Franchising

QUESTIONS TO ASK THE FRANCHISOR

Franchising is a business development method for expanding businesses and distributing goods and services using an established system and a recognised brand name. There are a number of areas that franchisees should consider before committing themselves to a franchising venture. These areas include;

Royalties (usually a monthly fee);

What amount of service charge and marketing royalties are due and payable to the franchisor on a monthly basis?
What determines this amount? Is it revenue alone, is the royalty tiered with revenue (i.e. does the royalty increase/decrease with predetermined levels of revenue)
Is the royalty/service fee reasonable when compared to similar franchises in the same industry?
What can you, as a franchisee, expect for paying this royalty (in terms of support/advertising from the franchisor)
How much over and above this marketing/advertising royalty are you expected to spend on marketing the business on a monthly and annual basis?
Is the franchisor willing to give a royalty holiday for a period should the business require this? Under what circumstances?
What type of assistance can a franchisee expect from the franchisor on a regular as well as an ad-hoc basis?

Franchise Fee - Usually an upfront fee paid to the franchisor (the IDC will not usually fund this amount);

What is the franchise fee payable to the franchisor? Is this reasonable when compared to similar brands in the same industry
What can you expect to get for paying this other than the right to use the patents/trademarks/brand/methodology supplied by the franchisor? i.e. is training/project management included in this amount?
It is important to query whether the deposit (which is sometimes the franchise fee) is refundable and under which circumstances this is the case.
Is this fee payable again at the end of the franchise term? Is this fee payable by the purchaser of the business should you decide to sell the business?
Do you get first right of refusal on any new outlets of the same brand opening within a predetermined area.
Do you have exclusive rights to be the only outlet of that specific franchise to trade within a specified area?

Suppliers;

Do you have to purchase all goods and services from franchisor approved suppliers? What is the process should you be able to source similar level product/services at a better price than currently available?
Does the franchisor earn a rebate on goods/services procured by the franchisees? Who benefits from this?
Does the franchisor negotiate price with the suppliers, what input do the franchisees have in this regard?
Has the franchisor negotiated pre approved terms with the suppliers, cash on delivery or pay after 21 days.

General;

What is the duration of training? What is the cost of training? What is the cost of ongoing training for franchise employees and for the franchisee?
How does the franchisor protect the brand? What are some examples of where this has occurred? Emerging Franchisors in particular are prone to allowing franchisee misdemeanours to slip by un-penalised. This is not conducive to the brand as a whole as each franchisee is affected by the action/inaction of each of the franchisees. The brand will benefit from having a franchisor that ruthlessly protects the brands integrity, sometimes even at the expense of short term financial gain.
Approach existing franchisees and ask them about their experiences of the brand and franchisor
Important aspects to look for when selecting a franchisor;

Good brand, still in its growth phase is ideal
A focused and committed franchisor that protects the brand and acts with integrity
The franchisor should have a track record of performance if they are established
Fees, including all royalties and franchise fees should be reasonable and justifiable

How many store closures/store relocations has the franchisor had in the last 3 years? How have they dealt with the outlets and what has the effect been on the franchise and franchisee?
3 simple and important variables;

SITE, even a good brand in a bad site will struggle
BRAND, What does it mean to your customers
MANAGEMENT, Even a good brand in a good site will fail without appropriate committed mangement

Who to contact

For more information on the Franchise SBU, please click here to contact us,or call us on 086 069 3888 or + 27 11 269 3677. Alternatively, email our call centre at callcentre@idc.co.za