FRANCHISING is often touted as a less risky stepping stone to business ownership.
The concept is cleverly punted by its supporters: work for yourself using a proven business system and the backup of those who perfected it.
The associated advantages for the franchisee seem incontestable - someone else has done the trial and error to tweak a business idea into an undisputed moneyspinner; that person will show you step by step how to replicate the formula; you immediately enjoy the trust and goodwill associated with a brand consumers are familiar with and, lastly, being part of a bigger collective gives you clout to procure stock and other necessities on the cheap.
This is indeed true for many franchise systems available in South Africa. Wimpy, MacDonald's, Steers, Chicken Licken, KFC and Nando's, all fast food and restaurant chains, are the first brands which come to my mind as successful franchises.
Trying to come up with other seemingly successful chains without resorting to a Google search, I can think of the names of well-known fuel retailers; more fast food and restaurant chains like Debonairs, Scooters, Mugg & Bean, Spur, Keg and King Pie; a few names in the health and beauty industry; groups doing business in the vehicle after-sales market and the franchise stores of well-known retailers like Pick n Pay, which will otherwise operate company-owned outlets.
The problem for first-time entrepreneurs seeking someone to show them the ropes while they find their feet as business owners is that they probably won't be able to afford the premium payable to own and operate an outlet of one of these brands.
I don't know the figures and procedures, but I'm not far off the mark when I say that for instance Wimpy outlets are owned by consortiums, or wealthy individuals with extensive experience in the restaurant industry.
The same probably holds true for the likes of Nando's, MacDonald's or Mugg & Bean. These groups will probably rather not open an outlet than entrust it to someone who still has to cut his or her teeth, not only in the restaurant industry but also as a business operator.
What this means is that a potential first-time business owner - an employed person seeking a decent business opportunity - will have to consider approaching one of the other about 500 franchise systems operating in the country. Unfortunately, the franchise-holding advantages do not hold true for a great many of these.
Consider for instance brand recognition and goodwill; would you, or any other Joe Soap, recognise the names of as many as 80 of the available franchise systems?
Are most of these groups really big enough to guarantee procurement savings based on scale?
If you are considering the franchise route as a way to opening your first business, keep the following in mind:
Has the company been around long enough to prove the sustainability of its business model?
It is alarming that the Franchise Association of South Africa (Fasa) grants membership to franchisors which have only been in business for a year. It is impossible to know whether any business will make it through the highs and lows of economic cycles if it has only been operating for one year.
Does the group have the capacity to assist you to establish your business, or is most of its activities centred on the recruitment of more franchisees?
This is especially true for newer franchise systems, where operators are under pressure to increase their volumes to cover business expenses.
Do not count on your franchisor to hold your hand on a daily basis. These people will be travelling the country to sell the concept to anyone prepared to listen. Also, they will probably run the business on a shoestring, with almost no resources available to fund a decent support infrastructure.
Is the business model really that special?
I recently came across a group doing business in the health and wellness industry. Its franchise package includes three days "all-inclusive" training at the group' head office. Here's my question: if it only takes three days for a franchisee to understand everything about the business, is it really worth paying a hefty premium for? Will Nando's train franchisees for only three days and then leave them to run a shop?
What information is included in the disclosure document?
Many franchisors think having a disclosure document translates into being a good franchise. However, visit Fasa's website (www.fasa.co.za) to find out what information has to be included in that document. If the franchisor doesn't want to disclose the details of former franchisees that have left the system, you should ask yourself why.
Would a bank lend you the money?
Even if you have your own funding available, approach a bank as well. Most have dedicated franchise departments - they won't be lending money to systems with a bad track record.
A final issue to consider is your reasons for wanting to operate your own business. Don't do it simply for the sake of owning a business; your ability to critically evaluate the available opportunities will be compromised.
- Fin24.com