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Tips for local entrepreneurs considering an investment in a franchise business - Part 1

Given the risks associated with starting a new business, not just in South Africa but globally, many potential business owners opt to go for the relative safety of a proven business model in the form of a franchise.
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One must understand that this might not be a good fit for all aspiring entrepreneurs, but it can be a wise strategy if the motivation, vision, and desired outcomes are well thought out and well-aligned.

Remember, most successful franchises started with a vision of individual success and later became ‘franchisable’ businesses, allowing the founder/s to transform from simply running a business to being franchisors.

Choosing the right fit

The starting point, especially if you see this as a long-term investment, is to choose the right franchise for you.

Ideally, you want to choose a franchise that offers services you would personally want to offer, or products you would want to buy and sell.

In some rare cases, ‘silent’ investors have done well by buying franchises and getting others to run them, however, this requires deep pockets to employ top-notch staff and a very sharp eye for business opportunity and growth potential, including brand (franchise) expansion through organic growth and franchisee growth.

Let’s assume that you are considering purchasing a franchise as an owner-manager or at least plan to be operationally involved.

Here are six questions you need to ask yourself:

1. What are your goals?

Are you looking for a part-time opportunity or will it need to replace your salary as an employee? Do you have the ambition/vision to own more than one franchise? Finding the perfect fit will be easier once you decide what you’re really trying to accomplish.

2. How much cash do you have?

The amount of money you have available to invest will determine the franchise opportunities available to you. By way of example, a Mcdonald's franchise in South Africa will cost you between R6-12m - of which around 50% needs to be put down as unencumbered cash. A Pick n Pay store costs around R13m , with a minimum of 10% in cash.

Like most businesses, a franchise takes time to be profitable, so make sure you have enough cash flow while you strive for break-even.

3. How much can you risk?

Consider the level of risk you’re willing to handle as this will help eliminate some franchise opportunities. New and sexy franchises can offer good returns, but if the franchisor fails, your business will suffer too.

If you’re risk-averse, you may prefer an established, big-name company over a cutting-edge franchise despite the promise of more return on your investment.

4. Hands-on or hands-off?

It’s important to find a franchise that fits the role you want to play. Not many franchises offer the opportunity to be an ‘absentee franchisee’ and most require a hands-on approach by being actively involved. Like any business, you will generally need to put in long hours to achieve success. If you only want to work weekdays 9 to 5, this will eliminate many retail and services franchise opportunities.

5. What’s the long-term plan?

Often overlooked by potential franchisees, this question can be essential in helping you select the right franchise. Most franchise agreements last five years with two franchisee performance renewals. Others last ten years, while some big-name food franchises with premises such as McDonald’s, Burger King, and KFC can last for 20 or 25 years.

Do you intend to run the business for just a few years and sell, or are you looking to build a business over several years?

6. What are your strengths?

Buying the right franchise is like looking for the right job. Evaluate your skills, experience, and personality to find the right fit. Consider if you want to work alone or with others, and whether you enjoy interacting with customers and managing staff or prefer not having to do so.

About Anton Ressel & Steven Francis

Steven Francis is a franchise specialist and Fetola mentor. He is the founder of www.franchisingmadeeasy.co.za and also the author of the upcoming book Your Guide to Franchising Success. Anton Ressel is a business mentor and coach. He is the entrepreneur in residence for Fetola as well as a trainer, facilitator and member of the senior management team.

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