With eight million people seeking employment, small business is going to be one of the ways to reduce unemployment in South Africa. It’s for this reason that the government is focusing on developing a culture of small business.
But starting your own business can be a daunting task — where do you begin? Franchising offers people a first step towards owning their own business without starting from scratch. A good franchiser has learnt from his own mistakes and can offer assistance in choosing a site and setting up the business. The brand and processes have already been tested. With back-up from head office, the business is operational from day one and suppliers are comfortable to deal with you. You may also find funding easier to obtain.
Eric Parker of Franchise Plus is an author of several books on small business, a franchising guru, a founder member of Nando’s and has assisted his sons in bringing the Seattle Coffee Company franchise to South Africa. Parker, who is also a franchisee of several franchises, has four basic starting points when he looks at buying into a franchise:
Read the trends of the market. There is no point going into a franchise that is in decline — rather get into franchises that operate in growing markets. Parker believes that the black middle market, known as the ‘black diamond†market, is where all the growth will happen over the next few years. This market has eight basic needs: transport, food, entertainment, health and beauty, communication, education, housing and clothing.
While it may be difficult to get into transport, for example, franchise companies such as pharmaceutical company Health Mode and entertainment store Reliable Music are great businesses that cater directly for this growing market.
Make sure you have a passion for the business. There is no point in going into food if you hate monitoring a kitchen. It has to be a business that inspires you.
Discriminate. Parker says there are more than 400 franchises in the market, but many of them come and go and you need to be careful about who you are getting into bed with. Parker estimates that there are only around 60 franchises that are worth looking at, and of those, about 20 you cannot buy for love or money. For example, Parker rates KFC as one of the best franchises around, but they it has not issued a new franchise in South Africa for years.
You need to identify up- and-coming franchises that cater to the right market and have the right people behind it, and then to get in on the ground level — that is where the real money is to be made.
You also need to understand the rationale behind the franchise operation. Some franchises make money out of their central kitchen or warehouse. This means that they make money selling products to the franchisee, so whether or not the franchisee is making the profit, for every additional store opened, the franchisor is selling more product. You want to find a company that makes money only if you are successful.
Location, location, location. No matter how great the franchise may be, if you can’t get a decent spot, it will fail. Part of selecting a franchise is to find out what spots are still available. More established brands may already cover some of the best spots. But it also requires you to think out of the box. For example, retailers that went into the Carlton Centre in the Johannesburg central business district a couple of years ago took a risk, but today it is a successful shopping centre with very reasonable rentals. The problem is that you can’t get space at the Carlton Centre today.
There are shopping malls opening in Soweto that could provide excellent opportunities, but you need to keep in mind that the first year of a new centre can be tough. It takes time to change shopping behaviour and you need to be prepared to tighten the belt until that happens.
Also, don’t get fixated on shopping malls. Seattle is finding that having coffee shops in offices is more profitable than in shopping centres where rentals are far higher.
When it comes to the nitty gritty, Riaan Fouche, head of franchising at FNB, says you need to do your homework carefully.
Firstly, ask for the disclosure document. This provides a list of the company’s financials, as well as any litigation against the company. It also gives a list of all other franchisees. It is worth calling a few to find out how their experience has been so far and if they are making money. Some franchisers may be reluctant to hand over the document, but all franchisers who are governed by the Franchise Association of Southern Africa are required to provide a disclosure document.
If you are buying an existing business, there are many tricks that the seller may use to hike up the price. One way to work out real turnover is to look at the supplier’s books to see how much stock the store has been ordering, and if this has been increasing or declining. Secondly, look at the franchise or royalty fee. This will also indicate if the business is in an up or down trend.
However, Fouche says some stores play it the other way round. For example, a franchise may determine the price of the business based on monthly turnover. For about six months before selling, the seller cuts the prices of the goods in order to increase turnover. The buyer then needs to look at gross profit margins. These can also be fudged, so Fouche recommends asking for a two-year turnover history. If you see a spike in the past six months, it is a good idea to start asking more questions.
When buying a franchise, ask yourself what happens if the franchise goes bust? Can you find another supplier? How valuable is the brand name?
How much are you paying for goodwill? For a fairly new franchise business there would be little goodwill in the brand name. But Fouche uses the example of Pick ‘n Pay to demonstrate the value of a good brand. Pick ‘n Pay launched a range of convenience stores called Right Value. They were not particularly successful, so Pick ‘n Pay rebranded them Pick ‘n Pay Mini Markets and turnover immediately increased by 35%.
When you buy your franchise, be ready to sell in a few years’ time to buy another. Franchise concepts tend to be fashionable for a period of time and few last forever — you need to keep moving with the trends.
Next month, M&G Money looks at how you go about applying for financing