Franchise advice

Jan 09 2013 12:57
A Fin24 user wants to start a fast food franchise in a township with three business partners, but doesn't know how to access funding. He writes:

I need some advice on how to apply for new business finance. Three other young business partners and I would like to start a fast food franchise in a township area where we believe there is a market for it.

The problem we currently have is that we would need to find about R500 000 in startup capital, which we do not have.

We are all under 30 and currently working in the financial industry. We have looked at different financing options and the problem we have encountered is that these financiers all need us to be involved in the day to day running of the business.

We want to employ a manager to look after the daily running of the business, as we do not wish to quit our current jobs at this stage.

We've also considered that should one of us be a full-time manager, would that qualify as being operationally involved in the day to day running as we are going to be applying for financing as a corporate?

Once up and running the business would be creating employment for about eight to 10 people, mostly from the area in which we would operate. We could now use all the advice we can get.

Anita du Toit, a partner at Franchising Plus, and business development consultant Anton Ressel give advice:

Says Du Toit: "Most banks require potential franchisees to have access to at least 50% of the capital required in cash to qualify for a bank loan.

"This is often difficult for young people who have not had the opportunity to save enough to qualify.

"However, institutions such as the National Empowerment Fund do consider lower cash contributions if applicants meet their criteria.

"The alternative is to approach friends and family for a loan."

She says most franchises will require the franchisee, or at least one of the partners in case of a partnership, to be involved hands-on in the business.

"If you are considering appointing a manager, you would need the franchisor's permission.

"In addition to that, to get the benefit of a dedicated and motivated manager similar to a franchisee, it's advisable to enable the manager to obtain equity or participate in profit through a profit-sharing scheme.

"A franchise is not a passive investment, especially a food franchise where operational risks such as shrinkage are high."

Ressel agrees, saying: "If you do not have the faith to jump in 'boots and all', why should a financier give you cash?"

He acknowledges that accessing finance for starting a new, unproven franchise concept will always be challenging, whether you try and raise it through commercial channels or via a government agency such as Sefa.

"[But] your challenge will be exacerbated by the fact that neither of you have plans to be fully hands-on at this stage.

Ressel advises that the partners contact a franchising expert such as Du Toit, who would be able to advise on the different options.

"A final alternative would be to look at some form of venture capital or crowdfunding."

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