Franchising become more attractive in tough economic times

2009/08/21

With retrenchment increasingly affecting more and more South Africans across all income brackets, franchising is increasingly attractive for many individuals who want to become part of a stable business concept, with proven systems.

Franchising offers franchisees the right to practice and use another person's business philosophy, with the franchisor giving the franchisee (the buyer) the right to distribute its products, methods and trademarks for a percentage of monthly sales and/or a royalty fee. This also includes training, advertising and other support services. In the USA today, almost 4% of businesses are franchises.

Franchising holds a special allure for a number of reasons. It’s not as risky as a start-up venture and according to the 2008 Standard Bank Franchise Factor Survey, franchising offers a 98% success rate, compared to a dismal success rate for other start-ups.

Businesses for which franchising works best often have the following characteristics: a good profitability track record, broad geographic appeal; they are relatively easy to operate; often they are inexpensive to operate.

Standard Bank head of Franchising, Marius Rautenbach, says that if you’re considering franchising as an option, you should do some serious self-assessment first. “Find out what appeals to you as you’re more likely to be successful if you’re doing something enjoyable and that you’re passionate about.”

Access to finance is one of the first hurdles for franchisees, and in order to secure bank finance, Rautenbach advises that one has a SWOT analysis, a detailed business plan and viability study that include Balance sheet information and cash flow projections. This needs to give a concise overview of facilities required, what collateral is available, how the business will be managed and an assessment of the environmental factors that may influence the business.

Standard Bank’s Franchise team assesses each application in conjunction with information gleaned from industry experts and the business case is stress tested for viability. Following this, successful applications have access to capital through a number of options, including overdrafts, business revolving credit plans, loans, debtor finance and vehicle and asset finance.

Rautenbach cautions that if a bank only approves a limited amount of the required funds, there is a very good reason for this and it is not advisable to attempt to raise the shortfall elsewhere. “If your affordability is limited, you may risk the viability of the franchise business by seeking funds elsewhere; not to mention your creditors who have lent the additional capital.”

Although franchises are more stable and successful, with fewer risks for investors, Rautenbach cautions that franchising is not a quick-rich opportunity. “Profits are not guaranteed and it takes hard work to build the business and its income stream.

He advises potential franchisees to do some research before committing to a franchise opportunity. Ask if they are members of a reputable industry association; if their disclosure documents are updated; if they are creditworthy. Find out how long they’ve been in business; how many franchised outlets they have; how many terminations they’ve had and why and also if you can contact an existing franchisee for a reference. Finally, check that they’re accredited with a financial institution. This accreditation is valuable as it means they have met the bank’s stringent requirements.

Data Privacy Policy
Please note that Supermarket.co.za adheres to ethical personal data privacy policies.
No contact details or other data are collected by us or stored for any purpose, unless it is clearly
stated on the page on which the data collection form appears.