Principles of Franchising

Principles of FranchisingA step by step guide to the world of franchising

Business BankingFranchise

Copyright noticeCopyright 2015. This publication has copyright under the Berne Convention. In terms of the copyright Act, No. 98 of 1978, no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, scanning, recording or by any information storage and retrieval system for purposes of resale without permission in writing granted by Absa Franchising.

PublisherAbsa FranchisingP O Box 7735, Johannesburg 2000

Publication detailsISBN 978-0-620-56297-3First edition, first impression 2015

DisclaimerThe content of Principles of Franchising is intended for general information only and is not intended to serve as financial or other advice. Absa Bank Limited does not guarantee, express or imply the availability or the accuracy of information, nor is it responsible for any decisions taken, based on this information. Absa Bank Limited excludes to the extent lawfully permitted all liability whatsoever for any loss or damage howsoever arising, which may result from, or be attributable to, directly or indirectly, the use of this website or reliance upon the contents of Principles of Franchising. Absa Bank Limited may amend the Principles of Franchising without obligation to notify any person. All intellectual property rights, including, but not limited to, copyright and trademarks in the material contained in Principles of Franchising is held by Absa Bank Limited and may not be copied, reproduced, adapted, published or distributed in any form whatsoever without the prior written consent of Absa Bank Limited.

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Franchising is a viable alternative for the entrepreneur looking to start a new business and wishing to avoid some of the dangers facing a new enterprise by adopting a proven formula.

The franchising team operates across a number of business categories, namely grocery retail, restaurants, quick-service restaurants, entertainment and leisure, automotive and fuel, just to name a few.

We believe in partnering with our franchise customers to achieve their growth objectives through the understanding of the environment in which they operate. Sound knowledge of our customers’ industries enables Absa to offer best-of-breed products and global solutions needed to meet franchisor and franchisee business needs, leaving them to focus on their core business. Absa’s infrastructure is geared to service franchises of all sizes from small to corporate. Our extensive network of industry specialists and relationship executives team up to provide the customer with the best the bank has to offer. With more than 15 years of experience in the franchise industry, Absa has established a credible record among many of South Africa’s top franchise companies.

We believe in developing partnerships with our franchise customers by ensuring that we have the footprint and products to provide a solution for their expansion across South Africa and into the continent.

Absa offers franchise customers a range of market-leading operational, lending and investment products. Our solutions are aimed at optimising banking value, reducing operational risks and enhancing cost efficiencies. Among our

Message by Absa franchisingAs an important part of our commitment to the growth and prosperity of the South African economy, Absa recognises the vital role played by the entrepreneur in creating new wealth and opportunities.

Principles of Franchising / Page iii

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About the authorKurt Illetschko’s involvement with franchising dates back to 1975. He had hands-on exposure as a franchisee, franchisor and franchise consultant and was instrumental in establishing the Franchise Association of South Africa (FASA). In recognition of his services to franchising, Kurt was elected a Life Member of FASA in 2003.

Kurt has written books on franchising for several publishers in South Africa and the UK. He is also a regular contributor to various business magazines and websites. Through his company, ManualMakers CC, he produces operations manuals and other written materials aimed primarily at the franchise sector.

Absa FranchisingTelephone: +27 (0)11 350 8000E-mail: [email protected]: Absa.co.za

market-leading operational products are cash management and payment solutions, merchant services, electronic banking, business insurance and advice, commercial asset finance and commercial international banking.

We are proud to make this booklet available to you and believe that its content will be equally useful to potential and established franchisors and franchisees. Given the broad nature of the topic, it will probably not answer all your questions. We therefore invite you to discuss your specific franchise plans with Absa Franchising. The contact details are as follows:

Principles of Franchising / Page v

The combination of an experienced franchisor expanding through a network of highly motivated owner-operators is simply unbeatable. When franchise failures do occur it can generally be traced back to poor evaluation and faulty decision-making. This booklet aims to address this by equipping the parties to the franchise arrangement with the tools they need to make an informed decision before any damage has been done.

The text has been arranged as follows: General information on franchising (chapters 1-4); information of specific relevance to prospective franchisees (chapter 5); information of specific relevance to prospective franchisors (chapter 6).

Chapter 7 is aimed at experienced operators, both franchisors and franchisees. It makes suggestions on how the benefits of franchising can be leveraged for mutual benefit. The main text ends with a bibliography followed by a resources section and an index. Important topics are placed in boxes and highlighted with one of six different icons; their meanings are explained on page vi.

Supplementary expert articles Franchising is a complex subject and space in this introductory book is limited. For this reason, reference is made to expert articles. These articles elaborate further on selected topics.

To access them go to the Absa website: www. absa.co.za/franchising

List of topicsA summary of the topics we have covered at the time of going to print will be found on page ix, together with a reference to the relevant page numbers in this booklet.

Periodic updatesIn an effort to provide you with the most up to date information at any given time, we plan to update the existing material as and when this becomes necessary.

We also plan to add further expert articles to the website from time to time as developments warrant this. It makes sense, therefore, to visit www.absa.co.za/franchising periodically to check for new topics.

Support via emailTo contact Absa Franchising via email write to [email protected].

PrefaceFranchising has been proven to be superior to almost any other business model.

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Message by Absa Franchising iiiAbout the author ivPreface vSupplementary expert articles vIcons used throughout the text viiList of expert articles accessible on the Absa website viii

1. Introduction to franchising 11.1 How franchising has evolved 11.2 How franchising works 31.3 Advantages and disadvantages of franchising 51.4 Look-alikes and impostors 91.5 Franchising in South Africa 101.6 Franchise failures 12

2. The stakeholders’ legitimate expectations 132.1 The prospective franchisee’s expectations 132.2 What franchisors expect from franchisees 14

3. The financial aspects of franchising 153.1 A franchisee’s initial financial obligations 153.2 A franchisee’s ongoing financial obligations 163.3 Raising finance 19

4. Legal and related issues 234.1 Laws that specifically affect franchising 234.2 Franchise documentation 244.3 Who owns what in a franchise? 274.4 Dispute resolution 28

5. Becoming a franchisee 295.1 Evaluate yourself 295.2 Investigate before investing 305.3 The need for professional assistance 335.4 What happens next? 34

Contents

The following set of icon will be used throughout the entire book, they are for your reference and will provide you with further readings, interesting facts and notes to keep in mind.

IconsIcons used throughout this text and their meanings.

BrightIdeas

CautionAdvised

ImportantDefinitions

Refer toWebsite

PracticalExample

Stop andThink

6. Franchising your business 356.1 Preliminary steps 356.2 Creating the franchise package 396.3 Marketing the franchise 416.4 Setting a timeline 43

7. Leveragingthebenefitsoffranchisingtobesteffect 447.1 General 447.2 The franchisor’s main responsibility 457.3 International expansion beckons 457.4 Succession planning and exit strategy 48

End notes 49

AppendixResources 50Support organisations 50Service providers to the franchise sector 50List of useful websites 52Dictionary of franchise terms 53Index 56

Principles of Franchising / Page vii

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List of expert articles on the websiteAddress: http://www.absa.co.za/Franchising

Directory and file name Full title of the document

FranchiseeCompetition Act - franchise notice The application of certain provisions of the competition Act

CPA regulations - extract Regulations to the consumer protection act affecting franchising

Detailed definition Detailed definition of business format franchisingDisc doc requirements - FASA FASA disclosure document requirements

FASA - intro Why FASA mattersFranchise agreement Issues that are commonly addressed in franchise agreementsHistory of franchising History of franchisingLegitimate variants Legitimate variants of business format franchisingLetter to franchisee Letter written by a franchisor to a prospective franchiseeLetter to franchisor Letter written by a prospective franchisee to a franchisorMicrofranchising Example of a microfranchising projectOperations manual content Table of contents of an operations manual for franchisees

Secrecy undertaking Suggested wording for a secrecy undertaking

FranchiseeApplication form Loan application form Absa 4036EX (for franchisees)Demanding performance Demanding performance from the franchisorExit strategy franchisee Developing an optimal exit strategy for franchiseesFranchisee selection McDonald’s Franchisee selection and initial training at McDonald’s

Franchisee’s role The franchisee’s role in building the brandGetting ready to trade Getting the business ready to tradeInitial investigation Initial investigation of franchise opportunitiesQuestions to ask franchisees Questions a prospect should ask established franchisees

Questions to ask franchisor Questions a prospect should ask prospective franchisors

Will I be happy? Will I be happy as a franchisee?

FranchisorAfrica expansion The siren call of AfricaCertificate Certificate to commence trading - new locationsConsultant selection Tips to ensure that the consultant you appoint adds valueFranchise application form CPA (2) Application for finance - franchisor

Franchise plan Mapping out a strategy for national network expansionFranchisee profile The profile of the ideal franchiseeFranchisee recruitment Recommended steps in the recruitment of franchiseesFranchisor’s role The franchisor’s role in building the brandSite profile Site profile and site evaluationViability of franchising Viability of franchising my business

Principles of Franchising / Page ix

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This chapter explains how the concept has evolved from modest beginnings into a force to be reckoned with, provides a brief summary of its advantages and disadvantages and concludes with an overview of local franchising.

1.1 How franchising has evolvedA form of franchising can be traced back to 200 BC when a Chinese trader used franchise arrangements to expand his market reach. During the middle ages, various franchise formats were used but it was only during the 1860s that the US-based Singer Sewing Machine Corporation developed a franchise model that compares with today’s franchises. Franchising has grown in

1. Introduction to franchisingFranchising has taken the world by storm. Most people believe that franchising is a relatively new business model but this is a misnomer.

leaps and bounds since then and has developed its own terminology.

The move towards business format franchising received a strong boost during the late 1940s, again in the USA where several seemingly unrelated developments combined to drive the growth of franchising.

A global explosion of franchise concepts followed and the sector hasn’t looked back since.

Principles of Franchising / Page 2

Readers wishing to learn about franchising’s history will find the article: The history of franchising located on the Absa website of interest.

The appendix to this book contains a Dictionary of franchising terms.

These were the initial triggers:

Strike 1: Lifestyle changesThe emergence of two-income families caused lifestyle changes. Eating out was no longer seen as a special occasion but as a time-saving convenience. The fast-food sector boomed to such an extent that its operators couldn’t keep up with the demand.

Strike 2: The need for expansion financeGrowing demand triggered the development of a string of quick-service restaurants. Unshackled by traditional ideas, the founders of these new restaurant concepts turned the sector upside down. Production-line methods replaced culinary artistry and service was cheerful and fast rather than ceremonial but cumbersome and slow. Although these restaurants were flourishing, traditional funders were reluctant to finance expansion. Emboldened by their early successes and unwilling to spend years proving the merits of what they knew were winning concepts, these new-age entrepreneurs were looking for alternative ways to source capital.

Strike 3: Desire for risk reductionAfter the end of World War 2, the threat of another world war breaking out seemed remote. The US army embarked on a demobilisation drive, which resulted in a large number of servicemen and women flooding the economy. Most were ambitious young individuals who were eager to make up time lost serving their country. They were keen to start businesses but wary of making mistakes.

