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.
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.
Here’s how four of South Africa’s biggest names in banking evaluate franchises.
According to Morné Cronje, sector head: Franchising, Absa looks at the support structure provided by the franchisor. The bank looks at whether or not the franchisor has a programme in place to assist the franchisee over any stumbling blocks that may arise.
“Where the franchisor is more involved, it is easier to assist,” he says. Cronje explains that Absa doesn’t grade franchisors, and views emerging franchisors very differently from those with no track record. He says the franchising division will assist in building a plan for a new franchisor to enter the market.
The bank will need to look at their business plan to determine the risk involved. Absa employs regional franchise specialists who will compile a report based on a full analysis of the franchisor, this is then presented to the bank’s shareholders.
Some of the aspects analysed include the financial background, where the franchise first started, how many closures they have had, their profits and how many new stores they plan to open.
Riaan Fouche, head of FNB Franchising, says FNB has a franchise rating model that it uses. A franchisor earns points for certain aspects of the business and is then given a rating of A to D. The rating is used to determine the risk posed by that franchise and will influence the pricing.
While FNB does not publish its rating system, Fouche highlights five important points to look at when evaluating the risk posed by a franchise.
Background of the business and its directors. This includes looking at their past experience and qualifications.
- Financial stability of the franchise.
A franchise cannot support a franchisee if it is not financially stable.
It is also important to look at the franchise’s main source of income – is it from company-owned outlets, rebates from suppliers or royalties from franchisees?
- Franchise agreement, disclosure document and the operations and procedures manual.
- Performance of existing franchisees.
- Expansion plans of the franchise.
While an ‘A-grade’ franchise is generally considered to be lower risk, Fouche explains that FNB also has an incubator category which recognises franchises with great potential. In this case the bank will fund some franchisees and see how they perform. The bank also assists a franchisor in the ‘B’ category to improve and move up to an ‘A’ rating.
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.
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.
Standard Bank uses an ABC, 123 system in its franchising division, explains Thabiso Ramasike, head of franchising.
When it comes to franchisors, he explains that not all brands are at the same level or have the same profile. The rating system helps the bank understand its clients requirements much better, he adds.
A ‘C’ franchisor is usually one that has been franchised for five years or less, hasn’t become a member of FASA and is still finding its feet while it has picked up an opportunity to fill a gap in the market.
The entry barriers tend to be minimal, so C franchisors have lower costs and offer more flexibility in terms of accrediting franchisees.These brands are usually growing quite rapidly, but haven’t really mastered the art of providing training and support to a franchisee. There are usually a few failures.
Ramasike says a ‘B’ franchisor has usually been operating as a franchise for five to ten years and has systems like IT, management support and training in place. They will usually have developed tools to assist with site location and are still in the growth space, even looking beyond South Africa’s borders. They are fully established FASA members and have established relationships with banks. In South Africa, Ramasike says this category of franchisor is quite dominant.
An ‘A’ franchisor has been operating for over ten years, is usually listed on the JSE and is often multinational. These franchisors have limited failures, in most cases there are no failures. They are passionate about their brand and have an influx of franchisees so they can afford to cherry pick them to ensure they get the “best of the best.”
The training offered is intensive and the support structure immense.
According to Ramasike there will usually be a team responsible for the different components. He explains that there are only a few ‘A’ franchisors in the market, but they have a huge footprint.
There is also a ‘D’ category, adds Ramasike.These are typically franchisors Standard Bank doesn’t want to do business with, usually because they have been dishonest or unscrupulous. They have sometimes been expelled by FASA, have a weak franchising system, numerous closures and only train franchisees for around two days.
What is your category?
Standard Bank uses a 1-2-3 rating system for franchisees based on their experience and commitment to franchising.
1. A multiple store owner is placed in this category. These are people who are in the business of franchising. They have their own companies with subsidiaries, which are the various outlets they own. They should own a minimum of three to five to qualify for this category of franchisee. They are considered corporate entities on their own, and are often multigenerational franchisees. They are taken very seriously by the franchisor and usually sit on councils, executive committees and assist in driving strategy. Larger franchisors prefer to have one franchisee owning three outlets than four franchisees each owning one outlet as it reduces the need to coach new franchisees.
2. Franchisees in this category usually own two to three stores and work on franchising full-time. They are in a totally different space to the other categories but are starting to see the benefits of franchising. They begin building a strong relationship with the franchisor and achieve a certain level of success.
3. This is a franchisee who owns one store, is new to franchising, and usually runs the franchise on a part-time basis.