Why Settle for One Store, When You Can Build an Empire?

The old adage ‘You have to spend money to make money’ rings true in multi-unit franchising, and the financial challenges can be daunting. Here’s what the country’s big banks have to say.

Why Settle for One Store, When You Can Build an Empire?

Owning multiple franchise units can be very lucrative, but it comes with increased managerial demands because quality and consistency has to be maintained across the units. “An additional franchise unit should enhance the overall income of the owner and not diminish profitability as a result of inadequate financial and operational controls,” says Andre Rosslee, Absa’s head of sector solutions and franchising.

“Franchisees may make the mistake of over-gearing the business when starting an additional operation. This places pressure on the cash flow of the existing business if cash from the current operation is used to subsidise the new store. A larger multi-store group may require a head office structure which comes with an obvious increase in staff and other overhead costs.”

Multi-unit owners will also have a higher capital requirement as revamps to the outlets will be required and these revamps may occur at the same time or in consecutive years.

It takes a much bigger capital investment to open multiple units than to open just one, cautions Simone Cooper, Standard Bank’s head of franchising.

“You need to understand your capital requirements thoroughly before making a decision. Will you be investing personal funds? Will you be borrowing some cash? If so, what guarantee do you have that the loans will be available at a reasonable rate when needed? Are you anticipating the profits of the business will support future investments in additional units? If so, what will you live on while your profits are going to open more stores? All of these questions need to be carefully considered before deciding on the multi-unit strategy.”

Getting additional loans approved

Generally, the usual funding criteria apply when it comes to securing finance from the bank. “It’s important to demonstrate that the additional franchise store is financially viable and can stand on its own,” says Rosslee.

“The performance of the existing business and the owner’s ability to manage more than one outlet is taken into consideration. The new acquisition should be able to repay the loan from its own cash flow. Ideally, the total gearing of the group should not exceed 50%.”

The benefit that comes with obtaining finance for a second franchise store is that you have a proven track record and can demonstrate to your bank that you have the ability to successfully run the business. “A successful franchisee acquiring additional outlets obviously has better insight and knowledge about the brand and the business than when they started their first outlet.

“This helps them avoid all the pitfalls and unnecessary mistakes they may have made first time round, enabling them to become profitable more quickly. Also, when a franchisor approves a second or third site, this provides comfort for the bank as the franchisor is obviously happy with the franchisee’s performance and track record,” says Rosslee.

FNB also takes into consideration whether the franchisee is buying a new or existing franchise.  “A new franchise will have to build a new customer base,” says Morné Cronjé, head of franchising at FNB. “If it’s an existing franchise, it might have a profitable customer base or it might require a turnaround strategy. The bank would need details of a turnaround strategy.”

The bank places a lot of reliance on the operator, Cronjé adds. “If they have proven that they are able to run an outlet successfully, make their loan repayments and ensure cash flow management, we will view the loan application more favourably.”

Cooper stresses the importance of the business plan. “Make sure your business plan is up to date, shows your ability to manage your loan payments, and includes a clear description of your business and contingency plans. Finding growth financing for your business should be easier than start-up financing because your business has a demonstrable history of success.”

Your personal stake in the business

An unencumbered cash contribution will ensure the gearing of the business is not too high and that the cash flow can accommodate the total monthly loan repayments. “We usually look at the total group exposure, which should not be more than 50% of the total value of the businesses owned,” says Rosslee.

“In some instances, provided the franchisor gives written confirmation that they are happy with a lower deposit on the new transaction, we may consider the application provided that the gearing of the group remains within our credit criteria.”

Top tips from the top banks

It’s as important to do a due diligence on a prospective unit as thoroughly as you did on your first investment. “You are probably better equipped after operating your first store for some time to know what to look for in the second site,” says Rosslee.

“But don’t cut corners when evaluating the additional store. Also, remember that you will not be able to be on site all the time. You need competent and trustworthy managers. Have your hands ‘on’ the business, and not ‘in’ it.”

Cronjé says the franchisee’s infrastructure must be evaluated to ensure it will cope with the opening of an additional outlet. “Also ensure that the franchisor is supportive of the venture, as they may have limitations on the number of outlets a franchisee may operate.”

Cooper adds that the brand’s business plan, marketing, systems, corporate management, and culture should be set up in a way that supports managing stores from afar, or at least not from the premises. “The best systems for multi-unit ownership are operationally simple, can be consistently executed and have the technology in place to report on successes and deficiencies,” she says.

“Technology is hugely important for success with multi-unit ownership. The franchisors’ websites, training platforms, and financial tracking software must be able to work across multiple systems with the ability to look at unit performance both individually and collectively. A good technology system can slice-and-dice down, as well as roll up to look at how well things work — scheduling, invoicing, and payroll.”

Ultimately, risk and reward will come into play more strongly than before when you become a multiple-unit franchisee. You’ll have a lot more investment in the business, and more of your money will be at risk. However, do it right and you will also have the opportunity to reap the      rewards of a larger and growing business.

Monique Verduyn
About the Author
Monique Verdyun is a regular contributor to Franchise Zone. Franchise Zone is published by Entrepreneur Media SA. It offers advice and franchising opportunities in South Africa.

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