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This ABSA info will help you to distinguish between franchises and other business systems. It will also provide you with guidelines on how to evaluate individual franchisors.

Because of the good name of the franchising industry, you may be tempted to buy a franchise without conducting a thorough assessment of the business. But be warned, not all businesses professing to operate franchise systems offer the support, back-up and training that go hand in hand with franchising.

To minimise the risk, you must ensure that the business you are buying is a true franchise. You must also establish that the franchisor will provide the aftercare and support that characterise this form of business.

What is franchising

A true franchise, also known as business format franchise, involves the granting of a licence by one party (the franchisor) to another (the franchisee) which entitles the franchisee to trade under the trademark or trade name of the franchisor. The franchisee can make use of an entire package that comprises everything necessary to establish the business. This package helps a previously untrained person to run the business with the franchisor’s continuing assistance, according to a predetermined plan.

The business format franchise affords the franchisee the following:

  • The entire business concept
  • Initiation and training in all aspects of running the business, according to the concept
  • Continued assistance and guidance from the franchisor
  • A contract known as the franchise agreement which sets out the relationship between the franchisor and the franchisee
When a franchise is something else in disguise

Other forms of business often present themselves as franchises because of the good reputation that franchising enjoys.

The following business arrangements are not franchises:

  • Agencies, distributorships and dealerships. These business forms do not follow an established business format. They can change their product ranges and they do not pay royalties
  • Pyramid systems. Businesses that use this method of distributing products are often wrongly described as franchises. In a pyramid system, staff members at the upper levels receive payment according to sales achieved and payments made by those lower down the pyramid
  • Employment franchisees are not employees. They do not receive salaries and their only allegiance to the franchisor is in terms of the franchise agreement
  • Partnerships. A franchisee is not a partner of the franchisor. The parties operate independently and are responsible for their own gains and losses. The franchisor provides the ground rules for the management of the franchise. The franchisee owns and runs the business
  • Investments. A franchisee is an investor only in the sense that he or she puts money into the project. Unlike a stock-market investor, the franchisee is not a passive party who selects the stock and then waits for it to perform according to plan. He or she actively manages and promotes the business. Its success depends on the efforts of the franchisee, and his or her relationship with the franchisor
Are you suited to franchising?

Any form of business requires tough-minded, energetic leadership. The qualities that make a good franchisee are essentially those that make a good business person.

However, you must be able to function within a business format that someone else has designed. As a franchisee, you need to maintain your independence while conforming to rules and procedures set by someone else. This position is the ultimate test of your strength as a team player.

Perhaps more important than anything else is the franchisee’s ability to resist the temptation of redesigning the business. You must be able to accept the sound advice and guidance of the franchisor, gleaned from many years in the business. The essential goal of the franchising system is to provide franchisees with the skills and knowledge that will make their operations effective immediately. You should not have to learn by your mistakes.

Running a franchise requires attention to detail. Despite the business format within which you work, you have to run the business. The franchisor provides the blueprint and some assistance, but ultimately you will determine whether the business succeeds or fails.

If you can answer ‘yes’ to most of the following questions, you are probably suited to the role of franchisee:

  • Are you willing to run the risk of owning your own business?
  • Are you prepared to work long hours?
  • Will your family support you in this?
  • Can you follow directions?
  • Are you a systematic worker who can adapt to another person’s business format?
  • Are you comfortable working with others?
  • Do you absorb knowledge easily to master the needs of a new business?
  • Will you enjoy working in your chosen field?
  • Do you qualify for business finance?
Advantages of franchising

Although you own the business, you are not alone. You can benefit from an infrastructure that is not available to the independent business person. Here are some of the advantages:

  • Low risk - You know that the business you are buying works well and has proven successful
  • Technical assistance - The franchisor provides the skills and technology needed to run a successful business
  • Access to finance - Banks take the approach that there is less risk involved in financing a franchisee of an established franchisor than an independent business owner
  • Advertising - As part of a larger group, you will enjoy the benefits of a recognised name as well as the advantage of corporate advertising
  • Bulk buying - In contrast to an independent business of a similar size, you will receive the discounts available to a business that buys in large quantities
  • Research and development - In the best franchises, this is a continuing process. You can take advantage of all developments that occur
  • Managerial assistance - This is part of the business format, lightening your load considerably
  • Specialist assistance - Franchisors often provide the services of specialists in tax consultancy, labour law, market research and product development as part of the package
  • Quality control - The franchisor’s method of working should ensure a product of consistent quality, resulting in few customer rejections
  • Training - The franchisor trains you and your staff in every aspect of running the business
  • Start-up assistance - The franchisor often provides or helps with shop fittings, equipment selection and many other aspects of starting a business
Disadvantages of franchising

