Does Your Business Have What It Takes To Become a Franchise?

Updated on 6 November 2014

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Franchising your small business is one of the simplest ways to expand your business, requiring less capital, and risk than other growth methods. It is also one of the fastest ways to expand over wide area.

By franchising your small business, you are essentially leasing the rights to use your business model, brand and operational strategies to another business owner. But how do you know if this method is the right choice for your business?

The good news is 92% of all franchise concepts in South Africa are home grown, this includes popular Portuguese restaurant Nandos, braaied meat fast-food restaurant, Chesanyama, and even the luxury spa shop Sorbet.

Where we do fall behind however is that our franchising sector only contributes around 12% towards the GDP, whereas in the USA, this figure is closer to 50%.

Morne Cronje, head of FNB Franchise, gives some valuable insight for those considering converting their business into a franchise.

What are some of the reasons people opt to turn their business into a franchise?

The most common reasons are wanting to expand in unfamiliar areas using the local knowledge of franchisees. Another reason is to expand with a third party’s capital, as the franchisee will be responsible for the establishment cost of an outlet in his or her area.

What makes a business suitable to be franchised?

Many brands have embraced the franchise model strategy, and many have tried and failed. Depending on the following, a business is franchise-able if it’s a tried and tested business model that has proven to be profitable; if the skills required to run the business can be transferred to a franchisee; if the franchisee is able to afford the royalty and marketing fees; if the franchisor is able to receive a return on investment from franchising the business, as the initial stages of franchising is capital intensive. The business must also have some uniqueness that is not easily copied, it must not be a “me-too” brand. The business concept must have staying power, as franchising is a long term relationship.

Is there a specific turnover amount that a business needs to be making to become a franchise?

There is no turnover requirement. However, it’s critical that both franchisor and franchisee will be profitable and make a healthy return on investment.

What is the difference between licensing vs franchising?

A license agreement typically awards a license to a third party to distribute or sell a product under license of the holding company. This is often very product-focused. A franchise agreement is more onerous since there are also operational guidelines and reporting standards in place and not just sales and branding guidelines.

A business format franchise provides a blueprint for the operation of the business with ongoing support training. Ongoing support is very limited in the case of a license agreement.

What are the legal requirements?

It’s important to get professional assistance as there are many pitfalls when franchising a business. Franchise consultants and attorneys can provide valuable advice and assist the potential franchisor to develop documentation that is compliant with the relevant laws.

It’s also important to develop a recognisable corporate identity, as the brand remains one of the benefits to buy into a franchise. This must be developed by a good designer or ad agency. Both the trade name and the trademark must be registered to protect both the franchisor and franchisees.

There needs to be a franchise agreement and disclosure document that are both compliant to the Consumer Protection Act (CPA). It is best to get assistance from an attorney specialising in franchising to draft these documents.

What are some of the costs associated in convert your business into a franchise?

It may cost anything in the region of R500 000 to R1 000 000 to have it done properly. Therefore, the capital investment required to franchise a business is high and it should not be entered into lightly.

What process should one follow, and how long does the process usually take?

It typically takes six months to become franchise ready if the business concept has been well-proven already. During this time, the franchise strategy and expansion plan must be developed and then franchise documentation must be developed. The operations manual takes the most time as this must be a detailed document outlining all the standards and procedures of running the business.

What are the institutions you should approach for franchising your business?

There are many institutions that can assist, should you be keen on moving into the franchise sector. Franchising Plus has built up a reputation for delivering unbiased advice and professional services of the highest standard to existing businesses and prospective franchise companies in expanding their operations by means of franchising, licensing and other suitable business distribution mechanisms.

What are some of the advantages for a small business in franchising their businesses?

– Owner Operator – An owner operator who is at risk will always outperform an employee. Very often the franchisee has invested his life savings in the business and must make it work!

– Reduced risk – You will not end up with branches running at a loss. We often get companies wanting to franchise their loss making branches – this is not possible – however the chances are these branches would have been profitable had they been franchised.

– Superior customer care – You will get a franchisee who really cares about his customers and will go out of his way to please them. The franchisee also has the authority to refund the customer in full or send them flowers etc.

– Support structure – To support franchisees you need a high quality staff structure. A field service consultant is the link between the franchisee and the franchisor. The field service consultant plays the role of a communicator and mentor and can be responsible for 12 to 15 franchisees.

– Reduced staff turnover – The franchisees are committed and permanent. You don’t have to worry about managing store management and staff and all the problems that go with it e.g. CCMA cases etc. – The franchisees will also utilise family and in so doing reduce staff costs and increase efficiency.

– Increased marketing expenditure – Each outlet will contribute a fixed percentage to the marketing fund. This money must be spent on marketing and therefore you will be able to develop a very strong brand. Remember the brand belongs to you and you are developing a very strong asset in your balance sheet.

– Offers you an impressive R.O.I. – Franchising offers you a unique profit opportunity consisting of very limited capital outlay, low risk, guaranteed monthly returns with high growth rates. The high growth rates and increased marketing helps you develop a brand which is a saleable asset.

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