find new ways to function. If your franchise is going to depend on business traffic or proximity to offices, you need to consider the model and your location.”
6. KNOW WHAT YOU’RE FINANCING
Noble says that it’s important to interrogate the setup costs when looking to establish a franchise so you understand where your money is going. “You need to know what you’re paying for. Some franchisors earn rebates from the suppliers to their franchisees – even for equipment required to set up the business – so it’s important to look around and make sure the start-up and operating costs aren’t overpriced,” he says.
7. HAVE REALISTIC EXPECTATIONS
“A lot of franchisees come from a corporate background and are used to a fixed salary. They start a franchise and expect to receive the same income every month,” says Noble. “The business may not be able to afford that until the breakeven point, so franchisees may have to make some lifestyle changes to accommodate a lower income.” He advises stress-testing a cashflow projection – reduce the turnover by 20 per cent and increase the expenses by 10–15 per cent to see if the numbers are still viable.
PRODUCT VERSUS SERVICE FRANCHISES
Franchises can offer tangible products or intangible services to their customers. CARYN GOOTKIN compares the two models
Franchising relies on standardising customer experiences, something that is often easier to do with a product franchise. “Product-based franchises have more tangible quality standards based on their products,” says Anita du Toit, franchise development consultant at Franchise Fundi. “Customer satisfaction is, however, also infl uenced by the buying experience. Service-based franchises should also have clear service delivery standards.
“As service franchises often deliver services at customers’ premises (think cleaning or courier services), the microlocation is not always that important,” adds du Toit. “Product franchises generally rely on customers visiting their premises (think restaurants and specialised stores), so require a location with visibility and consumer traffi c.”
Regardless, the success of either depends on location, market trends and availability of labour, says Sasha-Lee de Bod, franchise development consultant at Franchising Plus. “Location plays a major role in the fi nancial success of a franchise.”
Potential franchisees should think about the impact of market trends on the industry. “Restaurant and beauty franchises suffered terribly during the hard lockdowns, whereas
Both product and service franchises rely on excellent customer service, so franchisees must focus on being customer-centric.
Sasha-Lee de Bod
the demand for essential services franchises like cleaning services grew,” says du Toit. “In economic recessions, consumers often reconsider expensive or nonessential purchases, but might still treat themselves to low-value purchases such as takeaways or coffee.”
WHICH IS RIGHT FOR YOU?
“Service businesses often have lower overheads as rentals are lower outside of prime retail locations,” says du Toit. “But they often have higher staffi ng costs and require more active selling.”
Service franchises also require more customer interaction and specialised knowledge, adds de Bod. “And, while setup costs may be lower than for product-based franchises, it is generally more diffi cult to secure funding for a pure service offering without tangible assets that can be used for collateral.”
On the other hand, while product franchises tend to have more predictable sales trends, they are often more expensive to operate because of stockholding costs and retail rental, says du Toit.
“The benefi t of product franchises is that they are generally well-known brands with marketing campaigns managed by the franchisor,” adds de Bod.
Investors need to consider what they are best suited to. “They must look inward to determine whether or not they have what it takes to be successful in that business and to run it full time,” says de Bod. “Are they passionate about it?”
THE BEST OF BOTH WORLDS
Many primarily service businesses have a product element, and the opposite is also true. “Some products are bought from the shelf, some require installation, and others require ongoing service, which can be true for product or service franchises,” says de Bod. “Generally, franchises are not purely one or the other.”
She says Sorbet is a great example of a combination franchise. “It started by offering beauty treatments – a service – and then introduced products. So the front of the store has merchandising display stands and the treatments happen at the back.”
Du Toit cites home services as another example, where a franchisee installs products like kitchen cupboards, and both product and service elements are important. “Both the quality of the product and the sales process, including after-sales service, are important. Take a tyre fi tment business, for instance: consumers want good-quality tyres, but their experience (waiting times and staff effi ciency) can differentiate one brand from another.”
A Sorbet franchise store
SATISFACTION GUARANTEED
“Offering a guarantee can go a long way towards ensuring that staff do their best to achieve customer satisfaction,” says Franchise Fundi’s Anita du Toit. “For example, the Sorbet service promise says that customers who are not entirely happy with their treatment don’t have to pay for it.”
ONLINE SHOPPING
“Many product retailers offer online sales, which change a pure product offering to a combination of service (the logistical delivery process) and product (the tangible product they ordered),” says Sasha-Lee de Bod of Franchising Plus.
PLUGGING THE LEAK IN HOME SERVICE FRANCHISING HOW MUCH DOES
Home services like plumbing seem to be the ideal candidates for franchising, so why are there so few plumbing franchises in the country? RODNEY WEIDEMANN investigates
A PLUMBING FRANCHISE COST?
Perhaps the biggest reason for home service franchises not having taken off in South Africa as they have elsewhere in the world is a lack of regulation and enforcement, explains Brendan Reynolds, executive director of the Institute of Plumbing South Africa.
Reynolds says that while South Africa has a legal framework that covers plumbing, there is no enforcement in the country. “This effectively means that anyone, whether qualifi ed or not, can call themselves a plumber and do plumbing work, with no consequence,” he says. “The Plumbing Industry Registration Board (PIRB) is making big strides in correcting this situation, but it remains a huge challenge.”
The Drain Surgeon’s group general manager, Louis Minnaar, suggests that one reason plumbing franchises have not yet exploded onto the local market is simply that the bar to enter is set too high. “Some franchisors ask a lot in terms of fees, which for a one-man operation is just not viable. We have kept our costs as low as possible, and our key sales pitch is to target these small businesses with the message that once the owner retires, will they still have a brand to pass on?”
The idea, Minnaar continues, is for existing plumbers or entrepreneurs to invest in a brand like The Drain Surgeon because it will improve the resale value of their business. It is also worth mentioning that one doesn’t have to be a plumber to purchase a franchise – the owner can always employ a qualifi ed plumber and an assistant.
“We have registered over 120 trademarks under the Surgeon Group’s umbrella, including Pool, Garden, Irrigation and Electro Surgeon,” adds Minnaar. “So technically, a single investor could combine fi ve or six services under a single umbrella. For me, this proves that the sky is the limit for home services franchising.”
Reynolds adds that he has a sneaking suspicion that the time is ripe for franchising in the plumbing industry. “There are a few companies that have built up really good brand equity, which they could start leveraging. The work that the PIRB is doing is also starting to take effect in managing the unqualifi ed ‘plumbers’, creating more opportunities for careful investors,” he concludes.
FAST FACT
According to FASA, those in the service, business-to-business and education sectors were in demand during the past year. This was because people confi ned at home were undertaking renovations, using courier companies and moving to online learning – adding new streams of income for many franchise concepts.
Louis Minnaar, group general