They liked the idea of investing in a franchise but although several product franchises were operational, they did not offer sufficient ongoing support.

The emergence of modern-day franchisingThe fast-food pioneers were quick to realise that by offering aspiring entrepreneurs a complete business package, they could speed up the launching of their brands. As mentioned previously, a large number of ex-servicemen and women were looking for sound business opportunities. Franchising offered them the security blanket they craved.

Because these ex-soldiers were used to following instructions, franchising turned out to be a match made in heaven for them. To this day, ex-soldiers continue to make excellent franchisees. In 2011, the IFA introduced a formal scheme designed to help US war veterans become franchisees. Initially, the programme was perceived to be a social responsibility exercise. Take-up was slow but it soon became clear that ex-soldiers


Two articles offer additional insights into the characteristics of the franchise concept:• Detailed definition of the term

Business Format Franchising

• Legitimate variants of Business Format Franchising.

Access these articles in the directory: General.

do indeed make excellent franchisees. By now, the programme is highly successful with some of the early participants having graduated to multiple unit ownership.

Consumers embrace franchisingFranchising is a marketing tool and its sustained success depended on acceptance by consumers. Consumers welcomed franchising because for the first time ever, they could patronise their favourite brands at various locations, initially throughout the USA, later around the globe.

1.2 How franchising worksFive decades of efforts to educate the general public about franchising notwithstanding, misconceptions continue to exist.

The likely reason is that several other business models appear to function like a franchise but essential elements are lacking. On occasion, unscrupulous promoters take advantage of the confusion and encourage the gullible to invest in doubtful franchise schemes. See ‘Look-alikes and impostors’ on page 9.

Legitimate variants of business format franchisingThe business format franchise model is extremely flexible. Provided that certain basics are observed, it can be modified to suit specific requirements without losing any of its inherent advantages.

FASA’s definition of franchising reads as follows: “The business format franchise relationship is characterised by a continuing business relationship between the franchisor and the franchisee that extends beyond the implications of the product or service and trademark.

“Franchising encompasses the entire business process including marketing and advertising strategies, operating standards and procedures, accounting practices, quality control and operational standards. Above all, close communications between franchisor and franchisee will be maintained on an ongoing basis.1”



to group promotions and purchasing arrangements.

• Peer support. This is another important aspect. Life as an entrepreneur can be lonely. Access to like-minded individuals who share the same ups and downs can be invaluable.

• Resale value. Many small businesses, especially those of the ‘one-man-and-a-van’ kind, are closely linked to the person who owns them. Should such person wish to move on or the person dies, the business has little value. A franchise, on the other hand, is a branded business with a definite resale value. The franchisor may even have a prospective buyer on its database.

AdvantagesAccess to initial guidance and support, an established trademark, a proven operating system and valuable trade contacts. Instead of having to start a business from scratch, with all the attendant uncertainties, a franchisee receives a ‘business in a box’, ready to be operated at full throttle from day one.

• At least some members of the target market will know the brand and will look forward to doing business with it at the new location. This reduces the period to reaching break-even.

• Ongoing support ensures, among other things, that the franchisee keeps abreast of developments in the market, enjoys consulting and mentoring services and has access

1.3 Advantages and disadvantages of franchisingAlthough franchising offers many advantages, it should not come as a surprise that it has some disadvantages as well. This chapter examines the pros and cons as seen from both sides of the fence.

Seen from the franchisee’s point of view:


DisadvantagesYes, there are a few, but when compared to the impressive list of advantages most people are likely to agree that they tend to pale into insignificance. However, investing in a franchise is a serious undertaking and it is important to be aware of possible negatives before becoming involved.

• Initial and ongoing fees are payable. Subject to careful selection, this need not be a cost at all. In many instances, savings arising from group deals exceed franchise fees.

• Because franchisors have their corporate image to protect, they will not permit the cutting of corners during the set-up process. This means that set-up costs may be higher but this should be offset because break-even should be reached sooner.

• Underfinanced, weak or unprofessional franchisors could stifle the development of the brand and with it the development of the franchisee’s business. This calls for a repeat of the statement, ‘Evaluate before investing.’

• Some individuals resent the fact that they are forced to operate within a clearly prescribed framework. There is no way around that. I’d advise them to think carefully before investing in a franchise.

Should the requirement to follow the franchisor’s tried and tested systems create problems then investing in a franchise may not be the best choice. Don’t rush into a decision, though. As competition for good prospects heated up, many networks adapted their franchisee profiles to accommodate entrepreneurial types.

These franchisors grant their franchisees ‘controlled independence’ – allowing them a certain degree of freedom provided that they don’t stray too far from the basic concept.


Seen from the franchisor’s point of view:

AdvantagesFor a profitable business that is ready for expansion, choosing franchising as the preferred method of expansion offers several significant benefits, with the following standing out:

• Reduced capital requirements. To set up the infrastructure required to market and support a franchise is expensive. Fees for lawyers and other documentation, market and site selection research costs, and other professional fees also add up to a pretty penny but once all this is in place, the growth of the network will effectively be funded by its franchisees.

• Accelerated expansion. Because franchisees fund new units, expansion can be faster than would otherwise be possible. And because the franchisee is a separate legal entity, set-up costs and attendant loans are not reflected on the franchisor’s balance sheet. This makes it possible to raise capital for brand-building.

• Economies of scale. Because of the rapid pace of expansion that goes hand in hand with franchising, the franchisor can expect preferential service and advantageous terms from suppliers.

• Enhanced operational efficiencies. Companies that converted branches to franchises report an almost instant increase in operational efficiencies. The reason for this is that an owner is usually more diligent in controlling costs and minimising waste than a salaried manager.

• Reduced pressure on head office resources. This goes hand in hand with the previous paragraph. Because a franchisee owns the unit and is responsible for its management, the need for crisis management by head office personnel should be the exception rather than the rule.

• Better forward-planning. Because franchisees take responsibility for setting budgets and achieving them, network-wide forward-planning becomes more accurate and the income stream accruing from franchising is generally pretty predictable.

Disadvantages• Reduced per-unit profitability. Per unit

income in the form of management services fees is less than the profits generated by well-managed branches.


This has to be weighed up against the advantages of quicker market penetration, bulk buying benefits, reduced risk and lower operating costs.

• High initial costs. Although franchisees are responsible for unit establishment costs, a new franchisor encounters substantial initial costs. If all goes well, these costs can be amortised over a period of 3 to 5 years; it follows that patience is required.

• Cost of ongoing franchisee support. As we’ll see in chapter 3, franchisees pay an ongoing management services fee. However, this fee is usually linked to franchisees’ sales and this is where the problem lies, for the following reasons:

- A comprehensive franchisee support infrastructure must be in place from day one, failing which the franchise programme may never take off.

- The network has only a small number of franchisees to begin with. To exacerbate matters, all these franchisees are new and require extensive support. And because all franchisees build their businesses from scratch, sales may initially be low, leading to low management services fee income for the franchisor. It is easy to spot the imbalance but as the network grows and franchisees’ sales pick up the situation should stabilise. If managed correctly, operating a network of franchisees can be highly profitable.

• The need for a large market. Franchising is a numbers game. Sectors where expansion potential is limited are not suited to franchising – unless realistic potential exists to establish about 15–20 units over a relatively short period, franchising may not make commercial sense.

• Limitations on the freedom to act. In a legal sense, the franchisor will have contractually secured the right to determine strategy but because franchisees are investors and directly affected by the franchisor’s decisions, it is good franchise practice to seek their input. This could limit the franchisor’s ability to react quickly to opportunities as they present themselves.

• The danger of poor franchisee selection. If a branch manager underperforms, disciplinary steps can be implemented to correct the situation. With a franchisee, it’s not so simple and underperforming franchisees could damage the brand. A well-drafted franchise agreement is a powerful instrument in the hands of the franchisor but in the interest of franchisee relations, termination should rarely if ever be considered as a first step against an underperforming franchisee.


Mixed expansion is possible. Franchising a business does not need to be an ‘either/or’ decision; a mixed approach can be highly effective.

Under this scenario, the company operates branches in close proximity to head office and appoints franchisees in remote areas.

1.4 Lookalikes and impostorsFranchising is by no means the only vehicle for business expansion or the only route to business ownership.

Although anecdotal evidence suggests that it is the most successful business model currently known, it is not right for everyone.

Other business models have a place in the mix provided that they are not disguised as franchises. Indeed, subject to personal preferences, some other business model may meet an individual’s needs better than a franchise. To make this decision, you need to be aware of the differences.

The article: Entry Level Business Formats will assist.

Access this article in the directory: General.


1.5 Franchising in South AfricaFranchising is well established in South Africa. While in other emerging economies foreign franchise concepts tend to dominate, this is not the case in South Africa.

Some major foreign brands are well entrenched but the majority of brands are home-grown. This may be a remnant dating back to the sanctions era when many of the foreign brands withdrew (or stayed away) in response to pressure applied by human rights activists in their home countries.

Developments in franchisingThe first local brand on record that expanded through franchising is Steers. Their first restaurant started trading in 1962 and franchising commenced in 1965. The brand eventually morphed into Famous Brands, a multi-brand franchisor listed on the JSE. Several other multi-brand franchisors exist, with fast-growing Taste Holdings being an outstanding example.

Much has happened since 1965. According to research last conducted in 2010, 551 brands operate a total of 29 204 units, the bulk under franchise. (Most franchisors retain at least one company-owned unit which serves as development laboratory and training centre.) In 2010, the sector generated 287,15 billion rand in sales. This is equal to just under 12% of South Africa’s

GDP and the sector provides direct employment to over 497 000 people.2

These figures are impressive but as matters stand, there is no reason to celebrate just yet. Franchising’s potential is significantly greater than its performance to date suggests and ways need to be found to tap into it. This is in the national interest because franchising has the potential to make a meaningful contribution towards solving one of South Africa’s most pressing problems, namely job creation. The fundamentals are in place and the text box that follows summarises the status of franchising in South Africa.

The status of franchising in South AfricaFranchising is:• Well developed• Proven to work• Well regulated• Supported by Absa Franchising.

Franchising also constitutes an ideal vehicle for the implementation of sustainable BBBEE initiatives.

Let’s look at these points in detail.

• Well developed: South Africa’s franchise sector has accumulated a body of knowledge that is on par with that available to the world’s leading franchise nations.


• Proven to work: The vast majority of franchised companies remained successful even during periods of recession. 2012 was a tough year for most businesses, with many independents forced to close down. Against this background, it is remarkable that the 2012 Business Times Top 100 Companies Survey listed three franchised brands among the Top 25 performers.

• Well regulated: Unethical franchisors do pop up from time to time but since its formation in 1979, the Franchise Association of South Africa (FASA) has been working hard to protect the public from falling victim to half-baked schemes by actively promoting ethical franchising. From the outset, its members were obliged to adhere to a Code of Ethics, which to this day continues to be among the most stringent to be found anywhere in the world. FASA’s efforts were hampered because it has no jurisdiction over non-members. The Competition Act and the more recently introduced Consumer Protection Act (CPA) protect franchisees’ interests and are enforceable through the court system.

