What you need to know about buying into a franchise
15 February 2016
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Hello and welcome to the latest edition of Old Mutual Live Business, my name is Chris Gibbons. So, you’ve decided it’s time to leave the corporate world and branch out on your own. You love the idea of being your own boss, creating your own destiny and hopefully reaping a bigger share of the profits, but do you start your own business or maybe buy a franchise?
In a previous edition of Old Mutual Live Business we looked at starting your own, but now it’s time to consider a franchise. We’re joined now by Naas du Preez, CEO of the Franchise Association of South Africa, also the CEO of his own franchise business, Oasis Water. Naas, welcome to Old Mutual Live Business and thank you for joining us. First off, what are the benefits, the key benefits of buying a franchise?
The benefit of a franchise business
Naas du Preez: Chris, thank you for the opportunity and hello to everyone. The advantages of a franchise business is that it’s a tried and tested recipe that you buy into. You have corporate support and then you are buying into an established brand.
CG: Is it not a costly route to go? If you buy into a restaurant chain, for example, you’re probably not going to get much change out of R1-2 million.
NDP: It is a costly exercise, taking into consideration you want to make a living out of it. If you’re going to put R2 million in the bank and just live off the interest, it will be a tough ask anyhow. The advantage of the franchisor and if they are FASA accredited and they have jumped through all the hoops, we know they are vetted, then they give you a disclosure document.
At least you know that that is what you’re paying, you’ve ticked all the boxes. Where it comes to your own business, sometimes you get a lot of nasty surprises and it could end up costing you quite a lot more.
CG: If you like the idea of working for yourself, working on your own, but you have a bit of risk aversion, you need to think quite seriously about a franchise.
NDP: That is correct. It’s a bit of bustling the risk, going the franchise route, you have a big brother that is looking out for you. If you’re a very independent rogue entrepreneur, maybe doing your own business is a better option.
Getting financial assistance
CG: What about finance options, is finance available, if I decide that I do want to buy a franchise?
NDP: Yes, financing is available. It’s available through different avenues, from your commercial banks and then there’s also some initiatives from the state for the Small Enterprise Development Funds etc. There are avenues that you can pursue to get funding, but own contribution is advisable.
CG: What about personality type, how do I know if I am suited to running a franchise, as opposed to starting my own business?
NDP: Well, some of the questions that I will ask myself or did ask myself a few years ago, do I have the time? If you have a very complicated social setup, then sometimes it’s not the best thing. Is your health up to it? There’s a straining few years ahead of you. So can you keep up with it.
Do you have the support of your family, do you have the stamina? As I said, it’s going to be a tough ask for a few years. Then the type of personality traits or are you good with managing people, can you interact with customers, are you a problem solver. Then I think very importantly, if you’re afraid of failure, maybe this is not the right avenue.
You need to be good with managing relationships
CG: There’s an added dimension. You mentioned managing customers, managing staff, but in a sense, you have to manage your relationship with the franchise owner, the franchisor as well.
NDP: Yes, that’s one of the key elements to a franchise business. If the relationship between the franchisee and franchisor. In a recent franchise survey that FASA has done, that has again been highlighted, that that’s one of the most important relationships that you have to manage.
CG: The downsides of running or buying a franchise? I’ve heard it said, I don’t know if it’s true, that the real profits go to the franchise owner, the franchisor and not the franchisee, is there any truth in that?
NDP: Well, if that was the case, then I don’t think those franchise or business concepts would develop and prosper. If all the franchisees feel that they don’t make any profit and it’s only the franchisor, then the chances are that you won’t hear about that franchise in the near future.
So, there has to be a fair profit between the franchisee/franchisor and then obviously on the franchise level as well. I understand that there are some challenges out there and there might be exceptions to the rule, but in general, I do think it’s fair profits between the parties.
CG: Bear in mind that if you go down this route you are paying, there is a cost to that security which the franchise brings you.
NDP: That is correct, so that is one of the costs that you are paying for if you’re on your own. The chances are that you will end up paying for it and maybe much more, have some extra headaches in the process as well.
What to look out for when considering a franchise
CG: Naas, what would you say would be the key things to look out for when considering a franchise?
NDP: Firstly, I would clarify my own passion. If your current job is frustrating and that’s one of the reasons why you want to venture into your own business or into a franchise, then I think it’s very important to align it with your own passion and your own interests. The first thing is to clarify in which sector of franchising you want to venture into and I think if you clarify that and it is your passion, the chances of success are much higher.
CG: If you’re into food, into cooking, then a restaurant kind of franchise might be the thing for you, but if you hate all that side of the business, stay well clear!
NDP: That is correct. What we usually advise people, if it’s possible, is to spend a day, a week, a month, in the life of a franchise that you are interested in. Sometimes you can find out, even though it is your passion, the reality is a bit different than what you thought and maybe it’s not your cup of tea.
CG: Are most franchisees open to that kind of approach?
NDP: Not always, understandably you open the door to somebody that you’re not familiar with, you’re not sure what their agendas are. Some of the franchisors do encourage potential franchisees that have already gone through a process, to have that exposure, but unfortunately, it’s not always viable.
The importance of the Franchise Association
CG: The franchise association, I presume exists, for many reasons, but one of them is to provide more information to somebody thinking about this process.
NDP: Yes, the main aim of FASA, the Franchise Association, is to give guidance to the industry, to make sure, and we promote ethical franchising. Obviously we also have information, we can connect the franchisees or potential franchisees to service providers and to all the different training institutes and then, most importantly, to the different franchisors.
CG: So, if I’m thinking about a franchise, should I approach FASA directly or should I go directly to say the franchisor of the restaurant chain or in your case the water business, that’s caught my attention?
NDP: I think the FASA website is a very good starting point. Sometimes you’re not even aware of all the different, if you go the restaurant route, all the different options available. The Franchise Association’s website is very comprehensive, it’s updated quite regularly, so I think it’s a very good starting point to take as a first step.
CG: Let’s have the website address.
NDP: It’s www.fasa.co.za.
CG: There you have it, from the CEO of FASA, the Franchise Association of South Africa, Naas du Preez. Naas, thank you for joining me on Old Mutual Live Business.
NDP: Thank you Chris, it was a pleasure, have a good day.