It’s no easy task to get a bank to buy into a business concept. They are notorious for having strict requirements and being cautious when deciding who they will do business with, after all, they’re a business themselves and want to know that the money they lend will be returned to them with interest.
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.
Genen Gungiah, head: Franchise and Enablement for Business Banking at Absa
Franchisees generally have three funding options available to them when buying a franchise, namely: Using their own savings, crowd sourcing, where investors will own part of the business, and a loan.
Absa recognises the importance of the franchising sector to the economy and supports its growth. In deciding to fund existing or prospective franchisees, Absa uses several criteria, including:
- The supporting structure provided by the franchisor to its franchisee. Where the franchisor is more involved, it makes it easier for the bank to assist, especially if the franchisor will support the franchisee through difficult economic times.
- It is also important that franchisees applying for funding have a business plan supporting the vision and projected growth of the business.
- A franchisee’s capital contribution required to start the business and affordability to repay debt is another important consideration.
- The track record of the franchisor is important when assessing whether to lend finance. Franchise opportunities with a good reputation and track record will generally be assessed favourably.
- Is the franchise concept’s growth strategy supported by infrastructure?
- We also assess the franchise agreement and disclosure document to ensure that they adhere to the required legal requirements.
To learn more about franchise finance, email firstname.lastname@example.org or call +27(0)11 350 8000.
Morné Cronjé, head of FNB franchising, says FNB looks at three important factors:
- Franchisor financial performance/position: Are they profitable or making a loss? Are their financials stable? Do they have enough capital reserves to support the group if there’s a bad month? Do they rely on the sale of additional franchises to finance head office expenses?
- Franchisee network performance: Is the network growing or decreasing? What is the ratio of openings to closures? How many stores are in distress? This reflects the strength of the business model and brand. If the brand shows poor performance, there’s a risk that your investment might not pay off and banks will be reluctant to finance a risky investment.
- Franchisor support: What is the track record of support for franchisees? Is initial training sufficient to get you started on a strong footing? Is there ongoing training and franchisor support to help franchisees with any challenges? An absent or hands-off franchisor is not ideal.
At FNB, when assessing finance applications, we look at the total set-up costs plus the owner’s contribution, working capital, stock and rental guarantee, and provide a funding solution that addresses the total need.
If the franchisee wants to do a feasibility study or make use of a business broker, that would be at the franchisee’s expense.
Legally, there needs to be a franchise agreement and disclosure document, both of which are compliant to the Consumer Protection Act. It is best to get assistance from an attorney specialising in franchising when drafting these documents.
Mark Rose, head of new business development, Nedbank Business Banking, says Nedbank doesn’t work with categories. Instead, the different brands are grouped into segments — retail, fuel and the food sector, for example.
Nedbank goes through a full accreditation process on a brand, taking into consideration the sector it operates in. He calls this a ‘fit for purpose approach.’ Rose explains that Nedbank targets the brands that have a good track record, strong brand presence and have shown that there are opportunities for growth.
A full accreditation is then done on the brand, which involves sitting with the franchisor and doing an in-depth analysis.
Some of the aspects that are looked at include the franchise system, how many stores there are, how many closures there have been, and the reason for the closures, the franchisor’s strategy for distressed stores, what support is given, how the site selection works for a new store, and how a franchisor recruits and selects franchisees.
Ethel Nyembe is the Head of Franchising, Small Enterprises and Enterprise development at Standard Bank.
Standard Bank gathers information from franchisors annually to fully understand the different operating models of franchise brands. Strong brands typically share similar characteristics such as:
- Well established operating models with a substantial footprint
- Operating in excess of 25 years
- The training offered is intensive and is provided to the franchisee and its staff
- Assistance is provided to franchisees for site selection and lease negotiation
- Field service consultants are available to understand and support franchisees
- Predetermined and strict unencumbered cash requirements / required own contribution
- Cash flow projection assistance is provided for at least the first few years
- In-house support systems, IT, financial programmes, distribution logistics etc.
- Rare failures
- Strong marketing campaigns.
These more established brands, with excellent levels of support to franchisees, where higher levels of cash flow-based lending is feasible, are often multinationals that typically have a waiting list allowing for the best candidate selection. The entry barriers are high, and outlets can be quite capital intensive and expensive.
Related: Where South Africa’s Franchises Are
Established and growing brands
Growing franchise brands are well recogised brands and some may also be very capital intensive. They have some characteristics of the stronger brands, but there are still areas that are being perfected like support structures, training, centralised systems etc.
Fewer failures are evident, but failures are often attributed to incorrect location or failure to ensure that franchisees are ‘fit for franchise’. Growing brands make up the biggest portion of the South African franchise sector.
New entrants have mostly franchised for five years or less, and are still finding their feet. They have some acceptable franchise elements but lack the critical components of the strong and growing brands.
Entry barriers tend to be minimal, lower capital requirements exist and franchisees are not as carefully selected. The operating models are still modified through trial and error and there are usually a number of failures. Minor training and ongoing support is provided.
Finally, there are some franchisors that Standard Bank would not want to do business with, usually because they have been dishonest or unscrupulous.
We support the franchising sector and believe that success lies in the duplication of highly successful operating models. By obtaining current and relevant information, and staying abreast of developments, our classification of brands assists us to recognise weaker franchising systems with numerous closures, where the essential ingredients for success don’t exist.
Kinds of Franchisees
Multi-store owners are influential. They are generally well established and very successful, with a provincial and national footprint. They partner with franchisors and are considered to be key decision-makers in the system.
Multi-store owners generally have more than five outlets and can stretch as far as seventy or more. These highly corporatised entities are in the business of franchising. They have their own companies with subsidiaries.
Medium store owners usually own two to four outlets. They are generally stable and successful franchisees who are still actively involved in overseeing the operational aspects of their outlets. They are more familiar with the management practises and are beginning to form strong relationships with the franchisor.
A single store owner owns one store, often has limited experience and is new to franchising. They are vulnerable to any volatility.