Unsuspecting buyers risking their hard earned money in new franchise concepts raises red flag

franchisees-risking

The rapid growth of new franchise concepts right across the 14 different business sectors in the franchise industry, is of huge concern as unsuspecting franchisees seem eager to invest in these concepts without seemingly having done a thorough due diligence on the sustainability of the concept.

Franchises that are younger than three or fours years are still deemed to be ‘new and developing’ and potential franchisees should investigate the franchise opportunity from a start-up with great caution.  Many concepts do not have longevity and the chances of failure within the first two to three years of inception are very high.  If the company is not an accredited member of the Association it is a real red flag.  Accredited member franchises of the Association have to comply with strict membership criteria and the company’s franchise agreement, disclosure document and operations or procedures manual must comply with the Consumer Protection Act’s Regulations and other laws.  This process requires extensive financial investment in getting the documents drafted by experienced specialists, registering the trademark and various other requirements.

Various new franchise owners simply do not have the financial resources or are unwilling to invest in this aspect of developing a franchise company.   Some new franchises get away with setting up a franchise company ‘on the cheap’ as they still seem to be selling franchises to unsuspecting potential franchisees.  More importantly, franchise members of the Association are required to provide a written undertaking that they would abide by the Code of Ethics so even if a franchise assures a potential franchisee that the company’s documents are compliant with the Consumer Protection Act, the trademarks are registered and a support structure is in place there is still no onus on the franchise owners to conduct business on an ethical basis.

Having discussions with funders, landlords and other stakeholders in the world of business, the common thread in discussions is that ’times are tough’ and funders especially have become even more risk averse and selective when it comes to funding businesses – let alone start-ups.  Somehow potential franchisees and some stakeholders put so much trust in the concept of franchising that they invest in start-up franchise brands without asking too many questions or digging too deep.
The Franchise Association deals with enquiries from the public on a daily basis concerning franchisees who invested in a franchise that has not been accredited by the Association, only to realise afterwards that the business is not profitable for various reasons.   FASA receives very few complaints against its members and although there has been an uptick in the number of complaints it remains small in comparison to the rest of the industry but nevertheless, the careless decision-making process implemented by some people when it comes to buying a franchise is of serious concern.

The Association recommends that potential franchisees conduct a very thorough market analysis of the franchise they are interested in buying paying particular attention to the following:-

  • Has the franchise company been accredited by the Franchise Association of South Africa?
  • Did you conduct interviews with existing franchisees of the franchise you are interested in buying and would they invest in another business from the same franchisor?
  • Did you discuss the planned purchase with the franchise desk at your local bank or funder and if so, is the funder satisfied with the financial track record of the brand?
  • How many outlets has the franchise company closed to date?
  • Does the franchisor get involved in the marketing, training and hand-holding if a franchised outlet underperforms financially?
  • How many complaints have been lodged by customers or clients of the brand on social media and other relevant complaint websites?

If you are looking at buying a franchise we urge you to visit FASA’s website at www.fasa.co.za to make an informed decision.  Furthermore, the Association offers free mediation services to its members in the event of a dispute but there is no recourse for franchisees of non-accredited franchise companies other than through the legal system.

Vera Valasis

Executive Director at FASA
Vera Valasis has been at the helm of the Franchise Association of South Africa for a number of years and holds the distinction of being the first woman to hold the position in the history of the association.  Her experience in franchising spans over 30 years from her early days running restaurants to managing house-hold brands like Milky Lane and Juicy Lucy under the Pleasure Foods brand and before her tenure at the association, Debonairs Pizza and other brands within the Famous Brands stable.  She has been representing South Africa at the annual World Franchise Council meetings since 2006 and is a highly respected and experienced franchise specialist.
Vera Valasis
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