Bendeta Gordon is MD of Franchize Directions, and an expert on franchise development, consulting and specialised training for franchisors and franchisees. She has also spent many years researching the franchise sector, and recently published the findings of the Standard Bank Franchise Factor, a survey which she initiated and conducts.
Eric Parker is the former marketing director of KFC and co-founder of Nando’s. He is a past chair of the Franchising Association of Southern Africa (FASA) and has authored and co-authored several business books. As a partner at Franchising Plus, Parker designs strategic plans for franchise organisations.
Here they share with Entrepreneur readers the eights ways to ensure franchise failure, many of which can be avoided by conducting due diligence right from the word go.
1. Get to grips with the franchise mechanism.
Many people believe that franchising a great business is a guarantee of success, but it’s not. Say you own a hair salon that does really well. Your business focus is on hair cuts, colour and managing hairdressers.
Should you decide to franchise, you will suddenly be in the business of recruiting entrepreneurs, overseeing a team of franchisees and growing and protecting your brand. The fundamentals on which your business is based will be entirely different. Failing to understand how the franchise mechanism operates is a huge and costly mistake.
If you are considering becoming a franchisee,you must like people. If you don’t, you should not buy a franchise. To make a success of a franchise, you have to put in long hours and work with all kinds of people and personalities. The ability to manage employees and have a healthy relationship with the franchisor is essential to the success of your business.
It is imperative for a franchisee to understand that when you buy a franchise it is not automatically going to be a success just because there are 20 other successful stores in the system. 50% of that success may be attributable to the system, but the other half is the result of a lot of hard work. Running a franchise is not a nine to five job, it is like owning your own business and you have to have the will to assume all responsibility for that business.
2. Do your own research.
Not knowing what you don’t know is not only naïve, but it can close your business down. Before you think of going into franchising, speak to franchisors and franchisees of franchise systems in a variety of sectors. Find out what their expectations were, and whether they have been met.
Speak to consultants who have developed franchise systems and monitored the expansion of franchises in different business categories. Find out which franchises are most successful and why. Do some research into franchise systems that have failed and note the reasons for their failure.
If you’re a budding franchisee, establish whether the business you want to buy into has an established track record.
3. Don’t ignore the competition.
According the Standard Bank Franchise Factor study, there are 470 franchise systems in South Africa, representing a growth of 49% over the past two years.
Still think it’s OK to disregard competitors?The total number of franchised outlets has grown to 25 870, with the total turnover amounting to R188 billion. The point is that franchising is growing at a rapid rate, despite small business resource limitations, and competition is fierce.
You have to take into consideration businesses outside of the franchise that offer similar products and services. If the market is saturated, you may need to consider different regions, or a different industry altogether.
It’s advisable for franchisors to own their own stores so that they always have their finger on the pulse in terms of knowing what customers want.
Brands need to be contemporary. Branding is really about the perception in the mind of the consumer – it answers the question, “Why should I come here?” In the US, brands tend to be reinvented or refreshed ever.
15 to 20 years, whereas in South Africa, this exercise needs to be carried out every five to eight years, although it’s advisable to monitor the freshness of a brand on a yearly basis. South Africans like change – they are attracted to what they perceive as new and different. Research has shown that re-imaging a franchise system results in an increase in turnover of between 20% to 30%.
4. Pay careful attention to the numbers.
As a franchisor, if you cannot set up at least 40 franchises, and at least six within the first year, you need to question your business model. Without that volume, the franchise system will not make sufficient margins.
You may be able to do sufficient turnover and make enough sales, but the margins have to be good enough to deliver a solid return on investment or you will not be able to sustain the franchise infrastructure and provide the support the franchisees require.
Similarly, if your fee structures are too low, you will struggle to support your franchisees in terms of vital services like training and marketing. This is another good reason for franchisors to own their own stores. The profit from those stores provides an important financial base and can be used to fund the infrastructure of the franchise system.
A franchisee who cannot really afford the franchise is also bound to run into trouble. Do not fantasise about the potential success of a franchise. Until a new franchise makes a profit, the franchisee may not have enough money to run the business and to cover living expenses.This is why it’s vital for franchisees to be realistic about the income they expect, and their living requirements. They have to determine whether the franchise can afford them.
5. Ensure your business is not average.
A franchise system is based on a replicable business. The underlying business that forms the foundation of a franchise system should be great, not merely good. That means it must be contemporary,uniquely positioned and sustainable over a long period of time.
The nature of a franchise system is such that the business must also attract repeat customers –fast food restaurants, gyms and dry-cleaning services are all good examples.
6. Develop strict systems and stick to them.
One of the biggest fears – and misconceptions – about franchising in South Africa, is that it means loss of control; in fact, franchising should be all about maintaining strict control of the system.
Imagine you have a new franchisee who wants to retire to Knysna and she decides that opening one of your premium coffee franchises in the town is the way to go. Now imagine that she has a favourite curry dish that she thinks will be a great addition to the menu on those chilly seaside evenings.It may sound absurd, but that is exactly the type of scenario that can lead to the destruction of a brand.
Standardisation is a key factor in any franchising venture. A franchise system must have its own operations manual detailing all policies and procedures. Of course, the franchisor has to ensure that all franchisees adhere to the rules laid out in the manual on the understanding that this is for the benefit of the business and all those involved in it.
Franchise buyers invest in a franchise because they want to learn the business. They must adhere to the high standards of quality which makes the franchise system successful, and which customers expect to get from every other store in the franchise system.
7. Promote the business.
Many well-established and reputable franchisors in South Africa have marketing and advertising budgets to which franchisees contribute, and which are used for national campaigns. Other types of franchises advertise on a local level.
Getting the word out about your goods and services is vital to small business success. Some franchise owners mistakenly believe that the brand recognition that comes with the franchise does away with the need for them to promote their business locally.
Nothing could be further from the truth. Although your franchisor may offer you the opportunity to buy into a marketing campaign, you’ll still need to take steps to promote yourself in your area.
8. Do it because you love it.
Whether you are a franchisor or a franchisee, your heart and soul must be behind the business. Often success depends on the franchisee’s ability to get along with customers, employees,other franchisees, and of course the franchisor.
But a key element is passion for the business itself. If you have a bakery, you had better love the smell of fresh bread in the morning.
Don’t be fooled into thinking that owning a franchise is easy. Franchisors provide training and support, but franchisees must manage their own businesses. This can mean long hours and hard work. If you truly love what you are doing and the business becomes a means of self-expression for you, success will be that much more attainable.
The Bottom Line
Franchising is not fail-safe. Franchises can and do go under and it’s not only individual franchisees who are affected –sometimes entire franchise systems and the franchisors who own them can go bust. Many things can go wrong, so if you are considering buying a franchise don’t just look at success stories. Look at the failures too and see how they might have been avoided.
The Franchise Association of Southern Africa, +27 11 615 0359, www.fasa.co.za
FBS Group, +27 12 844 0230, www.fbsconsulting.co.za
Franchising Plus, +27 11 454 2235, www.franchisingplus.co.za
Franchise Synergies, 0861 FRANCH, www.franchisesynergies.co.za
Franchize Directions, +27 11 803 0665, www.franchize.co.za
Hubyeni Consulting, +27 11 467 7944, email@example.com