For some people, the loss of independence that goes with adapting to another person’s planning and vision is unbearable. Not everyone is suited to the role of franchisee. Some disadvantages are:

  • Limitations on personal initiative - Highly independent people may feel that the format according to which they have to run the business is too restrictive
  • Start-up costs - These are sometimes higher than in a similar independent business, especially if the franchisor demands elaborate decoration of business premises in keeping with corporate identity
  • Royalties and other fees - These do not apply to an independent business
  • Dependence - You may not always agree with the franchisor regarding advertising, selection of equipment or other matters. The dependence that is part of the relationship can become a burden
Finding the right type of franchise

The first step is to look inward. For example, if you cannot imagine yourself running a dry-cleaning business, go into another field. The best guideline in choosing a field of business is to do something that you enjoy. A new franchise will dominate your life for years to come, so choose one that relates to your own interests. Your answers to the following questions will help you establish which kind of franchise will suit you most:

  • What are your interests?
  • Which type of business fits these interests?

Now assess what you can contribute to the business:

  • What are your strengths and competencies?
  • Will your background and experience benefit the franchise?
  • What are your personal goals? Will buying a franchise bring you any closer to realising them, or will you find that it becomes a long-term burden?

It is pointless to negotiate with a franchisor to bring the franchise closer to what you want. The reason for the success of a franchise is that it has a successful formula.

Choose one that suits you. Do not try to adapt one to your needs. Having considered your own interests and inclinations, you can identify fields of business that may suit you.

The importance of outside professionals

The skills provided by consultants cost money. However, we strongly urge that you do not attempt to buy a franchise without consulting specialists. Because franchising is such a singular field, it is advisable to gather all the information you can before signing a business contract.

Ask your accountant to examine the franchisor’s financial projections to see whether they are what they seem. An attorney with specialist experience in franchising should scrutinise the franchise agreement to ensure that the clauses have no hidden aspect that may surprise you later.

Franchising consultants within the industry that you intend entering will also be sources of useful information. They can evaluate the franchise you are considering and weigh it against others in the same industry.

An experienced franchise consultant can also show you the possible consequences of clauses in the franchise agreement and give you a clearer idea of the feasibility of the business than anyone else will.

Choosing a franchisor

There are more than 300 franchises operating in South Africa today. This gives the prospective franchisee a wider choice than ever before. You can source information on available franchises from the Franchise Association of South Africa, journals of business opportunities and other business publications.

Identify those franchises in your chosen field that satisfy your criteria and evaluate them.

Approaching the franchisor

Most franchisors do not advertise to attract new franchisees but receive requests from many prospective franchisees wanting to become part of their franchise system. It is therefore in the best interests of the franchisor to differentiate between various levels of interest among possible franchisees. The initial screening takes place when you first telephone the franchisor.

Do not give up if you meet with rejection from the franchisor of your choice after the first telephone call. Follow up the call with a letter or proposal that explains what you can offer the franchise.

If your approach is successful, you should make every effort to get to know the key figures in the franchisor’s business. You will be working closely with them for years to come and you will want to feel comfortable with them.

The disclosure document contents and what it tells the franchisees

In order to ensure that prospective franchisees have adequate information about franchises that they are thinking of acquiring, and that they are given adequate time to make an informed decision, it is now a requirement for membership of FASA that franchisors must submit their disclosure document for approval by FASA, and keep it updated and approved on a regular basis. The information that the prospective franchisee can expect to find in the disclosure document is as follows:

A) Key franchise details:

  • Legal and trading name of franchisor
  • Addresses of the franchisor
  • Membership status with FASA
  • Details of franchise officers, shareholders and employees
  • Details of group structure if applicable

B)  A background to the franchise including product details

C)  Current franchisees:

  • Details of all current franchisees
  • Details of terminations over past year
  • Details of any current litigation

D) A profile of the ideal franchisee, stating all the most important characteristics that a franchisee is likely to possess

E)  Site details if the disclosure document relates to one specific site

F)  Franchise agreement summary:

  • This section should include a summary of the key clauses in the franchise agreement

G)  Franchisor support:

  • This section should state in detail the level and nature of service, support and training to be provided by the franchisor

H)  Financial information:

  • The franchisor must provide a full assessment of the financial obligations of the franchisee.
  • This should set out:
  • Initial franchise fee
  • Establishment costs
  • Initial working capital required

I)  Certain appendices should be included, namely:

  • Franchise officers’ details, including curriculums vitae and the length of time that they have been involved in the franchise business
  • An auditors’ certificate certifying that the franchisor is a going concern, and is in a position to pay its debts as and when they become due
  • A directors’ statement on a company letterhead in which the directors of the franchise certify the viability of the business
  • A set of detailed projected financial statements that are typical of an actual first year’s trading in the particular franchise
What to ask existing franchisees

