Franchising a Business in South Africa: a Guide

Franchising a business
Franchising a Business

Franchising a business is a means of expanding an already successful business, not as a testing ground for new or unproven business ideas.

Having a concept that has been working well over a reasonable period as a freestanding business is the first step to the creation of a successful franchise. Moreover, the franchisor must understand how the business operates and what systems, procedures, expertise, etc are at the roots of its success.

This development period eases the franchisor into the task of entering a new business- to franchise a concept to others. During this period, the franchisor will also have had an opportunity to bring the market research up to date and correct any problems that might have been manifested themselves, be they linked to the product range or operational issues.

In addition to the core business, the franchisor should operate at least one unit at arm’s length before franchising commences in earnest. This means testing the concept as a franchise, in the form of a joint venture with a trusted staff member or outsider. At this point, the problems that manifest themselves can be addressed. It may emerge, for example, that new franchisees require a longer training period than originally thought, or instructions given in the operations and procedures manual may prove inadequate.

Retaining a company-owned outlet helps the franchisor to generate income to fund ongoing operations. It also forms the ideal base for providing training and testing new products and/or services.

The operations and procedures manual, franchise agreement, and disclosure document are documents that should be drafted by a competent attorney.

Deciding who will make an ideal franchisee is an essential step. Good franchisees help to build the network into the leader in its sector, bad ones can bring it down. Franchise fees notwithstanding, franchisors make a huge investment in their franchisees and depend on them to help grow the business. It follows that choosing the right franchisees is vital, especially but not only during the early stages as the initial franchisees form the backbone of the network.

The franchisor needs to identify what skills, experience, and characteristics are essential for success; develop a profile around these findings and strictly adhere to it. Next, the franchisor should consider tools such as psychometric assessments to assess whether the potential franchisee fits the profile required.

The franchisor needs to decide what training franchisees require, its duration, where it will be presented, and who will deliver the training. The franchisor should develop both an initial and ongoing training programme for franchisees.

Franchising a business
Franchising a Business

Fees Paid when Franchising a Business

Setting the correct franchise fees is a vital success factor. If fees are set too low, franchisee support will suffer; if fees are set too high, franchisees will be unable to make ends meet.

  1. Initial Fee: Although there is no law governing this, it is accepted good practice that the initial fee should not contain a significant profit component for the franchisor. The franchisor’s return should come from ongoing management services fees. The purpose of the initial fee is to compensate the franchisor for costs incurred during start-up assistance to a franchisee.
  2. Management Services Fee: Set it at a level that ensures that the franchisor’s operation becomes financially viable over time, keeping in mind that the franchisee must have a chance to earn adequate returns on his/her investment and labour. The fee should be market-related when benchmarking against other franchises in the category.
  3. Marketing Fee: Marketing is an investment and not an expense. One of the benefits of joining a franchise is the access to an existing brand and national marketing campaigns. The marketing fee should also be market-related. According to the Consumer Protection Act, marketing contributions must be paid into a separate bank account and franchisees must receive feedback on the use of the funds. Ideally, the franchisor should match franchisee contributions to have a marketing budget that is substantial enough to make an impact.

There are numerous ways of recruiting franchisees. Leading the way is online portals, such as the whichfranchise website. Then, there are exhibitions, advertisements in business publications, and so on. The franchisor will need to create literature that outlines the structure and nature of your franchise, and what’s involved in becoming a franchisee of the network.

The franchise management team plays a key role in a franchised network. They are usually responsible for selecting franchisees and providing initial and ongoing support. Moreover, they also monitor franchisee performance, reporting and providing technical assistance to franchisees. As these are key staff members, relied upon to recruit, manage, and support franchisees; they should be top calibre people. They should be employed in sufficient numbers to ensure adequate coverage of the network, and should be trained on the intricacies of maintaining good franchise relations.

Contact us for assistance with franchising a business.

Franchising a business
Franchising a Business