• Supported by Absa Franchising: We have put together a dynamic team that is focused on the franchise industry. Our aim is to understand your specific industry and where it’s heading. We use that knowledge to improve relationships with our customers and deliver the most competitive financial products. To this end, we believe in actively working with our customers to develop individual

solutions that meet current unique challenges while at the same time providing for a better future.

• An ideal vehicle for BBBEE initiatives: In addition to the other advantages franchising holds, micro franchising3 and tandem franchising are supremely suited as vehicles for the implementation of sustainable BBBEE initiatives. These concepts are defined in Legitimate Variants of Business Format Franchising and Microfranchising: Presentation before the Portfolio Committee on Economic Development, Parliament of the Republic of South Africa. Both documents are on the website under General.


What is holding franchising back?The above suggests that franchising in South Africa is in an excellent space right now, and indeed it is, so why doesn’t it live up to its potential? Yes, there is some growth but it’s not enough. Franchising’s share of GDP hovers around 12%. Compare this with the figures of 20 to 30% attained in Australia and some EU countries and over 50% in the USA, and it becomes clear that there is much room for growth. This means that opportunity beckons.

When examining the performance of franchising in the USA, market share isn’t the only metric worth looking at. The sector also provides 8 100 000 jobs, up from 7 990 000 in 2007. Granted, the USA is a bigger country than ours so absolute numbers aren’t comparable but the percentage increase in jobs created during a period of near-recession when other sectors were shedding them demonstrates franchising’s resilience.

In the South African context, one of the main reasons for franchising’s attractiveness is that it offers new entrepreneurs opportunities to benefit from skills transfer and to operate under a known brand using tried and tested systems. Ongoing support is another plus factor.

The main reason for franchising’s relative under performance in South Africa appears to be a lack of understanding of the concept, followed closely by a lack of trust. Unlocking the concept’s full potential will require a change in mind set by all stakeholders.

1.6 Franchise failuresWithout reference to franchise failures, this section would be incomplete. When compared with the overall size of South Africa’s franchise sector and the many success stories that exist, the few failures on record pale into insignificance. One could even argue that they are not franchise failures at all but the result of poor research, evaluation, planning and implementation.

To put this differently: Let’s assume that you have a nice piece of exotic hardwood and a set of the finest woodworking tools in your possession. Give these items to a master craftsman and he will produce a piece of furniture of great beauty. In the hands of a layperson, the result will be less than satisfactory.

To sum up: Franchising is comparable to a set of tools which, if used correctly, will contribute towards business success. If used haphazardly or fraudulently, the outcome will be an unmitigated disaster.

Working diligently through the balance of this booklet will equip you to make the right choice.


2.1 The prospective franchisee’s expectationsIndividuals ready to invest in a franchise have a series of expectations. They put their trust in the franchisor and its brand; they are even willing to pay for the privilege. Their future is at stake and nothing less than full and comprehensive disclosure will enable them and their professional advisers to make an informed decision.

Once part of the network, they will expect to be treated fairly, and with

Some of the requirements set out below are supported by legislation, others are not. Before signing a franchise agreement, prospective franchisees should examine this document with care and seek input from a professional.

(Chapter 4 deals with franchise agreements and related issues in some detail.)

2. The stakeholders’ legitimate expectationsIt stands to reason that both the franchisor (grantor) and the franchisee (grantee) of a franchise will enter into the arrangement with certain expectations. Unless these expectations are aligned, the resulting relationship may be doomed because friction is bound to lead to disputes.

the respect business owners deserve. This section is of interest to prospective franchisors and prospective franchisees alike because each party needs to know what the other party’s expectations are.

Prospective franchisors who are either unable or unwilling to deliver on franchisees’ legitimate expectations will be well advised to select another expansion model. The same applies to prospective franchisees. Both parties need to draw up a list of their expectations, keeping in mind that items deviating from the norm need to be discussed before the franchise agreement is signed. This simple step should prevent disagreements from arising at a later stage.

A prospective franchisee’s wish listWhen an individual decides to become a franchisee, he has certain legitimate expectations. Let’s assume that a prospective franchisee and the franchisor of his choice had a series of meetings and are ready to take the relationship to the next level. At this point, the prospective franchisee could write a letter to the franchisor along


the lines of the example placed on the website – see the website icon at the bottom of this page.

In reality, it is highly unlikely that such a letter will ever be written. The example merely intends to draw both parties’ minds to a franchisee’s legitimate expectations. Prospective franchisees should draw up their own list of issues that are important to them and discuss these with the franchisor of their choice during a face-to-face meeting. It is important to do this prior to signing the franchise agreement.

2.2 What franchisors expect from franchiseesFranchising is a two-way relationship. Just like franchisees have certain expectations, so do franchisors. A letter written by a franchisor to a prospective franchisee illustrates this.

Please refer to the website, directory General, for the following texts:

Letter to prospective franchisor (by franchisee) Letter to prospective franchisee (by franchisor)


3.1 A franchisee’s initial financial obligationsProspective franchisees can expect to come across the following financial obligations:

Upfront feeThe establishment of a franchise requires a substantial investment by the franchisor who will try to recoup this investment from franchisees on a pro-rata basis. The resulting fee is known as the upfront fee (UFF) or initial fee. The amount levied varies from one industry sector to the next and even between brands.

3. The financial aspects of franchisingThe explosive growth of franchising has generated a lot of publicity, leading some of its protagonists to talk about it with an almost evangelical fervour. This is not helpful because at its core, franchising is a method of doing business and must make commercial sense. This chapter explains the various financial issues that will typically arise in a franchise relationship and concludes with some tips for raising capital.

Franchisors calculate the upfront fee by taking some or all of the following costs into account:• Development of the franchise

package including the cost of obtaining expert advice.

• Franchisee recruitment and initial training.

• Assisting franchisees with site selection, lease negotiations and the setting-up of the business.

• Assistance with the launch of the business, often culminating in a Grand Opening.

Capital investmentIn most instances, franchisees are responsible for all costs arising from the setting-up of the new business and getting it ready for trade. Depending on circumstances, this will include the cost of buildings, building renovations or modifications as required; the purchase of furniture, fittings and equipment; the acquisition of initial stock.

As a rule, the UFF is a once-off fee that is payable at the time the franchise agreement is signed. Some franchisors also charge a renewal fee when the agreement is renewed.

If so, it must be stated in the disclosure document and recorded in the franchise agreement.


Working capitalTo set up a new business and get it ready for trading takes time. Even once the business is up and running, it will take time before the money coming in fully covers the money going out. In the interim, a host of ongoing expenses needs to be paid. This requires working capital.

The actual amount will obviously depend on the type and size of the business. As explained in chapter 4, it is a legal requirement that the network’s disclosure document contains detailed projections.

Provision for sundry expensesThis important aspect of planning cash requirements for the business is often overlooked. Franchisees need to provide for their living expenses during the period until the business generates sufficient income for them to draw a market-related salary. Fees payable to professional advisers (lawyer, accountant, etc.) in exchange for initial advice must also be provided for. Lastly, it is always a good idea to keep some money aside for unexpected expenses.

3.2 A franchisee’s ongoing financial obligationsOngoing franchise fees are levied in exchange for services provided by the franchisor. They fall into several categories:

Management services feeThe management services fee (MSF) is most often calculated as a percentage of the franchisee’s sales. Percentage figures range from 2% to 8% and more, depending on the nature of the business, attainable sales levels and profit margins and the extent of the support services the franchisor provides.

Some franchisors levy a fixed monthly fee instead of a percentage of the franchisee’s sales. Experts tend to frown upon this practice because it removes the all-important element of risk-sharing from the equation. (An unscrupulous or short-sighted franchisor could be tempted to reduce the amount of support provided to franchisees because in the short term it would not affect fee income.)


Advertising fee (ADF)Franchisors undertake national advertising campaigns and other product-focused brand-building initiatives. These are usually funded through contributions by all members of the network including company-owned units.

The Consumer Protection Act (CPA) provides that franchisors must keep advertising contributions in a separate bank account. Monies in the ADF fund must not be used for purposes other than product marketing and brand building.

Franchisees are entitled to receive regular reports on spending; chapter 4 has more on this topic.

Local advertising expenditureIn addition to conducting national advertising campaigns, most franchisors will expect their franchisees to spend

an agreed amount on local advertising. Details will be given in the disclosure document and the franchise agreement and the franchisor is likely to monitor the franchisee’s spending.

Other franchise-related feesPurists may argue that the following costs are not franchise fees at all and therefore do not belong under this heading. They have a point but we list them in the interest of providing a comprehensive picture.

• Administration fee: Charging an administration fee is justified if the franchisor takes on operational tasks that would ordinarily be the responsibility of the franchisee; an example is keeping account books.

• Purchasing fee: Should the franchisor operate a purchasing scheme but does not levy a mark-up or receive confidential rebates, then charging

ADF contributions can either be calculated as a percentage of sales (usually between 2-5%) or as a fixed monthly contribution. Setting the ADF as a fixed amount is acceptable because it makes the fund’s future income more predictable and this facilitates planning.

The MSF will contain an element of profitfor the franchisor. This is how it should be because it will encourage the franchisor to provide ongoing assistance to the franchisee.

However, Ray Kroc of McDonald’s fame cautioned that, “A franchisor company should not live off the sweat of its franchisees but should earn its keep by helping its franchisees to become more successful.4”


a service fee would be justified. In a best-case scenario, franchisees stand to benefit because they qualify for bulk prices negotiated by the franchisor on the strength of the network’s combined purchasing power. The opposite could also happen, were it not for the fact that the Competition Act and the CPA offer protection.

• Operating costs: It goes without saying that every franchisee is responsible for all operating costs the business incurs. This includes costs arising from the purchase of inputs, rentals, salaries, taxes and statutory payments and all other operating expenses.

On the face of it, the Competition Act protects franchisees against exploitation by franchisors but it would be unwise to rely on this alone because the Competition Board is unlikely to intervene unless it receives a complaint. Affected franchisees need to stay alert and, should circumstances demand, raise the alarm.

The steps a franchisee can take if support by the franchisor is not forthcoming are set out in the document headed Demanding performance from the franchisor. It is located in the directory named Franchisee.Is it worth it?

Having gone through the list of initial and ongoing fees and other costs arising from the operation of a franchise, prospective franchisees could be forgiven for questioning the value of the investment. They need not worry. Experience has shown that provided the

right opportunity is chosen and correctly operated, franchisees not only stand a better chance of staying in business, they are also likely to make more money than independent operators working in isolation. It must be noted, however, that there are no guarantees.

In exchange for payment of the upfront fee, a new franchisee leapfrogs the learning curve because the ‘trial and error’ stage of setting up the business will have been negotiated by the franchisor who can be relied upon to pass on the resulting experiences. On an ongoing basis, support provided by the franchisor including access to group purchasing and marketing schemes will enhance sales and margins. As a result, profits are likely to build up faster in a franchise than in a comparable independent business.5


3.3 Raising financeAbsa Franchising appreciates the advantages franchising offers and is keen to fund sound franchise schemes.