Existing franchisees are as important a source of knowledge as the franchisor. They are running identical businesses to the one you are contemplating and have the clearest possible picture of the way the franchise functions. Here are some questions you should ask them:

  • Is your business profitable?
  • Are you doing as well as the franchisor led you to believe you would do?
  • Has the franchisor given you the support that he or she promised?
  • Did you receive adequate training?
  • Have you had any serious disagreements with the franchisor? If so, what were they about?
  • Do you know any franchisees who closed their businesses? If so, why did they take this step?
  • Do you know any franchisees who went insolvent?
  • How do you feel about the advertising support you received?
  • Does the franchisor show an interest in your business?
  • Does a representative of the franchisor visit you regularly?
  • If you had the choice again, would you still buy a franchise from this business?
  • How long have you been a franchisee?
  • How would you describe your relationship with the franchisor?
  • Do you feel that your business can compete effectively with others in the field?
  • Are you satisfied with the quality of products that the franchisor supplies?
  • Do you receive deliveries on time?
Studying the feasibility of a new franchise

As in any other form of business, you need to understand the target market. You must know why customers bring their business to the outlets of this franchise. Is the market big enough to absorb more franchisees? Are you buying into a recognisable brand name?

When assessing the financial feasibility of a proposed franchise outlet it is usually wise to call in a professional in the field.

What it costs to acquire a franchise outlet

The amount that you pay a franchisor for a franchise is usually far smaller than the total capital needed. The franchise fee is only the first of many expenses.

The franchisor may split the required payments into separate units. You should know what these are, what you will be paying for and how much the franchisor requires of you.

You must pay for the outfitting and equipping of the premises, both of which can be surprisingly expensive in a retail outlet. Costs may include:

  • Stock
  • Deposits on premises, electricity, other services and equipment
  • Staff salaries when training starts
  • Licence and registration fees

Once the business is running, there will be royalties that you have to pay to the franchisor.

You also have to pay for the launch and secure early working capital to see the business through the first difficult months. The final list of expenses can grow to a formidable length and will often amount to more than you expected. Add to this the cost of finance, if you have taken out a loan to help you set up.

In running any business, you have to cater for your personal subsistence expenses. In the early months of your franchise business, it may not be possible to draw a salary.

You must provide for your personal needs until the business can pay you a salary.

Acquiring the franchise

Once you have satisfied the franchisor’s criteria and the franchisor has met yours, it will not be long before you receive a document that formalises the relationship.

Bear in mind that South Africa does not yet have specific franchise legislation.

Therefore, the franchise agreement will be the only document that sets out your rights and obligations, and those of the franchisor.

The franchisor will have a standard agreement that you must sign. To protect the integrity of the franchise, the contract may not be negotiable. Ask your lawyer to study the agreement before you sign it. If necessary, insist on changes that will offer you more protection.

Nothing in the agreement should depend on a friendly relationship between yourself and the franchisor. Remember that the franchisor could sell the business, leaving you to deal with someone else.

While you must protect yourself when applying for a franchise, the franchisor will also seek protection. Because of its complexity, a franchise agreement can run to fifty or even a hundred typed pages. Do not rush through it. Study every page of the agreement.

The franchise agreement is more important than most contracts as it establishes a long-term relationship between the franchisor and each franchisee. From the franchisor’s point of view, the agreement should be fair and reasonable so that it will be acceptable to all franchisees.

You can expect the agreement to contain sections that govern the use of the franchisor’s trademark by franchisees. It is also likely to contain provisions that enable the franchisor to demand the maintenance of standards. This protects all franchisees, as they become part of a chain that provides consistently good service.

The franchisor may include a restraint-of-trade provision in the termination clauses. This is a way of preventing a former franchisee from using certain intellectual property after the agreement has ended. Such restraint of trade is usually for a fixed period. Any standard agreement is likely to cover the use of the operating manual which governs the business system according to which the franchise operates in all its outlets.

All fees and royalties will also fall under provisions in the agreement. The agreement is usually for a certain period. If you lease premises, the period of the lease should coincide with that of the premises. After cancellation of the agreement you will not need to continue leasing the business premises. The agreement must contain details regarding the granting of exclusive territory rights. It should set out the size of your territory as well as all other aspects of the relationship between yourself and the franchisor.

This is the aspect of buying a franchise in which professional help is most necessary. Ask an expert to check the document before you sign it.

The Franchise Association of South Africa

The Franchise Association of South Africa (FASA) was established in 1979. It exists for the following purposes:

  • To promote the concept of franchising
  • To issue guidelines according to which franchise systems should operate
  • To apply a code of ethics to the industry
  • To promote franchising in the small business community
  • To collect and distribute information on franchising
  • To maintain a database
  • To provide education on franchise-related matters
  • To represent the industry in dealings with government, the media and the public

FASA holds an annual franchise exposition and publishes a range of useful handbooks on various aspects of franchising. Because South Africa does not have specific franchise legislation, FASA has devised a code of ethics for the governing of franchise practices. Some of the provisions of its 18-point Code of Ethics and Business Practices are of a general nature, concerning the maintenance of high standards in business. Most of the provisions apply specifically to the protection of people involved in franchising.

