Buying a Franchise? Don’t Forget About These 4 Things!

Buying a franchise can give you access to an established brand, a proven business model and support that you wouldn't necessarily have when starting a business from scratch.

But a familiar logo doesn't automatically make a franchise a good investment.

South Africa has a well-established franchise sector. According to the Franchise Association of South Africa (FASA), the country has hundreds of franchise systems and more than 68,000 franchise outlets, supporting hundreds of thousands of jobs.

If you're thinking about becoming a franchisee, the important question isn't simply “Which franchise should I buy?”

It's “Does this franchise make financial, operational and personal sense for me?”

Here are four areas worth investigating before signing on the dotted line.

Buying a recognised business model is not the same as buying a passive investment.

As a franchisee, you'll usually be expected to operate according to the franchisor's systems, standards, branding and processes.

That means you need to ask yourself some practical questions:

• Do I understand this industry?
• Am I comfortable following an established operating system?
• Do I have the skills to manage employees, customers and finances?
• Am I prepared for the time commitment involved?
• Do I genuinely believe in the product or service?
• Can I work within the franchisor's rules?

An established franchise can provide valuable systems and support, but you still have to run the business.

Standard Bank recommends understanding both the franchise brand and your own skills before investing.

Don't choose a franchise simply because the brand looks successful. Choose one that makes sense for your abilities, financial position and long-term goals.

The franchise fee is rarely the only amount you'll need.

Depending on the franchise, your costs could include:

• Initial franchise fees.
• Premises and deposits.
• Shop fitting.
• Equipment.
• Initial stock.
• Staff recruitment and training.
• Marketing contributions.
• Royalties or management fees.
• Technology costs.
• Licences and professional fees.
• Working capital.

You'll also need enough cash flow to keep the business running while sales build.

Before investing, ask for financial information and understand how the franchisor arrived at its projections.

Speak to an independent accountant or appropriately qualified financial adviser and stress-test your numbers.

What happens if revenue takes six months longer than expected to reach target?

Can you still pay salaries, rent, suppliers and finance instalments?

A franchise might have a strong brand and still be the wrong investment for your budget.

One of the best sources of information about a franchise is somebody already operating one.

Don't only speak to the franchisor's sales team.

Ask existing franchisees questions such as:

• How accurate were the initial cost estimates?
• How long did it take the business to reach sustainable cash flow?
• What support does head office actually provide?
• How effective is the training?
• Are marketing fees delivering value?
• How responsive is the franchisor when problems arise?
• Are there restrictions on suppliers?
• How much control do you have over pricing and local marketing?
• Would you buy the same franchise again?

Standard Bank specifically recommends speaking to existing franchisees, assessing franchisor support and conducting local market research before committing.

You should also investigate the area where you plan to operate.

A franchise that performs exceptionally well in one suburb or province may face very different competition, customer demand and operating costs somewhere else.

The paperwork matters.

Before signing a franchise agreement, understand exactly what you're committing to.

South Africa's Consumer Protection Act regulations require franchisors to provide prospective franchisees with a disclosure document at least 14 days before signing the franchise agreement.

Use that time properly.

Review the disclosure document, franchise agreement, lease, funding agreements and other relevant contracts with appropriately qualified legal and financial professionals.

Pay particular attention to:

• Franchise and ongoing fees.
• Territory rights.
• Renewal conditions.
• Supplier requirements.
• Performance requirements.
• Marketing contributions.
• Transfer or resale conditions.
• Personal guarantees.
• Termination and exit provisions.

And don't overlook risk protection.

A franchise may operate under an established brand, but the individual business can still face theft, fire, storm damage, liability claims, vehicle accidents, equipment losses or interruptions to trading.

That's where the right business insurance becomes important.

Business insurance isn't one blanket product that automatically protects every risk. The cover should reflect what your franchise actually owns and does — from premises, stock and equipment to vehicles, liability and potential interruptions to trading.

Miway's guide to what business insurance covers in South Africa explains the major types of cover businesses may need.

You can also review Miway Business Insurance options when deciding how to protect your new operation.

At minimum, prospective franchisees should understand the documents relevant to the transaction, which may include:

• The disclosure document.
• Franchise agreement.
• Lease agreement.
• Funding documents.
• Operations manual.
• Financial projections.
• Any sale agreement if you're buying an existing outlet.

Standard Bank similarly recommends reviewing franchise, lease and funding documentation and obtaining specialist advice before committing a substantial investment.

A franchise can offer advantages such as an existing brand, operating processes, training and support.

But that doesn't eliminate business risk.

Performance can still depend on location, costs, competition, management, customer demand, the franchisor's strength and your ability to operate the business effectively.

Think of a franchise as an established system, not a guaranteed result.

Start with five questions:

1.      What will the total investment really cost?

2.      What ongoing fees will I pay?

3.      What training and support will I receive?

4.      What do existing franchisees say about the business?

5.      What happens if I eventually want to sell or exit?

Clear answers before signing can prevent expensive surprises later.

Buying a franchise can be an exciting step into business ownership, but a recognisable brand is only the starting point.

Do your research.

Check the numbers.

Talk to existing franchisees.

Get professional advice.

And make sure you understand the risks you'll be taking on.

Once you've decided the opportunity is right for you, make sure your business insurance keeps pace with what you're building.

Get a Miway Business Insurance quote and choose protection that reflects the way your franchise operates.