However, it is necessary to distinguish between the funding needs of a prospective franchisee and a prospective franchisor.

Prospective franchisees often complain that funding is not available, but this is not quite accurate. In most instances, capital is available but the banks need to balance their willingness to grant loans with their obligation to safeguard the interests of their depositors and shareholders. Subject to certain criteria, prospective franchisees of a reputable franchisor stand a good chance of raising capital; the franchisor’s brand will certainly be taken into account.

Should the owner of an established business wish to expand through franchising, the loan request is likely to be assessed like any other application for expansion funding. (An application form is on the website, directory Franchisor/

Franchise Application Form). The bank will examine the history of the business, its profitability, future market potential and, above all, the company’s corporate culture as this will affect the company’s approach to franchising. Chapter 6 has more about what makes a business ‘franchiseable’.

Careful preparation is essentialThis section is aimed at prospective franchisees. To enhance the success chances of a loan application, applicants need to prepare themselves well. A loan request is unlikely to be successful if the applicant has not written down the details of the project that must be funded.

When approaching a bank for a loan, it will be useful to demonstrate familiarity with the different funding options that are generally available to SMEs.

The most common ones are listed on the following page.


The bank will also expect unambiguous answers to the following five questions:1. How much money do you require?2. What will the money be spent on?3. How do you propose to repay the

money?4. What qualifies you to make the

business successful?5. What surety can you offer?

When responding to question 1, the loan amount must make sense. Borrow too much and you will waste money on interest charges. Borrow too little and the business may run out of funds early on. To secure additional funds at that point will be extremely difficult.

The network’s disclosure document will provide the answers to questions 2 and 3. In response to question 4, explain to the bank that as a franchisee of the specific brand, you are confident that the business will be successful. If you struggle to respond satisfactorily to question 5, keep in mind that, on the assumption that everything else pans out, unconventional forms of funding could come into play.

Equity fundingThis is the amount of money you (and your business partners if applicable) plan to contribute from own unencumbered sources. It is also where many prospective franchisees come unstuck. They expect the bank to lend them the full investment amount but this is not realistic, for the following reasons:

• The loan has to be repaid with interest. If you borrow the full investment amount, the resulting monthly repayments may strangle the new business’s cashflow and this could derail the business.

• Unless you have accumulated a reasonable amount of capital, the bank has no way of assessing your ability to handle cash responsibly.

• In the absence of any meaningful equity in the business, your commitment to the venture would be doubtful. With little to lose, nothing would prevent you from simply walking away should the business develop at a slower pace than expected.


Though soft loans are informal by nature, it is best to have an attorney draw up a formal loan agreement. This will ensure that everyone knows where they stand and thus prevent misunderstandings from arising.

Sundry funding sourcesOther funding formats exist but are not always readily available. You could, for example, take on a business partner who injects capital. There is also the possibility of entering into a joint venture arrangement with the franchisor who takes a stake in the business.

This funding format is often used in BEE deals. An example is ‘Tandem franchising’, explained previously. Crowd funding – many small investments raised through the internet – is another avenue. Venture capitalists are generally not too keen to invest in SMEs but the situation may change if the deal involves a multi-

unit franchisee.

Before granting a loan, the bank needs to be convinced that the prospective borrower will be able to repay the loan in full, with interest and within the agreed period. The bank will also expect the borrower to sign a surety document in his personal capacity. Lastly, banks are obliged to take the provisions of the National Credit Act into account. A listing of the most common forms of loans granted to SMEs follows.

Soft loansSoft loans originate from family or friends who want to help you realise your dream of starting or expanding your business. A soft loan may seem attractive because it will typically have no fixed repayment date and interest payments are negotiable, but there are some pitfalls.

Firstly, you need to make it clear to the lenders that they have no right to meddle in your business affairs. Secondly, they should be made aware that their loans will be unsecured, meaning that should the business fail, their rights would be subordinated to those of other creditors and they could lose the full amount.


• Overdraft: An overdraft is intended to support cashflow during temporary ‘dry spells’, for example at the end of the month when overheads and suppliers’ bills need to be paid but debtors payments are still outstanding. It can be extremely useful because interest is payable only for the actual number of days the loan is used.

• Term loan: Term loans are usually granted for periods of between 3 to 5 years. Subject to the terms of the loan agreement, the money can be used to fund the purchase of equipment, shopfittings and other capital items as well as to bolster working capital.

• Provided that repayments are made as agreed, a term loan will usually not be called up prematurely. The downside is that you have to keep the loan for the full period, even if you have surplus cash on hand. (Early repayment can be negotiated but this may attract a penalty.)

• Asset finance: The purchase of production equipment and motor vehicles can be funded through some form of asset finance, for example a rental agreement or a financial lease agreement. An instalment sale agreement is another possibility. What happens is that the bank buys the asset and makes it available for use by the business. As soon as the cost of the item including interest charges is paid off, ownership passes to the business, either at no cost at all or against payment of an originally agreed residual amount.

Preparing a winning loan applicationBanks are frequently frustrated by the poor quality of the loan applications they receive. Putting in the necessary effort will enhance the applicant’s chances of success tremendously; guidelines for the preparation of a professional loan application are given in chapter 5.

An overdraft balance is expected to fluctuate. Although a formal overdraft agreement will be in place, the bank can call up the overdraft at any time without having to give reasons. Therefore, an overdraft should not be used to fund capital purchases.


4. Legal and related issuesChances are that scrutinising legal documents does not appeal to you at all. Being an entrepreneur at heart, you would much rather get on with building the business, wouldn’t you? This is understandable but you need to remember that becoming involved in franchising, be it as franchisor or franchisee, is a serious undertaking that has long-term consequences. A basic grasp of the legal issues surrounding franchising is advisable and this chapter provides a rudimentary introduction.

The website, directory General, contains the following supplementary documents and articles: • An extract from the Consumer

Protection Act headed: CPA Regulations. It deals with franchising and lists minimum requirements for the compilation of disclosure documents and franchise agreements.

• An article published by the Competition Commission: Competition Commission Franchising Notice. It summarises the Commission’s approach to franchising.

• A paper published by Maria D’Amico Attorneys Inc. with contributions by Maria D’Amico and Pieter Swanepoel deals with the impact of the new Companies Act. This is of extreme relevance to franchised establishments and careful reading is recommended. However, it can never be a substitute for obtaining competent legal advice before taking action.

4.1 Laws that specifically affect franchisingAlthough South Africa does not have specific franchise legislation, several pieces of existing legislation impact on the conduct of franchise operations. A list of the most relevant Acts follows, but this does not mean that you have to study them in detail.• Consumer Protection Act, Act No. 68

of 2008

• Competition Act, Act No. 89 of 1998

• Companies Act, Act No. 71 of 2008

• Trade Marks Act, Act No. 194 of 1993

• Copyright Act, Act no. 98 of 1978

• National Credit Act, Act No. 34 of 2005

Following their promulgation, some of the Acts listed above have been supplemented by Regulations and/or amendments. This makes them a moving target but the dti’s website is a good place to look for the most current status regarding business-related legislation – see Resources.


4.2 Franchise documentationLegal and quasi-legal issues relating to franchise arrangements are set out in a series of documents described below. For ease of reference, they are arranged in the sequence prospective franchisees can expect to come across them.

The disclosure documentFranchise failures, albeit rare, do occur. Among the reasons is that in the past, a small number of self-styled franchisors have been economical with the truth, causing unsuspecting individuals to make ill-advised investments. This has resulted in heartbreak and financial losses.

To reduce the chances of this happening again, FASA members are compelled since 1994 to provide qualified prospects with disclosure documents. However, this requirement was binding on members only, leaving prospects exposed to exploitation by non-members.

The situation changed for the better in 2011 when the Consumer Protection Act (CPA) came into effect. Every franchisor is now obliged to provide qualified prospects with a disclosure document at least 14 days prior to the date on which the franchise agreement will be signed.

The disclosure document contains all the information prospects and their professional advisers will reasonably need to make an informed decision regarding the opportunity. It describes the nature of the business and the franchisor’s trading history, gives full details of the required investment and includes trading projections based on the performance of existing outlets.

The disclosure document also contains a list of existing franchisees complete with contact details as well as an auditor’s certificate confirming that the franchise company is a going concern.

Because much of this information is highly confidential, franchisors will insist that the prospect signs a Secrecy Undertaking.

Refer to the website, directory General for the following material:• Suggested wording for a Secrecy

Undertaking to be signed by qualified prospects.

• The current disclosure document requirements applicable to members of the Franchise Association of South Africa (FASA).


The franchise agreement

The Consumer Protection Act contains a detailed definition of a franchise agreement which, for ease of reference, has been reproduced below. It reads as follows:6

‘‘Franchise agreement’’ means an agreement between two parties, being the franchisor and franchisee, respectively -

a.) in which, for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor;

b.) under which the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices, that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor;

c.) that governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to

be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor.

The Act also prescribes that the following statement must be printed on the first page of every franchise agreement:

“A franchisee may cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor.”

It is important to remember that this cooling-off period of 10 business days applies in addition to, not instead of, the cooling-off period of 14 days that must lapse between the date on which a prospect received the disclosure document and the earliest date on which the franchise agreement may be signed.

Although the CPA imposes an obligation on the drafters of legal agreements to use plain language, the franchise agreement remains a complex document, often consisting of 100 or more pages. This is unavoidable because franchise agreements need to regulate all facets of a long-term and highly complex relationship.

The directory General on the website contains an article: Issues that are commonly addressed in franchise agreements. It makes for very interesting reading.


The operations manualWithout well-documented processes, systems and procedures, uniformity in the performance of departments and far-flung branches of a business would be impossible to maintain. For this reason, any business that employs a sizeable number of staff and/or operates from more than one location should have an operations manual. In the franchise environment, this has become an imperative because the success of a franchise depends to a large extent on consistency.

The operations manual for franchisees must interface with the franchise agreement. While the agreement addresses the various rights and obligations of the franchisor and the franchisee respectively in broad brush strokes, the operations manual gives details and outlines the tactics to be used to ensure compliance. It should address all eventualities the franchisee is expected to deal with. Among other things, it provides a brief history of the business and specifies the network’s corporate identity (CI) requirements. Most importantly, it gives detailed operating instructions pertaining to every aspect of operating and managing the business including its administration.

Subject to a well-written operations manual being in place, the franchise agreement can limit itself to describing the areas the franchisor wishes to control. In any event, dealing with operational issues in the franchise agreement in any detail would make the

agreement far too unwieldy and there is another aspect that also needs to be considered.

Operational guidelines need to keep up with rapid changes in the market. The operations manual can be updated by the franchisor at will while changes to the franchise agreement would require negotiations leading to agreement by the parties.

For an example of a typical table of contents for an operations manual refer to the website, directory General.


4.3 Who owns what in a franchise?This issue tends to cause much uncertainty among prospective franchisees but it is actually very clear. In most instances, the franchisor owns all intellectual property including the trademarks and operations manual while the franchisee owns the infrastructure (buildings, shopfittings, equipment, vehicles and stock).

