South Africa is stuck in the longest business cycle slump since 1945 (Bloomberg 27 June 2019) – what a frightening headline..! Times are indeed tough and much more difficult than most of us realise. Job losses are every day news and since the beginning of this year alone Dunkin Donuts & Basking Robbins’ closure resulted in 120 retrenchments, Standard Bank announced 1200 retrenchments, Absa 827 retrenchments, Sibanya-Stilwater 3450 retrenchments, MultiChoice 2000 retrenchments and Tongaat Hulett 5000 retrenchments with many other big corporates not even disclosing job losses i.e. Group Five, PPC Cements and Tiso Black Star Group. Some people who have been retrenched look towards getting into their own business and franchising immediately comes up.
But a sure-fire way to lose money is to invest in a franchise without doing a thorough job investigating the company. Just like we read about job losses and closures in the corporate environment, we sadly also read about closures and job losses in the franchise industry. However, there are franchise companies and franchise companies so what separates the shining stars from the heaps of ash..?
Most importantly a potential franchisee should consider the following:-
Is the franchise company an accredited member of the Franchise Association of South Africa – so why is this important? Currently the National Consumer Commissioner is not enforcing or policing the Consumer Protection Act and its Regulations’ requirements for franchising in South Africa – the Association is the only body that verifies compliance with the Act. Furthermore it requires that all member franchisors undertake to implement and abide by the Association’s Code of Ethics.
The Code is derived from the World Franchise Council – South Africa is a longstanding member – and adjusted for South Africa’s Regulations and applicable laws. Some franchise companies advertise that their documents comply with the requirements of the Consumer Protection Act but it is to be remembered that these companies are not required to operate their franchise in accordance with the association’s Code of Ethics so if they chose to operate like cowboys no one could stop them.
The Association offers free mediation services to its members – things sometimes go wrong but complainants do not have to spend money on consulting with an attorney if they wish to make use of the online complaints portal.
Ask existing franchisees of the franchise company you are interested in if they would invest in another franchise from the same company – this is often a good barometer for the success of a brand. If an existing franchisee offers you their business then you know things are not what they seem and the financial success of the franchise company is not what franchisees expect or what the franchisor promised.
Find out how many outlets the franchise company have closed down – this must be disclosed in the disclosure document. Sometimes franchise companies camouflage store closures by way of store relocations. Make sure the site you are interested in is not perhaps one where an outlet has previously gone out of business.
Ascertain what measures the franchise company would take in the event that an outlet is not delivering the financial returns expected. In business, so many outside factors that a franchise has no control over could have a negative impact on the performance of an outlet for example, a revamp of a mall, road upgrade or closure in close proximity to the franchised outlet, competitor promotional activity or the entrance of a new direct competitor.
Approach the franchise desk of the bank that you deal with and discuss your intended purchase with the manager to find out whether the bank or funder has some inside information about the brand that could impact on your decision one way or another – your should have the same discussion with an auditor or financial expert as well as a franchise attorney.
One thing is clear no one can jump into buying a franchise without taking time to investigate the brand properly – yet so many unsuspecting potential franchisees get carried away emotionally through their own excitement – don’t get intimated by some franchisors who put pressure on interested parties to make a quick decision because ‘another person is also looking at the site’ – the old saying still rings so true today…Buyers beware!
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