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Taking the leap of investment in a franchise

The profit potential is compelling and banks see franchises as a relatively safe bet, but you’ll need some money of your own.

Lack of capital is the biggest barrier to opening a franchise outlet, but this is where banks such as Nedbank have come to the party with a suite of products to get entrepreneurs on the path to self-employment.

Banks recognise that franchises are relatively safe business opportunities, so financing is therefore readily available. Nedbank’s dedicated franchising unit can assist with a number of financing options. In a number of cases, predetermined credit criteria have already been met for certain franchise brands to improve the chances of a prospective franchisee acquiring finance.

You’ll probably need to have some capital of your own – it’s called having ‘skin in the game’. Few banks will lend you money without you taking some of the financial risk too.

The big question then is: which franchise? In the Fournews group there are six brands from which to choose, each with different set-up costs and expected monthly income.

The most costly from a set-up point of view is Moyo, which is likely to need R6.5 million, but with expected monthly income of R1.4 million and a projected net profitability of 18%, servicing the bank loan is well within reach.

A News Cafe will likely cost around R6 million to set up, and monthly income should hit R1.3 million once you’re on the home straight. The gross profit for these outlets is a generous 65%, with a net profit target of 20%.

At the other end of the cost scale you have Senhor Peri Peri, with a R1.6 million set-up cost and expected monthly income of R450 000 (yielding a net profit target of 16%). Opening a Hello Tomato outlet would set you back somewhere in the region of R1.9 million, with a projected monthly sales target of R500 000 and a net profitability of 15%.

Brooklyn Brothers, one of the newer Fournews brands, falls somewhere in the middle of the cost bracket. Kitting out a store should set you back about R2.8 million, with expected monthly sales likely to reach R650 000 (giving a net profitability of 15%).

These figures are indicative, but they are based on the experience of stores already in existence.

How do these figures stack up against other franchises? Pretty good – better in some instances, and very much dependent on the enterprise and energy of the franchisee, says Manny Nichas, Fournews new business manager. Nichas owns a number of Ocean Basket outlets himself, so he knows the joys and challenges of franchising inside out.

Read: SA’s food franchising sector among ‘best in the world’

“The beginning stages are the most nerve-wracking for someone new to franchising,” he says. “You’ve spent all this money, and you wonder if it will pan out of the way you imagined. This is where you need a lot of hand-holding and guidance. If you follow the tried-and-tested formula for success, you start to see results immediately.”

Having strong relationships with the banks is critical in any franchise operation.

“Our relationship with Nedbank goes back a long way, starting with when I was at Ocean Basket,” says Nichas. “They understand our business, our finances, our operations and marketing, so every time we get approached by a potential franchisee, they know we are very strict in our selection criteria. When we put a deal on the table, they know we have done our due diligence and this helps push it along.”

Banks typically demand 50% unencumbered capital from prospective franchisees before they will grant a loan for the balance.

Brought to you by Nedbank Franchising.

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