‘Sale’ vs ‘Grant’In this context, one more issue needs to be addressed: Franchisors talk about ‘selling a franchise’ but this could be misleading. It is widely accepted that if a person buys something and pays for it, that such person is free to do with it as he/she pleases. In the context of investing in a franchise, it’s not that simple. Although franchisees own the business, they are under contractual obligation to operate it according to binding guidelines. Depending on need, CI, product range, number and level of staff employed, the method of service delivery and even the administrative processes that must be applied in the business, will be prescribed.

Within this framework, the franchisee is free to operate the business, maximise its potential and retain the resulting profits. If the franchise agreement comes to an end, the outgoing franchisee retains ownership of the infrastructure of the business but would have to remove and return or destroy all intellectual property. In instances where the agreement is terminated prematurely, the franchisor would probably be under no obligation to refund the upfront fee or any other franchise fees.


4.4 Dispute resolutionThe success of every franchised network depends to a large extent on the quality of the relationship between the franchisor and its franchisees. Franchisors and their franchisees know that generally speaking, relationships between the parties are good. The large number of franchisees who request extension of their franchise agreements upon expiry of the initial franchise agreement is ample proof of that.

However, given the size of the franchise sector, it should not come as a surprise that disagreements do arise from time to time. In most instances, seeking legal redress is cumbersome and expensive. A better option may be for the parties to use alternative dispute resolution processes. This should be provided for in the franchise agreement. Various dispute resolution bodies exist but because of

their intimate knowledge of franchising, FASA’s dispute resolution service should not be overlooked. See quote below.

“Within franchising’s structure of a franchisor and many franchisees, the legal intricacies within the business system can sometimes result in disputes. FASA has a proud record in playing a facilitating role between franchisors and franchisees, often assisting in resolving disputes before they reach the courts.”7


5.1 Evaluate yourselfThe first thing you need to establish before you go any further, is whether you are likely to be happy as a franchisee. Although for most aspiring entrepreneurs, investing in a franchise will make perfect sense, it is not the right choice for everyone. Franchisees receive a blueprint for business success that they need to comply with, plus extensive initial and ongoing support. Making the business successful remains their responsibility.

5. Becoming a franchiseeThis chapter focuses on the prospective franchisee. It begins with self-evaluation and takes you through the entire evaluation process up to the point when you sign the franchise agreement. Because the decision to invest in a franchise is likely to have far-reaching consequences, this step should not be rushed. It is best to remain focused and approach the task as a process, not an event.

Starting a new business from scratch gives true entrepreneurs an adrenaline rush like nothing else can but the risks are high. Verifiable figures are difficult to come by but anecdotal evidence suggests that out of every 100 independent start-ups, only 10 make it past the ten year mark. The opposite applies to franchised businesses; they have a survival rate of about 90%. This is not at all surprising because access to a proven system, the right to operate under an established brand, extensive support by the franchisor and access to bulk deals make it somewhat easier for franchisees to succeed.

Even franchisees who fail to make the grade will usually experience a softer landing. Precisely because they operate under the network’s brand, franchisors have a vested interest to apply damage control. A failed franchisee may not walk away financially unscathed but in many instances, at least part of the original investment can be recouped.

As a franchisee, you need to have many of the qualities of an entrepreneur but also need to be a team player, prepared to operate within the framework of a tried and tested system. Other prerequisites are the willingness to make a long-term commitment and the determination to work hard towards achieving success.


The benefits franchising offers come at a price, in this instance conformity. Individuals who cannot operate within a rigid system will not be happy as franchisees.

The directory Franchisee on the website contains an article: Will I be happy as a franchisee?

Be brutally honest with yourself when you contemplate the questions the article poses.

The directory Franchisee on the website contains the following documents:

• A checklist: Initial investigation

• The article: Franchisee selection at McDonald’s. It is included because it illustrates how an iconic brand goes about recruiting new franchisees. It also shows how patient prospects must be.8

The resulting answers will prompt you to make a decision that will impact on your own and your family’s lives for a very long time to come. If at all possible, have someone you trust and who knows you well review the answers you have provided and discuss them with this person before you move to the next step.

5.2 Investigate before investingHaving concluded that investing in a franchise is the best option for you, the time has come to do some research. The first step is to identify the right opportunity. You might have a specific opportunity or industry sector in mind, but it is still a good idea to investigate the wider market and find out as much as possible before commencing negotiations with a specific franchisor.

The internet is a good starting point for your search. The section named Resources at the end of this booklet lists some relevant websites. Other options for identifying opportunities are visits to franchise exhibitions and scrutinising advertisements in business-oriented magazines and newspapers. You could also talk to the owners of franchises that you frequent as a customer, for example your local fast-food outlet or tyre store.

Because the volume of opportunities on offer can be overwhelming, it is best not to cast your net too wide or you may never get past the initial research stage. This is not an encouragement to rush the process, merely a suggestion not to waste time on researching opportunities that are either of no interest to you or are out of your reach financially.


Be wary of franchisors who want to sign you up without conducting a thorough investigation into your background and your skills.

Should a franchisor representative pressurise you into signing an agreement under the pretext that others are keen to invest in the territory under negotiation, it may be better to break off negotiations. It could indicate that the franchisor is more interested in collecting upfront fees than in building a solid network of franchisees.

Making contactMost franchisors’ websites have a facility for the direct submission of franchise enquiries. Complete their enquiry forms then sit back and wait for the responses to arrive in your inbox. It’s a buyers’ market out there; in most sectors, competition for good prospects is fierce so you shouldn’t have to wait too long. If a company fails to respond, it is generally best to cross it off your list and look elsewhere because if they treat you with disdain at the courting stage, it doesn’t bode too well for future co-operation.

The information packs you receive should give you additional insight into the workings of the brands. Draw up a shortlist and contact the first two or three companies of interest. Their representatives will probably answer some of your preliminary questions and then ask you to complete an application form. This can be an arduous task but you need to persevere. Intensive scrutiny of prospects by a franchisor indicates that they are serious about building a solid network.

After reviewing your application and assuming that you meet the network’s franchisee profile, the franchisor representative will set up a face-to-face meeting. Sell yourself but also make use of the opportunity to check out the franchisor. Those who have nothing to hide will appreciate that. At the same time, be prepared for the fact that some of the questioning you will have to endure may appear to be intrusive. They will also check and double-check every piece of information you provide but as indicated earlier, this is a good thing.


Once you have reached the stage where the franchisor has pronounced you a good fit and you are ready in principle to ‘forsake all others’, this is how the process should typically unfold:

1. Check out the industry sector: Learn as much as possible about the industry sector, its future potential and the standing of the brand within the sector.

2. Obtain the brand’s disclosure document: The franchisor is under a legal obligation to make a disclosure document available to qualified prospects, but will require you to sign a Secrecy Undertaking. Think carefully before you sign it because should you change your mind about the opportunity, you may be unable

The form: Questions to ask the franchisor provides examples of questions prospects should ask. You will find it on the website, directory Franchisee.

During early meetings with the franchisor, you should talk openly about your aspirations. The responses you receive will help you to determine whether joining this particular brand will assist you to achieve your dreams. Even if a meeting with a prospective franchisor brings no concrete results, it won’t be time wasted because you will gain valuable insights into the workings of various franchises.

to become involved in the same line of business in the foreseeable future.

3. Work at a company-owned store: It is in both parties’ interest that you work in one of the network’s company-owned stores for a few days. Indeed, many professional franchisors will insist on it because it enables both parties to check each other out in a realistic setting.

4. Interview several of the network’s franchisees: The disclosure document will contain a complete list of the network’s franchisees. Make appointments with a cross-section of them and visit them. Don’t allow a franchisor representative to accompany you as this may hinder the free flow of information. Keep in mind, though, that even if you visit on your own, you are still a stranger to the franchisees so you can’t expect them to give you the full story. However, after speaking with several of them you will get a good feel for the way things really are within the network, especially whether the franchisor generally keeps promises.

The form named Questions to ask established franchisees lists questions you should ask existing franchisees of the network under investigation. In terms of the CPA, you have every right to do that. You find the form on the website, directory Franchisee.


5.3 The need for professional assistanceThe importance of seeking professional assistance cannot be over-emphasised. Such assistance doesn’t come cheap but because of the magnitude of the commitment you are about to enter into, the fees charged by professional advisers are insignificant when compared with the cost of potentially making the wrong decision. This is not to say that you need to hire a team of advisers.

The single most important professional you need to consult with is a good franchise attorney. Next in line would be an accountant with a good understanding of franchising. A franchise consultant’s input could be useful too, but cost considerations may put this out of reach of most prospective franchisees. However, should your franchise involve a multi-million rand deal, it would be false economy to try and save on consulting fees.

5. Secure funding: Because of the impact of variables such as the size of the premises (which will be governed by the size of the operation), the exact investment amount may not be known at this stage but the disclosure document should contain a reasonable estimate. This can be used to negotiate funding in principle. Absa Franchising has tailor-made franchise finance packages in place; they also maintain a database of franchisors whose opportunities have been investigated.

How Absa can helpAt Absa Bank we believe that hard work goes hand in hand with vision and focus. So, when you are ready to talk to us about your business plans and dreams, we’ll be ready to discuss with you the funding solutions that are likely to optimally meet your specific requirements. With an impressive track record when it comes to working with entrepreneurs, we have the practical knowledge, financial products and dedicated services to help you make your business dream become reality.


It is a good idea to ask a franchisor representative to accompany you on visits to professional advisers and the bank. This is advisable because the franchisor will be able to answer questions that need a level of familiarity with the franchise that you are unlikely to possess at this stage.

5.4 What happens next?Let’s assume that you and the franchisor of your choice have reached agreement regarding the opportunity, the bank has approved your loan in principle and you are ready to sign the franchise agreement. From here onwards, the process is likely to unfold as set out in the document: Getting ready to trade. It will be found on the website, in the directory marked Franchisee.

It is important to realise that at this point, the franchisor’s obligations arising from the payment of the upfront fee have been fulfilled. Ongoing franchisee support will be supplied in exchange for the payment of ongoing franchise fees. These are usually payable monthly for the duration of the franchise relationship.

Ongoing supportDepending on the nature of the business, franchisees will have access to some or all of the following benefits: Joint purchasing and marketing initiatives; access to a troubleshooting hotline and technical support; regular updates to the operations manual and periodic support visits by a field service consultant. Mature networks may offer coaching services as well.

The need for participationTo derive maximum benefit from being a member of a franchise, franchisees need to embrace the brand and actively participate in all its activities. This includes, for example, participation in the network’s marketing campaigns, attendance of regional and national meetings and supporting all other activities. Involvement in the network’s franchisee council or similar structure, if operational, is also important. One more thing: Franchising depends on teamwork, so it’s not a happy playground for lone rangers. Both parties will do well to keep this in mind before becoming involved.


6.1 Preliminary steps

ReviewIt is best to begin with a review of the issues that need to be considered before you decide to expand your business by franchising it.

