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Successful franchising hinges on more than economic factors
The franchise industry represents more than 30 000 businesses across South Africa and contributes about 10 percent of our gross domestic product (GDP). Little wonder then that franchising is top of mind for many people who want to start their own businesses, says Kobus Engelbrecht, Head of Marketing at Sanlam Business Market.
Research shows that franchised businesses have an 80 percent chance of survival compared to the 20 to 30 percent survival rate of self-governed businesses as they are based on tested and successful concepts. It stands to reason, says Engelbrecht that many people therefore perceive franchising as an easier route to self-employment.
The fact that franchising is based on an existing system does, however, not guarantee the success of a venture and people interested in franchising should know that they will need to invest many hours in their business as any other new business owner.
“If you don’t necessarily have an interest or affinity for a particular industry and only see an opportunity in a particular area as a way to make money, you should tread with caution. When it comes to purchasing and successfully managing a franchise, an interest in and passion for a particular industry is vital, as you’ll be spending almost to all of your time there,” says Engelbrecht.
What it takes to run a franchise
Engelbrecht explains that the distinction between an entrepreneur and a franchise owner is not simply a superficial observation. While entrepreneurs will probably breathe life into new business ideas, they may find it challenging to invest in and manage a franchise.
“As a franchise owner, you need to follow a particular franchise system right down to the T, because that is its proven formula. If you are more of an entrepreneurial type of person, then you should think very carefully whether franchising is the right decision for you, given that you are very likely to see things your way and to want to do things your way instead of the way prescribed by the franchisor. Pursuing your own approach in a franchise may lead the franchisor to believe you are breaking the rules of the business, when in your opinion, you may just be trying to innovate!”
Engelbrecht says it may be a generalisation but, typically, good ex-corporate employees are more successful in running franchises because they are used to routine, structure and working to formulas.
The balance between innovation and sticking to a successful formula is not, however, straightforward, he says. “While there are rules, franchise owners still needs to be innovative within the system to make a success of their franchises.
“You can’t just sit there and rely on the franchisor to place advertisements as a marketing tactic. You will also need to consider what you can do to promote your business, like engaging with your community.”
Should you leave your job?
There are a number of factors to consider when deciding whether to quit your full-time job to start a business. These may include the time it will take for the business to break even, the impact on your family and room for growth in your current job.
Engelbrecht says research from the South African Franchise Association (FASA) shows that three in four franchisors have been in business for more than six years and a significant 46 percent have been in operation for longer than 12 years.
While this suggests that a franchise is a sustainable business, Engelbrecht says there may be more risk in running a franchise should you select one that doesn’t interest you or is not suited to your skills and preferences.
Financing your franchise
Given the difficulties to obtain a 100 percent loan for a business venture, Engelbrecht says people interested in franchising should be prepared to put down around 50 percent of the purchase price.
FASA statistics showed that the average purchase price for a franchise business was R560 003 last year. But franchises in popular categories like fast food and restaurants require an initial investment of millions of rand.
“You have to establish what is the franchise going to cost, where you are going to get the 50 percent initial amount from and then you have go and do the cash-flow calculation to see if the projected income of that franchise will meet your income needs to stay in business.
“If it’s an existing franchise and its current figures do not match what you need per month, how are you going to survive? You have to be very realistic about what you are getting into.”
It’s also worth noting that 43 percent of franchisors surveyed by FASA estimated that it takes up to six months before a new franchisee breaks even and a further 28 percent said it could take up to a year to reach the break-even point.
The success of franchising, therefore, presents a real attraction to own a franchise – but the decision calls for careful evaluation of one’s interest in a particular business environment and of one’s personality type, Engelbrecht concludes.