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Insurance key to franchise management

Nov 06 2013 14:42


Company Data

Santam Limited [JSE:SNT]

Last traded 303
Change 12
% Change 4
Cumulative volume 161608
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Cape Town - More and more entrepreneurial South Africans are seeing the value and opting to buy franchises.

The franchise trend generated R302bn for South Africa’s economy in 2012 and employed more than 300 000 people.

This is according to a recent survey conducted by Research IQ for the Franchise Association of South Africa (Fasa).

For every one franchise that closed its doors last year, another three opened.

Another indication of the sector’s growth is its addition of more or less 3 700 franchised units in the last financial year.

Many entrepreneurs are recognising the benefits of franchising.

Besides being part of an already established brand, they benefit from training support, advice from independent experts as well as a business strategy that is already in place.

Ensuring a franchisee has sufficient short-term insurance cover is a core element that will add to its overall success.

“Having the correct insurance cover is of utmost importance for franchisee owners," said Shehnaz Somers, head of commercial underwriting at Santam [JSE:SNT].

"If properly covered and faced with an unforeseen set-back, franchisees are protected from undue business interruption that could lead to financial losses or, in extreme cases, a complete shut-down of their franchise.”

The cost of food franchises, for example, range anywhere from a few hundred thousand rand up to several million rand, depending on its size and nature.

Purchasing a KFC franchise, for instance, could demand an investment of around R5.5m.

“With a cost like this comes a magnitude of risk that needs to be protected and when it comes to insurance for a franchise, one doesn’t want to take any chances,” said John Fitzpatrick, managing director of hospitality and leisure underwriting managers, Santam’s specialist underwriting agency in the hospitality sector.

Insuring a franchise is very much dependent on the franchisor. In some cases, the franchisor stipulates in the agreement that the franchisee must use its preferred insurer.

If the franchisee is not obligated to a specific insurer, then more often than not the franchisee will opt for an intermediary and insurer with which they already have an existing relationship.   

Tips to consider

Franchisor’s insurance or your own?

This is dependent on the franchisors agreement.

“There are advantages when opting to make use of your franchisors insurer," said Saul Chait, director at CJB Brokers, who specialises in insurance for franchises.

"One is that an existing insurance package will more than likely be in place. Whether your franchise is situated in a high or low risk area you will pay a standard fee.

"Just make sure you are fully covered, as you don’t want to run the risk of not being covered if something happens at a time when a mishap sends your business to your competitor.”

Don’t take short-cuts

Some risks that franchisee owners will consider as low risk, often proves costly. Purchasing of incorrect or inadequate cover can be most damaging to a franchisee owner.

A franchisee owner might not feel it’s important to have cover for business interruption, for example.

However, if employees of a franchise go on strike for a week or two, the cost of this could be detrimental for the business.

“An advantage with franchises, unlike other businesses, due to its nature, under-insurance is not common as the franchise knows what must be covered. Being adequately insured helps to settle claims quickly as the exact costing elements are known,” said Chait.

Consider the use of an intermediary

Franchise risks vary. Through experience and market knowledge, an intermediary is able to assess your franchise needs, highlight potential problems and provide you with an insurer and customised package that best suits your franchise, resulting in an elimination of future losses and ensuring you are not over- or under-insured.   

Intermediaries are most helpful when enquiring about insuring a franchise as they know all the right questions to ask and know all the risks involved.

Be aware of risks and obtain sufficient cover

It cannot be over-emphasised how important it is to identify potential risks and obtain suitable and adequate cover.

In South Africa, there are a full range of plans available to cover everything from general assets, to accident cover, to liability cover.

“We have seen a variety of claims over the years, from loss of money during exchange, strikes, disability, and fire. We have even had occasions where guests were locked in bathrooms due to malfunctioning locks,” said Chait.  

What not to over-look

Make sure you understand exactly what your policy covers and all the types of insurance available to your business.

Look for what you think could happen, and make sure you have cover for that event. You can never be too careful, said Chait.

- Fin24

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santam  |  franchises  |  entrepreneurship


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