6. Franchising your businessMost of the benefits of expanding a business through franchising have been set out in chapter 1. This chapter focuses on the actual steps involved in setting up a professional franchise operation. Only broad principles are covered; detailed guidelines for franchising a business are available from FASA.

Why expand through franchising?When a business is ready for expansion, setting up branches may be most entrepreneurs’ first choice but it is rarely the best option. A strong resource base is required and this tends to slow down the process. Furthermore, branches rarely perform to their full potential.

They are operated by managers who may or may not be sufficiently motivated because they don’t share in the business risk. By contrast, having made a sizeable investment, franchisees can be relied upon to manage the business optimally. This results in customer service excellence, quicker market penetration and enhanced returns.

Is the business franchiseable?Most of the information on what makes a business franchiseable is given in chapter 1. In addition, consider this:1. Offering franchises is not an

‘add-on’ to the core business. It is a new business venture which should operate separately from the core business. The new business’s objective will be to ‘put people into business and make them profitable’.

Should proof be needed that franchising tends to outperform other business models, the recent economic downturn provided it.

The franchise sector weathered the storm significantly better than independent businesses did. Indeed, most of the stronger networks continued to grow.


2. Franchisees are not branch managers. They have made a substantial investment and expect to be treated with respect. They also want a say in the future direction of the business and expect utmost transparency, honesty and loyalty from their franchisor.

3. Setting up and operating a franchise requires acceptance of a long investment horizon. Given the high cost of creating a professional franchise package, plus the costs of setting up and operating the necessary franchisee support infrastructure, the franchisor can expect to incur operating losses for two to three years after start-up. Provided that the programme is implemented correctly, the situation can be expected to change for the better as soon as a reasonable number of franchisees become operational.

4. To ensure, as far as this is possible, that franchisees are successful, the underlying product or service must have a clearly defined USP (unique selling proposition) that is likely to appeal to the target market. The target market must be sizeable and growing.

5. Franchisees need to have a realistic chance to earn fair returns on their investments after paying franchise fees and drawing market-related salaries. This means that the target

market must be prepared to pay a premium for added value in the form of highly personalised service.

6. Franchising is a numbers game. Unless there is sufficient potential for expansion, franchising may not be a viable option and other methods of expansion should be explored.

7. What type of person makes an ideal franchisee? What attributes and skills do they require? How much money will they have to invest? Taking all this into consideration, will I be able to attract the right people in sufficient numbers?

8. Once the system has been fully developed and tested, launch must be swift to minimise initial operational losses. If the concept is site-dependent, will suitable sites become available? If so, will I find sufficient sites at affordable rentals? (New franchisees cannot be expected to sit at home waiting for a site to become available because in the meantime, they will be quite literally eating into their savings.)

The directory Franchisor on the website contains the following documents:• Viability of franchising my business

• Franchisee profile

• Site profile

• Mapping out a strategy for national network expansion.


Developing the financialsA complete set of financials must be developed for the prospective franchisor and the typical prospective franchisee. This culminates in the drafting of a franchise plan - essentially a business plan that reflects the development of the franchise operation over the next five years in terms of territorial coverage, income and expenditure.

For this exercise to be meaningful, the following issues need to be examined:1. Target areas for expansion: These

need to be identified based on the findings obtained during the operation of the pilot unit; you would look for areas with similar demographics. The projected number of units to be established under franchise over the projection period can then be worked out.

2. Franchise development costs: The cost of developing the franchise package must be estimated. Details of what this entails are given in chapter 6.

3. Franchisee recruitment and support costs: Costs arising from the recruitment and support of franchisees need to be calculated; see “caution” below.

4. Working out franchise fees: Based on the above findings, upfront fees and management services fee percentages can be calculated. As a rule, as soon as the network has achieved critical mass, usually after 5 to 8 units are up and running, management services fee income should cover the cost of franchisee support and begin to leave a profit in the franchisor’s hands.

It is customary to amortise franchise development costs pro rata based on the number of units the franchisor expects to establish over the first three to five years after start-up.

During the initial period after a new franchise commences operations, all members of the network will be busy building their businesses from scratch. This means that demand on support services will be high while income from ongoing fees is likely to be low.


When franchise fees are calculated, the franchisor’s legitimate expectation to generate a profit needs to be balanced against the reality that unless franchisees stand a realistic chance of generating adequate returns on their investment, franchising the business will not be viable.

5. Calculating the advertising/marketing fee: The advertising/marketing fee can be set as a percentage of sales or a fixed amount. It is not income in the hands of the franchisor but must be calculated at this point because it affects franchisees’ operating costs and therefore needs to be included in the financial projections.

The pilot unitLet’s assume that everything works out as expected and the decision is taken in principle to go ahead with franchising the business. One final step is still outstanding: It is advisable to operate a pilot unit for a reasonable period. This could be an existing company-owned outlet but it is usually better to set up a new unit from scratch and operate it at arms length from the core business.

Think of the pilot unit as a laboratory for the development of the franchise package. Everything necessary to make future franchisees’ businesses profitable including the setting-up process will be tested, reviewed and tweaked to perfection before the necessary systems and procedures are recorded. On completion of the piloting phase, the pilot unit can be used for the development of new products, systems and procedures and their testing. It will also be useful for the training of new franchisees and their staff. Alternatively, it could be sold as a going concern to a franchisee.


6.2 Creating the franchise packageThe franchise package consists of the necessary documentation (operations manual, disclosure document and franchise agreement), plus marketing and training materials. With the exception of the franchise agreement, which must be drafted by a competent attorney, most of the work could be done in-house but this may not always be the best option.

The need for professional assistancePrior to discussing the franchise package, the necessity for using professional advisers needs to be addressed. Many entrepreneurs feel that advisers charge exorbitant fees but contribute little in terms of real value. This is a misnomer. It is true that good advice doesn’t come cheap, but neither does failure.

1. Branding consultant: Unless the company’s corporate image has been professionally designed and no tweaking is required, now is the time to commission professional designs and have them legally protected. Leaving it for later could put the franchise programme into jeopardy. It would also be unfair on early franchisees who would be forced to rebrand.

2. Franchise consultant: Seeking input from a good franchise consultant at an early stage is recommended. Franchising a business is a complex undertaking and provided that

the right individual is retained as a consultant, this move will add substantial value. FASA’s website lists franchise consultants under ‘Affiliate members’; discuss your project with several of them and obtain cost estimates. There is also a relevant article on the website - see Consultant selection in the directory Franchisor.

In addition to providing guidance on franchising and help with the necessary documentation, some consultants offer to assist with the recruitment of franchisees. Depending on the agreed remuneration model, this could be problematic.

Should the consultant be paid a commission he/she could be under pressure to sign up poor prospects.

The quality of a network’s franchisees will ultimately make or break the brand. Also, far from being a once-off deal, the relationship between the franchisor and its franchisees is ongoing. It follows that the franchisor must retain the final say on franchisee recruitment.


3. Manual writer: The involvement of a professional manual writer will ensure that the operations manual not only covers every aspect of systems, procedures and processes franchisees need to adhere to but the writer will also know how to present the material in such a way that franchisees actually want to use the manual. Some consultants provide this service but it is advisable to call in the services of a specialist.

4. Franchise attorney: To stand up to scrutiny in the face of a potential legal challenge, the disclosure document and the operations manual need to interface seamlessly with the franchise agreement.

Retaining an attorney with franchise experience to prepare the franchise agreement and having such attorney review all other franchise

documentation is essential. This is one area that definitely does not lend itself to a DIY approach. FASA’s website lists franchise attorneys under ‘Affiliate members’. Discuss your project with several of them and obtain cost estimates before committing yourself.

5. Accountant: Your accountant’s role is to review your financial projections and ensure that they make sense.

To save on professional fees without taking risky shortcuts, finalise your franchise project on paper. Next, have the operations manual completed and an early draft of the disclosure document drawn up before you commission the drafting of the franchise agreement.


The Regulations to the Consumer Protection Act list the minimum information the disclosure document must contain. In addition, FASA publishes guidelines under the heading:

Disclosure Document Requirements7 which are compliant with the Act but are more detailed.

These two documents can be accessed on the website under General.

A growing number of experienced franchisors create, in addition to the ubiquitous operations manual for franchisees, a formal guide for franchisor personnel, essentially a franchisor manual. This introduces new personnel to the workings of the franchise and ensures compliance regardless of changes in head office staff. Seen from the franchisee’s viewpoint, it ensures consistency.

Writing the operations manualInformation garnered during the piloting phase forms the input for the creation of the operations manual. This manual needs to describe every activity the franchisee needs to carry out to emulate the franchisor’s success. Although it is possible to write the operations manual in-house, it may not be the best option because the manual shouldn’t limit itself to operational guidelines only. Every professional manual writer knows that numerous other issues need to be addressed.

Creating the franchise marketing materialsWith competition for good prospects at an all-time high, good marketing materials are an essential prerequisite for attracting high-calibre individuals as prospective franchisees. The information can be web-based to reduce production costs and simplify updating but professional web design is essential.

Regardless of whether the marketing materials are printed or published digitally, the secret to the creation of good franchise marketing materials is ‘to tell it like it is’. To promise more than you are prepared to deliver would not only be unethical, it could also create legal problems in terms of the Consumer Protection Act.

6.3 Marketing the franchiseIn the past, franchising used to be a ‘seller’s market’ but this is no longer the

Drafting the disclosure documentThe disclosure document can be drafted in-house. Alternatively, the manual writer or the franchise attorney can undertake this task.


case. It is true that South Africa’s leading franchise brands, especially those active in the quick service food sector, continue to have long waiting lists of franchisee hopefuls but other franchisors find it quite difficult to attract quality prospects. This notwithstanding, there is no doubt that subject to the right approach, suitable prospects can be found.

Promotional mediaCreating a section on your website that promotes your franchise offering is essential. On top of the list of media that are known to drive traffic to franchisors’ websites is another website – www.fasa.co.za Participation in franchise and small business exhibitions (see Resources) and the placement of advertisements in business-oriented publications rank next in importance. PR can also play a major role.

The power of ‘word of mouth’Nothing is more powerful than a personal recommendation. It could come from existing franchisees, supplier representatives, customers of your core business and fellow members of the social club you belong to. In short, anyone and everyone who believe in your brand and who are prepared to pass on information about the opportunity.

To quote franchise legend Martin Mendelsohn, “It is not uncommon to find that a franchisor will have more problems originating from among the first 10 franchisees than from all those who join the network subsequently.” Granted, your franchise agreement will empower you to get rid of ‘bad apples’ but in the interest of positive franchise relations, termination of a franchise agreement should be seen as the last resort.

A hard-sell approach should be avoidedPromoting the franchise opportunity is acceptable, pressurising a prospect into signing up is not. It is best to respond promptly to initial enquiries but to leave it to the enquirer to make the next move. Once the prospect has been qualified, the situation changes. Some people are born procrastinators; giving them a gentle nudge in the right direction will be in their best interest.

The prospect’s ability to support the required investment is important, but this should not override other considerations. Poor franchisee selection creates all sorts of problems and can damage your brand.