While the code is useful, it is only a guide. Because it does not have the force of law, it applies exclusively to members of FASA. If you believe that a FASA member is transgressing the code, you can take it up with the member’s organisation. However, even member companies can ignore the code without suffering legal consequences.

A franchisor’s membership of FASA provides you with the assurance that the franchisor agrees to function according to the code of ethics.

You know that you will not be buying into a pyramid selling organisation, because such an organisation may not become a FASA member. As a franchisee, you can also expect full disclosure, training and factual advertising from FASA members.

However, not all reputable franchisors are members of FASA. Some who apply the highest ethical standards choose not to join the association. Ultimately, as a prospective franchisee, you are personally responsible for your decision and cannot afford to take anything for granted. You must approach any franchise deal with caution, regardless of the franchisor’s affiliation.

Membership of FASA should benefit a franchisor by enhancing his or her reputation.

The fact that members commit themselves to a written code of ethics, against which others can measure their performance, serves to reassure potential franchisees.

Launching your franchise outlet

After the agreement has been signed, the franchisor should assist you in the selection of premises, especially in a retail business. You should also receive help in preparing the premises for business.

While you are making these preparations, your training and that of your staff should commence. Apart from the appropriate courses, the franchisor must provide a training manual to help you run the business. The franchisor should also supply operating and marketing manuals at this stage, to guide you in future.

On opening day , the franchisor usually helps with a launch to get the business going.

Key staff of the franchisor’s business should attend the launch and you should make a special effort to attract as many potential customers as possible.

Avoiding the pitfalls

As in any other business transaction, there are many potential dangers involved in buying a franchise. Most problems occur with businesses that incorrectly present themselves as franchises. The easiest way to avoid them is to approach any deal very carefully. Here are a few problems you may encounter:

  • Your circumstances may change after you get into the business. Make sure that you have a way out if you need it
  • You may be committing everything you have, so get professional help to evaluate and minimise the risks before signing up

If you are not careful, you can find yourself buying something quite different from what you intended. A decision to buy a small franchise to supplement your income can turn into something much bigger in the hands of a skilled marketer

Do not take on something you do not want.

  • A pile of paper will descend on you once you sign up. Unless you read it all very carefully, you may find yourself committed to something that you would not otherwise have accepted
  • Be cautious of new franchises. They may offer fresh opportunities, but they are more risky than established franchises. Risk is precisely what franchisees aim to avoid
  • Be wary of excessive claims by the franchisor. Some franchises have a bad reputation because of inflated claims
  • Watch out for hidden costs. When you investigate a franchise, ensure that you get the complete list of financial commitments in writing
  • Avoid buying a failing franchise. You can do this by asking other franchisees how they perceive the franchise. If the franchisor is hesitant about putting you in contact with them, you should probably take your business elsewhere
Warning signs

It is possible to avoid getting involved with businesses that promise more than they are able to deliver. Watch out for the following:

  • Resistance to disclosing information about the business is a warning sign. You will rely heavily on the franchisor in future, so do not allow him or her to hide the financial situation. Reject arguments that the franchise is not a public company and therefore does not have to reveal financial information to you. You are not an ordinary member of the public. The franchisor owes you full disclosure
  • Watch out for claims that you can make large amounts of money by spending a few hours on the telephone. Any success is going to take hard work
  • Beware of the hustler who tells you that the territories are nearly all occupied, so if you do not act soon you are going to lose the opportunity. Obtain a complete list of existing territories from your franchisor
  • The sales representative who attempts to impress you with his or her own material success is probably selling something of little or no value
  • Be careful of the business that is too anxious to get money from you at an early stage of negotiations. If the franchisor wants cash only, do not proceed with the deal
Avoiding failure

The failure of a franchise business is usually the result of the franchisee not knowing enough about franchising or not having the aptitude for this form of business. Here are some steps you can take to avoid failure:

  • Carefully evaluate your own aptitude for running a franchise
  • Do not undertake a franchise commitment unless you can handle the stress associated with running a business
  • Do not commit yourself to a franchise that you cannot afford
  • Investigate all suitable franchise opportunities
  • Assess your earning potential carefully, after discussions with existing franchisees
  • Speak to former franchisees to learn why they ended the relationship
  • Carry out your own market research on the product or service offered
  • Read the franchise agreement carefully and make sure that you understand   its contents
  • Seek help from the franchisor when necessary
  • Follow the franchisor’s business format. If it has proven to be a success in the past it WILL work for you