Forming partnerships for success in Africa
Into Africa |
06 May 2015, 12:00
Expanding into Africa comes with both risks and rewards. To mitigate the risks Head of Franchising, Rest of Africa for Standard Bank, Philip Myburgh, advises on why business owners should find the right partners for business success.
The big expenses in franchising you should know
Whether you are considering buying a franchise or have an existing outlet, make sure that you are well prepared for both the good times and the bad times by ensuring you have a support system to carry you through.
Related: Advice for first time franchisees
Buying a new or existing franchise
Standard Bank encourages prospective franchisees to carefully consider your franchise outlet options when you want to buy. Look at both the pros and cons of either buying an existing business or starting up a new outlet.
If you buy an existing outlet, make sure you understand exactly what that business was about while it existed. If you buy a new outlet, understand your competition and what it will take to compete against them.
Ask questions in terms of the franchisor field visits, franchisor support, the guidelines and whether these guidelines are sufficient to support and assist the franchisee.
If you don’t ask these probing questions you may end up buying a business and suddenly feeling adrift at sea, which will be too late as you would have already entered into agreements such as rental agreements and bank loans.
Understand the franchisor support structure
Make sure that you understand the type of support and training that the franchisor offers. There are some very strong brands that provide training and support to their franchisees and would never let one of their outlets get into trouble without stepping in to understand the situation and nurse it back to health.
There are, however other franchisors who might not give the necessary support to a struggling franchisee. Standard Bank encourages ‘hand holding’ for franchisees that are in distress so that these outlets can be assisted in their recovery.
Prepare for the big expenses
The upfront franchise fee, which you pay to join the franchise, is often not considered by a franchisee themselves. The ongoing royalty fees are often also not considered. They’re not hidden, but many new franchisees don’t realise they’re an essential component of franchising.
The same is true of advertising fees. However, these costs are generally disclosed when you first approach a franchisor.
A common stressful period for a franchisee is a required revamp, for example if the franchisor changes the corporate image or even upgrades equipment. This can cost a lot of money and sometimes the franchisee might not have made provision for this expense.
A very healthy business could go through a difficult revamp stage and come out at the end in financial difficulty.
This is where banks can play a big role in assisting. Sit down with your franchisors and work together with the franchisor and your bank.
Your franchisor could be open to ceasing certain monthly payments for a short period of time, like reducing an advertising fee etc., while your bank could assist you with the correct loan to help with the revamp costs.
More often than not when a person is in financial distress the bank is not the first place that they will turn to for assistance. Most business owners will hope that it will eventually come right and this makes it more difficult to rehabilitate them back to a position of stress.
An unencumbered deposit
Unencumbered cash relates to an amount of money that you have that is not tied i to anything. In other words, it’s a deposit that you can make directly to buy a franchise.
Unencumbered should not be drawn from your bond, and it wouldn’t be borrowing the money from a bank; it is money that you would physically have to have to invest into the franchise itself.
Why you need to have this in place
Many franchisors ask potential franchisees to make a substantial unencumbered payment as part of the business process. There are two main reasons for this:
- The contribution helps to make franchises more viable, and ensures that the debt is reduced to manageable levels, something that is vital when initial cash flow is slow as the business finds its feet.
- A franchisee investing their own money in a store is making a commitment to its success; something that makes a franchisor and the bank comfortable. When borrowing money to finance a franchise it is important to match the duration of the funding to the lifespan of the assets.
What to consider when approaching the bank for a loan
A franchisee looking at investing a significant amount of time and money into a new franchise needs to do thorough research before signing any agreements.
By applying the same thinking as banks, you should be able to determine whether the franchise you are interested in is a good investment.
Related: 6 Franchise coach myths, debunked
When looking to the bank for financing there needs to be an element of skin in the game. This means that you need to be prepared to invest your own money in the franchise before considering an investment from the bank.
This shows your commitment in the business and illustrates to the bank that you are prepared to make a success out of it.
It’s also essential that when you buy long term assets you place it on the right vehicle. Put long term debts on a loan and your working type capital on overdrafts. If you are unsure about what solution will be the best option for your business, then speak to the bank so that we can advise you on the right fit for your business.
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