As soon as expressions of interest are received from prospective franchisees, the sequence of events will usually unfold as set out in the document:

Recommended steps in the recruitment of franchisees in the directory Franchisor on the website.

6.4 Setting a timelineProspective franchisors always ask how long it will take to prepare a business for franchising. The realistic answer is that it will take one-and-a-half to two years. This tends to put them in a state of shock.

You need to accept that franchising a business is a massive undertaking. The process should not be rushed and no matter how many resources you allocate to it, certain steps can’t be tackled unless the previous step has been completed. The text box provides an example of the typical duration.

Compiling the operations manual will take a minimum of 4 to 6 months; usually longer. The manual writer can’t begin to document processes before the piloting phase has been completed, adding another year. And the lawyer can’t finalise the franchise agreement before the operations manual is completed. This is how time adds up.


7. Leveraging the benefits of franchising to best effectFranchising is well established but the concept is capable of delivering so much more, especially in the South African context where job creation and BBBEE issues are national priorities. This chapter shows how the benefits of franchising can be optimised.

7.1 GeneralUnless a brand is constantly reinvented, it will lose market share and eventually wilt away. Brand development is the responsibility of the franchisor but franchisees have an important role to play.

Firstly, they need to act as the network’s eyes and ears and alert the franchisor to any changes. Secondly, they are responsible for the implementation of approved changes.

The documents named The franchisee’s role in building the brand (directory Franchisee) and The franchisor’s role in building the franchise (directory Franchisor), both on the website, provide tips on how the parties can advance their individual interests while at the same time driving the growth of the brand for mutual benefit.


7.2 The franchisor’s main responsibilityThis is arguably the most important section in this chapter yet it is among the shortest because the franchisor’s main responsibility can be defined in one simple sentence. It reads: The franchisor’s main responsibility is to enhance the sustainability and profitability of the network’s franchisees.

This objective is in keeping with the spirit of franchising and little else matters. It makes perfect business sense because franchisees’ financial health translates into sound network performance. Sounds like Utopia? Well, it need not be. Many successful networks have demonstrated that it can be done.

The steps a franchisee can take if support by the franchisor is inadequate are set out in the document named Demanding performance from the franchisor. You find it on the website, directory Franchisee.

7.3 International expansion beckonsGiven the high level of consulting expertise available, South African franchisors have access to global best franchise practices; some have used this to best effect. As soon as their local market presence is sufficiently strong, they take their concepts into other countries.

Many markets around the world, but especially in the rest of Africa, hold South African brands in high esteem. Already, several of our leading franchisors have taken up the challenge, with great success. Given that Africa’s middle-class is expanding exponentially, potential for those who are brave enough to exploit it remains virtually unlimited.

Considerations surrounding international expansionFranchising is an ideal vehicle for international expansion because it facilitates mutually advantageous co-operation between the exporter of the concept and operators in the target country who are familiar with local conditions. Under the next heading, several franchise formats suitable for international expansion are listed.

However, before you even begin to consider their respective advantages and disadvantages, you should have established a strong presence in your home market and have spare capacity that can be redirected towards international expansion. Martin Mendelsohn, in his book Franchising in Europe10, identifies 5 common mistakes inexperienced master franchisors tend to make:

1. An insufficiently strong home-based business

2. An unwillingness to devote resources exclusively to international development

3. An unwillingness or inability to devote sufficient financial resources to the effort


International franchising should never be undertaken on a whim, or in response to an enquiry received from some exotic country that may or may not constitute a viable target market for the product or service on offer. Target countries need to be selected based on their potential and access to a suitable local partner.

4. An unwillingness or inability to devote sufficient manpower resources

5. An inability to recognise the amount of time it will take to become established and profitable in the target country

Formats for international expansionRegardless of the format used, the most common pitfalls that arise in international expansion are cultural differences, existing legislation that, for example, fails to adequately protect the master franchisor’s intellectual property and restrictive exchange and/or import controls. These issues must be addressed before anything else is set in motion because there is no point in entering into an agreement with a foreign partner if it cannot be enforced. Several business formats can be used.

Direct franchisingForeign franchisees are signed up just like local franchisees, except that legislation in the target country needs to be taken into account. For logistical reasons, this format is primarily viable in neighbouring countries.

Setting up a subsidiaryA subsidiary that acts as the franchisor is set up in the target country. It operates one or more pilots to adapt the offering to local needs, before recruiting, training and supporting franchisees. This approach requires a substantial investment and carries the biggest risk because the franchisor will have to acquire an intimate understanding of the local market but it also offers the highest level of control and potential rewards.

Entering into a joint ventureThe franchisor sets up a joint venture in the target country. This is similar to setting up a subsidiary but the joint venture partner will have an intimate knowledge of the local market. Risks and rewards are shared.


The master franchisor, too, needs to earn a reasonable return on initial and ongoing involvement. Proven potential to achieve adequate volumes and trading margins in the target market must be evident before the establishment of a master franchise should be considered.

Initial and ongoing obligations of the master franchisorIn principle, these are the same as in the home market. Representatives of the master franchisee are trained at the master franchisor’s home base in all aspects of operating the franchise. A period of operating pilots in the target country for the account of the master franchisee but with strong support by the master franchisor follows.

During this period, the necessary experience is gained to adapt the product offering and the franchise documentation to local requirements. The master franchisee is now ready to launch the franchise. At operational level, the master franchisor will gradually withdraw but will maintain close contact, which should include periodic support and monitoring visits.

Appointing a master franchiseeThis is the most common method of expanding into foreign markets. Generally speaking, it is also the most successful. Issues that need to be considered before this step is undertaken revolve primarily around legal and cultural differences, exchange control and, on occasion, differences in business ethics.

So, how does a master franchise work? The master franchisee is a legal entity that resides in the target country and is granted the right to operate as the franchisor in that country. A master franchise agreement is drawn up that sets out the rights and obligations of the parties and an initial master franchise fee is paid. As a rule, the master franchisee carries the full operational risk in the target country.

Franchise fees in international franchisingWorking out a fair fee structure can be problematic because franchise fees need to be shared between the franchisor and the master franchisee.

Over time, the master franchisee must stand a reasonable chance, firstly, to recover the initial master franchise fee. Secondly, the master franchisee needs to cover the cost of rendering ongoing franchisee support and be left with a reasonable profit.


Following Absa’s acquisition of Barclays branches throughout the rest of Africa, local expertise is now on tap in many countries throughout the continent.

The article Africa expansion, to be found on the website, Franchisor directory, provides additional insights.

7.4 Succession planning and exit strategyNo matter how much a franchisee enjoys being part of a network, the day will come when such franchisee wants to leave. Exiting a business can either be done in stages or ‘cold turkey’. For example, the owner of the business could nominate a family member or a deserving employee as successor and groom such person for the role. Or the business could be sold outright.

Expanding into the rest of Africa offers vast opportunities but it is not for the fainthearted. Although the population exceeds one billion people, it would be a big mistake to see them as a homogenous market. The cultural, economic and legal consequences of setting up business must be explored on a per-country basis, making co-operation with individuals who possess local knowledge invaluable.

The article: Developing an optimal exit strategy for franchisees is located on the website, directory Franchisee. Most of the issues it deals with apply to exiting any business but exiting a franchise adds an extra dimension because the franchisor must be involved from an early stage.


End notes

1 Illetschko, K: How to Franchise Your Business, 6th edition, FASA, 2012.2 Gordon, B: The Franchise Factor 2010, website of Franchize Directions, 2011.3 Sireau, N, Illetschko, K et al, Microfranchising, Greenleaf Publishing Ltd, UK, 2011.4 Love, JF: McDonald’s – behind the golden arches, Bantam Books, USA, 1986.5 Illetschko, K: How to Evaluate a Franchise, 5th edition, FASA, 2012.6 Consumer Protection Act 2008, Act No. 68 of 2008, Government Gazette, 2011.7 Osso, G et al: 2012 Franchise Directory, FASA, 2012.8 Illetschko, K: SA Guide to Franchising, Butterworths, Durban, 2001.9 Mendelsohn, M: The Guide to Franchising, Cassell, London, 1992.10 Mendelsohn, M: Franchising in Europe, Cassell, London, 1992.


Resources

Contact details of Absa Franchising

Telephone +27 (0)11 350 8000E-mail [email protected] site www.absa.co.za

Support organisations

FASAThe Franchise Association of South Africa (FASA) promotes ethical franchising. The website – directory General – contains a summary of this organisation’s activities: Why FASA matters.Telephone +27 (0)11 615 0359E-mail [email protected] www.fasa.co.za

SEDASEDA (Small Enterprise Development Agency) is a member of the dti Group. They have staff and resources available to assist individuals interested in franchising with additional information. Telephone +27 (0)12 441 1000E-mail [email protected] www.seda.org.za

The following pages contain a list of a cross section of established service providers to the franchise sector arranged in alphabetical order. The list does not claim to be comprehensive and Absa does not endorse any specific organisation or company.

Service providers to the franchise sector

Franchise consultants• Franchise AssistFeasibility studies, franchise model determination, franchise documentation and related requirements.Contact: Lynn Mendonça – [email protected]

• franchizedirectionsFranchise consulting and training as well as business consulting and training for franchisors and franchisees.Contact: Lindy Barbour – [email protected]

• Franchising PlusSouth Africa’s leading franchise consultancy with over 100 years of combined franchise expertise.Contact: Anita Du Toit – [email protected]

Lawyers• Adams & AdamsFranchising, licensing and distribution agreements; patent, trademark and copyright attorneys.Contact: Danie Strachan – [email protected]

• Bowman GilfillanIntellectual property, franchise and commercial law attorneysContact: Paul Hart-Davies – [email protected]


• D’Amico AttorneysWe provide professional advice on the drafting of franchise agreements and related intellectual property issues.Contact: Maria D’Amico – [email protected]

• DM KischDM Kisch provides legal services pertaining to the setting-up and maintenance of legal structures franchisors require.Contact: Kevin Dam – [email protected]

• Hogan Lovells South AfricaWe are a leading full-service law firm with affiliations in 47 countries across the world.Contact: Ian Jacobsberg – [email protected]

• Livingstone CrichtonSpecialists in the drafting of contracts, property transactions and litigation pertaining to the franchise sector.Contact: Lee Astfalck – [email protected]

• Smit & Van WykLaw firm dealing with intellectual property, licensing, franchising and related commercial aspects.Contact: Esmari Jonker – [email protected]

• Spoor & FisherPatent, trademark and copyright attorneys with offices in Johannesburg, Pretoria and Cape Town.Contact: Hugh Melamdowitz – [email protected]

• Webber WentzelLegal assistance pertaining to franchise arrangements including structures, agreements, dispute resolution and intellectual property.Contact: Candice Meyer – [email protected]

Providers of other relevant services• Go CommunicationsPublic relations, marketing and events management with focus on the franchise sector.Contact: Giuli Osso – [email protected]

• ManualMakers CCI focus on the compilation of operations manuals, disclosure documents and franchise-related publications.Contact: Kurt Illetschko – [email protected]

• safranchise warehouseWe publish the most accurate and comprehensive monthly franchise and business opportunities listing in South Africa.Contact: Kobus Oosthuizen – [email protected]


List of useful websites

The following websites will be of specific interest to those prospective franchisees who are interested in opportunities in the fuel sector:www.sapia.co.za www.sapra.co.zawww.fuelretailers.co.zawww.energy.gov.za

The following websites provide general information on franchising:Absa Franchising www.absa.co.zaAssociation de la Franchise Marocaine www.fmf.maAustralian Franchise Council www.franchise.org.auBritish Franchise Association (BFA) www.thebfa.orgEgyptian Franchise Development Assoc. www.efda.org.egEuropean Franchise Federation (EFF) www.eff-franchise.comFranchise Association of South Africa www.fasa.co.zaFranchise Association of West Africa www.franchisewestafrica.orgFranchise New Zealand www.franchise.co.nzFranchising Association of India www.fai.co.inInt. Franchise Association (IFA) www.franchise.orgManualMakers CC www.manualmakers.co.zaNigerian Int. Franchise Association www.nigerianfranchise.orgThe Franchise Magazine (UK) www.thefranchisemagazine.netWorld Franchise Council (WFC) www.worldfranchisecouncil.org

Other franchise-related websites:www.franchise-chat.com www.franchisedirect.com www.franchiseinfo.co.ukwww.franchiseeurope.comwww.franchise-group.com


Dictionary of franchise terms

English is the lingua franca of franchising and English words have found their way into many other languages. As a result, certain business and franchise-related English words have been assigned a meaning that differs slightly from their original definition. AArea developer – individual or company holding the right to establish a chain of franchised outlets within a defined area. This is often linked to a development plan that determines how many units must be set up within a certain period.

