Evaluating the franchise opportunity

If you’re thinking of becoming a franchisee, the franchise disclosure document, as legislated in The Consumer Protection Act, will provide you with important pieces of information on how much you’ll be expected to invest, whether the brand is expanding or shrinking, how high the ongoing fees will be, and whether existing franchisees are mired in litigation with the franchisor.

In addition to providing details of the franchise opportunity, its owners and the number of franchisees and their contact details, the most important part of the disclosure document has to be accompanied by an accounting/auditor certificate from a person eligible in law to certify that the business is an ongoing and financially sound concern and provide recent audited financial statements that show the growth in the franchisor’s turnover, net profit and franchised outlets for the financial year.

The FASA 2023 Franchisee Survey, sponsored by Absa, showed:

The incidence of receiving disclosure document at the time the agreement was being negotiated was significantly higher among building, office and home services franchisees (67%) and retail franchisees (52%). The franchisees in the remaining categories were more likely to receive these documents once the agreement had been signed.
In addition, the higher the purchase price of a franchised outlet, the more likely that the disclosure documents would be handed over once the agreement had been signed (66% – R500 001 – R1 million and 80% – more than R1 million).
The average price paid for an outlet was correlated with the size of the outlets, with the small franchised outlets costing an average of R505 373, up to the very large franchised outlets costing an average of R664 721.
36% of the total sample claimed to own the property on which the business was situated and 1% did not know or refused to give the amount of the upfront deposit paid.
The amount of working capital required was well above the norm when buying a retail outlet (R742 321), a building, office and home services outlet (R545 920) or an automotive products and services outlet (R434 000).