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Franchising on a budget

How much capital do you need to get into the game.

To franchise with R800 000 or to not? This was a question that Moneyweb was asked by an aspirant franchisee looking to get into the food and hospitality sectors. Franchising on that budget sounds a bit tight, so what can be done with it?

“Whilst R800 000 is enough to make an investment in a franchise, the options are limited as there are not many franchises that can be purchased or set up from scratch from this sized investment,” explains Jeremy Lang, General Manager of Business Partners.

When investing in a franchise it mainly depends on what you are looking for. There is a difference between starting up a new store compared with buying an existing one. Morne Cronje, head of franchising at FNB, says: “If you’re looking at a new store, then the franchisor determines set-up costs. In addition to that, the bank normally asks for a 50% owner’s contribution, which is the responsibility of the franchisee. This equals the investment amount.”

Whereas when “taking on an existing store, the selling price is determined by the value of the business and the franchisor needs to approve the sale of the business as well as approve the franchisee.”

It all depends on finding the right franchise that is going to suit the budget you have planned. With an existing franchising, Cronje elaborates: “Normally the investment amount depends on the serviceability of the business. In other words, the bank will ask the question – what loan can the business service / afford?”

There are also always other factors to consider as well. When we spoke to Lang he told Moneyweb, “Different franchisors have different methods of charging a franchisee for the use of its brand and intellectual property. It is common practice for a franchisor to initially charge a once-off franchise fee together with a monthly royalty, usually based on turnover. ”

Cash flow will also be important: “Understand and budget for the working capital requirements for the business. This too may vary from franchisor to franchisor depending on the nature of the business and length of the working capital cycle. This will ensure that you do not find yourself short of cash shortly after you start trading.”

Cronje adds: “Cost is going to play a huge role in franchising in the future. The country’s current economic situation means that businesses have to keep an eye on increasing costs such as electricity, minimum wage, inflation and rental.”

Focusing on the food and hospitality sectors, Cronje continues: “Competition at the moment is very big. There are a number of international entries into the South African franchising market such as Pizza Hut, Burger King and Domino’s…. If a franchisee is to succeed in the industry, it is important to know what your core business is and develop a strategy around that.”

But do you sink your hard earned capital into your own offering or go the franchise route?

Franchising seems to be the more popular route says Simone Cooper, Head of Franchising and Enterprise Development at Standard Bank. “The franchising sector contributes close to 10% of the country’s GDP and employs approximately 500 000, is generating good returns and it is also a sector in which job creation can thrive.”

Lang goes back to the struggle of starting up. “Franchises have the advantage of owning an established product or service that is already familiar to the public so the initial challenges of introducing your product into the market and gaining market acceptance are to a large extent avoided.

“Franchised businesses have been resilient, taking into account the tough economic conditions we have experienced over the past couple of years. Current growth trends are good and higher than some dominant industries. This is mainly due to proven business models, uniformity of operations and support provided by the franchisors,” Lang adds.

 

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