BBusiness format franchise – comprehensive blueprint offered by the franchisor, entitling the franchisee to receive access to a brand as well as initial and ongoing support.Business plan – the document used to project the development of a business into the future. Within the context of franchising, the franchisor will develop a business plan for the franchise operation known as a franchise plan.

CCapital expenditure (CAPEX) – the investment required to set up a business and its infrastructure.Confidentiality agreement – also described as secrecy agreement – is a formal legal document designed to protect the franchisor against misuse of confidential information by individuals holding themselves out to be

prospective franchisees with an intention to invest.Consumer Protection Act (CPA) Legislation that impacts the franchise relationship.Conversion franchise – established businesses in the same industry sector convert to a franchised network’s brand and operating systems.

D, EDisclosure document – contains highly confidential information pertaining to a franchise offer. In terms of the FASA Code of Ethics, such a document must be given to qualified prospects before a franchise agreement can be signed. A cooling-off period of 14 days needs to be observed.

FFASA: Franchise Association of South Africa.Field service consultant (FSC) – an individual employed by the franchisor who is tasked to visit franchisees and provide ongoing on-site support as well as troubleshooting services.Fractional franchise – a franchised unit that operates under the roof of another business that may or may not be a franchise. An example would be a car wash located within the precinct of a petrol station.Franchise – see business format franchise.Franchise agreement – the legal document that governs the relationship between franchisor and franchisee. It is usually a standard document and not negotiable.


Franchise Association of South Africa (FASA) – the industry body established since 1979 that represents the interests of the franchise industry. Membership is voluntary.Franchise manager – individual employed by the franchisor to manage the franchise operation.Franchise plan – see business plan.Franchisee – owner of a business that operates under a formal business format franchise arrangement. Franchisees are obliged to conduct the business in accordance to guidelines issued by the franchisor.Franchisee Representative Committee (FRC) – committee consisting of democratically elected representatives of the franchisees of a network to represent franchisees’ interests.Franchiser – a term used occasionally instead of franchisor, notably in the United States. However, franchisor is the universally accepted term and is preferred.Franchisor – grantor of a franchise. Owns the intellectual property package that constitutes the franchise and is compelled to provide initial and ongoing support to franchisees.FRC – see Franchisee Representative Committee.FSC – Field Service Consultant.

G, H, IGet-up – description of the appearance of a store etc., also known as the trading style of a network.Initial fee – lump sum payable by the franchisee to the franchisor at the beginning of the franchise relationship.

It pays for access to the network, use of trademarks, access to expertise and initial support.Intellectual property – the intangibles owned by the franchisor including trademarks, registered names, patents, designs, colour schemes and copyrighted materials.

L, MLicence agreement – legal agreement granting rights to specified intellectual property for a specified period. For example, the licence to use the franchisors name, trademarks and business know-how forms part of every franchise agreement.Management services fee – ongoing fee franchisees are compelled to pay to the franchisor. Usually calculated as a percentage of franchisees’ sales, payable weekly or monthly in arrears. Calling it a royalty is misleading and should be avoided.Marketing fee – paid by franchisees into the network’s advertising or marketing services fund).Marketing services fund – administered by the franchisor, usually in cooperation with franchisees. It pays for product advertising and is funded by franchisees and company-owned stores.Master licence agreement – formal legal agreement used to grant a company or an individual the right to a master franchise covering an entire country or continent. It would include the right to sell franchises in this country and the master licensee effectively becomes the franchisor in the target country.


Multiple unit franchisee – operates more than one unit of the same franchise. Frequently used to create a bigger footprint and discourage opposition from establishing itself in an area. See also satellite franchise.Mystery shopper – individual hired to visit stores pretending to be customers and provide formal feedback.

N, ONetwork – wide purchase arrangements – initiated by the franchisor to secure bulk purchase benefits for all members of the network.Operations and procedures manual – a comprehensive collection of instructions issued by the franchisor for franchisees to follow. It is a highly confidential document known as the “bible of the network”.

P, Q, RRegional master franchisee – acquires the right to establish, within a specified region or area, own unit(s) as well as the right to sub-franchise to others.Restraint of trade – places restrictions on franchisee and sometimes franchisee’s key staff, should they wish to compete with the franchisor and other members of the network. Must be specific in terms of time and area covered.Royalty – fee payable in return for the use of intellectual property, be it a musical or literary work, a trademark, a protected name or a process. Sometimes used in place of the term management

services fee but this is wrong and can have unintended consequences.

S, TSatellite franchise – additional unit operated by an existing franchisee in close proximity and designed to offer a limited range of services to the immediate neighbourhood.Secrecy agreement – formal undertaking not to use confidential information in any way other than it was intended to be used and/or to divulge it to unauthorised third parties.Territorial rights – a franchisee’s right to an exclusive (or non-exclusive) area. This could be a province, a town, part of a town or merely a street address. Such arrangements are generally frowned upon by the Competition Commission and may not always be enforceable. Competent legal advice should be sought prior to granting such rights.Total investment – this is the sum total of the initial fee (or upfront fee), the required capital expenditure and the necessary working capital needed to set up the franchised business.Trading style – everything pertaining to the image that the business wishes to convey including store design, fittings, furnishings, logo and colour schemes.

U-ZWorking capital – the amount of money an entrepreneur needs to finance ongoing operating expenses.


Index AAccountant’s role .................................... 40Administration fee in a franchise ..........17Advantages of franchising - franchisee ................................................... 5Advantages of franchising - franchisor ................................................... 7Advertising (marketing) fee ...................17Asset finance ........................................... 22

B, CBecoming a franchisor ........................... 35Business format franchising ................... 3Capital investment in a franchise .........15Controlled independence ........................ 6Cooling-off period ................................... 25Cost of ongoing franchisee support ..... 8

DDefinition of franchising .......................... 3Development costs for franchisor ....... 37Disadvantages of franchising - franchisee ................................................... 6Disadvantages of franchising - franchisor ................................................... 7Disclosure document requirements ... 24Disclosure document ............................. 41Dispute resolution .................................. 28

EEquity funding ......................................... 20Exit strategy ............................................. 48Expansion finance .................................... 2Expansion formats ................................. 46Expansion into Africa ............................. 48Expectations of franchisors ...................14Expectations of prospective franchisees ................................................13

FFailures in franchising ............................ 12Financial aspects of franchising ...........15Franchise agreement ............................. 25Franchise attorney .................................. 40Franchise documentation ..................... 24Franchise failure ...................................... 12Franchise fee calculations ..................... 37Franchise lookalikes.................................. 9Franchise package .................................. 39Franchise statistics ..................................10Franchisee selection ................................. 8Franchising a business .......................... 35Franchisor manual .................................. 41Franchisor performance .........................18Franchisor’s responsibilities .................. 45Funding sources...................................... 21

G, H, IHistory of franchising ............................... 1Imposter ..................................................... 9Initial cost of franchising ......................... 8Initial financial obligations -franchisee ..................................................15International expansion ......................... 45Investigate before investing .................. 30

J, K, LLaws impacting on franchising ............ 23Legal assistance...................................... 40Legal issues in franchising .................... 23Loan application ......................................19Local advertising expenditure ...............17


M, NManagement services fee (MSF) .........17Manual writer’s role ................................ 40Market share of franchising .................. 12Marketing a franchise ............................ 41Martin Mendelsohn, quote ................... 42Master franchisee ................................... 47Micro franchising .....................................11Mixed expansion strategy ....................... 9Modern-day franchising .......................... 2

OOngoing financial obligations - franchisee ..................................................16Ongoing support in a franchise ........... 34Operating costs .......................................18Operations manual................................. 26Overdraft finance .................................... 21Ownership issues in a franchise .......... 27

P, QPilot unit ................................................... 38Professional assistance ......................... 33Provision for sundry expenses - franchisee .................................................16Purchasing fee ........................................17Questions to ask franchisees ............... 32Questions to ask franchisor ................. 32

RRaising finance .........................................19Recruitment and support costs ........... 37Renewal fee in a franchise .....................15Risk reduction ............................................ 2

SSale versus grant in a franchise ........... 27Secrecy undertaking .............................. 24Self-evaluation, franchisee ................... 29Soft loans ................................................. 21Status of franchising ...............................10Succession planning .............................. 48Sundry expenses in a franchise ............16

TTandem franchising ................................11Target areas for expansion ................... 37Term loan ................................................. 22Timeline setting up a franchise ........... 43

U - ZUpfront fee ................................................15Variants of franchising ............................. 3Viability of franchising ........................... 36Word of mouth in franchising .............. 42Working capital ........................................16

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Are you ready to take charge of your future by starting a business but concerned about the associated risk?

A franchise may be the answer.Franchises are often described as ‘entrepreneurship with a safety net’ and there is a good reason for this. Every legitimate franchise concept has been tried, tested and turned into a blueprint for business success.Options open to prospective franchisees are no longer limited to Fast Food outlets or fuel retailing. Thanks to franchising’s explosive growth, opportunities are now offered in over 21 different business sectors. There is truly something for everyone. In addition to prospective franchisees, operators of successful businesses will find this book to be an eye-opener. It shows how expansion through franchising can turn a budding brand into a national icon in double-quick time. Absa makes this book available to demonstrate its commitment to franchising. The information it conveys is easy to digest and thoroughly practical. However, Absa’s support for franchising doesn’t end here. Our team of experts is standing by to provide advice on franchising long before offering customised funding solutions.

Documents

Principles of Franchising