Franchising opportunities abound — with options for entrepreneurs available in sectors such as fast food, cellular outlets, automotive as well as health and beauty.
Regardless of the route a potential franchisee wishes to take, a hefty deposit will be required and there will be high operational costs.
Since very few people are able to invest from their own resources, the Mail & Guardian looked at finance packages from the big four banks and loan originators.
Franchise fees generally fall into two broad categories: an upfront fee and ongoing fees.
The upfront fee, also known a joining fee, will vary depending on the franchisor’s offerings.
Franchisees will also be expected to fund the day-to-day requirements of their business, which could include building or renovation work, although some brands offer assistance with this.
The cost of a franchise will vary depending on the type of offering and the sector, and prices can range from R250 000 to more than R1-million.
Cash Crusaders, for example, requires R1.2-million in set-up costs for a full turnkey solution, which includes R250 000 in initial stock and R180 000 in working capital.
However, it requires potential franchisees to have R500 000 of their own, unencumbered capital. Royalties are charged at 11.1% of gross profit and there is an 8.9% marketing fee.
Most franchises are aware of the shortage of start-up money, but what is often lacking is a well thought-out funding application and business plan.
On its website, Standard Bank states that before committing to an opportunity certain questions must be asked:
• Will I be happy operating on my own, but in accordance with rigid guidelines?
• Does the particular type of business suit my personality and interests?
• Can I comfortably acquire the knowledge and expertise to operate in the chosen industry?
A site dedicated to franchising, whichfranchise.co.za, states there are various types of funding available, including equity finance, which requires the franchisee to have their own cash resources.
“You cannot expect outside funders to advance you money unless you are willing and able to contribute some cash of your own.”
Another option is a soft loan, which is cash loaned from family and friends and can be unsecured, open-ended and possibly even interest-free.
“You need to keep in mind that should the business venture fail, the chances of the grantors of such loans receiving anything back would be slim to non-existent,” states the site.
Taking partners on board in exchange for a share in the business is also an option, but partners need to be chosen with care, states the website.
“It is especially important that your future business partners share your vision for the business.”
Some franchisors are prepared to enter into joint venture arrangements with suitable individuals. Initially they take a large share in the franchise, which trims the capital outlay and makes it easier to source loans, it states.
Bank finance is available in several forms, such as an overdraft, term loans, and asset finance and factoring, which involve selling the debtors book if there is already a stable customer base.
Standard Bank adds that applications for finance need to be submitted with a comprehensive business plan, and the information needed includes a personal balance sheet for all parties involved, a specimen pro forma balance sheet for the trading entity, the business’s income and expenditure statement as well as a cash flow projection.
Other documents required are:
• Copies of all partners’, members’ or directors’ identity books;
• Company or corporation registration documents, if available;
• Partnership, shareholders’ or members’ agreement; and
• Draft lease agreement for premises to be leased
Other funding can come from trading activities, such as through arranging payment terms, raising finance from customers through deposits or early-payment settlement fees.
What’s out there?
Absa Small Business Franchising offers “dedicated franchise experts” to provide solutions to existing or prospective franchisees for entities that turnover less than R10-million a year.
On its website, Absa states that franchising finance could be the right solution if the entrepreneur is about to buy into a franchise or manages an existing franchise with an annual turnover of less than R10-million, has already acquired the franchise and is looking for funding, wants help to assess the financial feasibility of a proposed franchise outlet or needs expert advice and support on an ongoing basis.
Standard Bank also provides financing for franchisees and offers a toolkit with several products, such as revolving credit plans, vehicle and asset finance and financial planning. It also offers insurance and credit card services.
Nedbank also offers a variety of services and notes on its site that those thinking of buying a franchise, or who have been in business for less than two years with a projected turnover of up to R7.5-million, can take a minimum start-up loan of R100 000, which will then provide access to free cash deposits, debit orders and internet banking. It also offers mentorship and training.
First National Bank’s offerings include a toolkit with a business plan template and cash flow template.
A franchisee loan origination agency, Franchise Finance, has application forms available online and a web-based system that enables it to present a “professionally” prepared loan application to several banks simultaneously, inviting them to compete for business.
The system means that applications are fast-tracked and an answer is provided in 10 days.
The agency helps franchisees to prepare loan applications and business plans, introduce these to the banks and monitors the process until its conclusion.
It operates in four areas of finance: new projects, the purchase and sale of existing franchised businesses, upgrades or expansions, and restructuring of existing loans, which could lead to a lower interest rate.
Before the loan process can get going, Franchise Finance needs confirmation that the application for a franchise has been approved in principle. However, it only offers assistance for an approved list of franchises.
Website whichfinance.co.za notes that the amount borrowed must be “just right” to avoid high interest payments or running into a cash crunch.
If no assets are available to offer as security, the applicant can consider a credit guarantee scheme from government’s small business finance agency, Khula, although Franchise Finance notes that this adds fees to the deal.
This feature has been made possible by the Mail & Guardian’s advertisers. Contents and photographs were sourced independently by the M&G’s supplements editorial team