Interview with Christo Botes – Executive Director: Business Partners Limited
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Month: April 2012
What is franchising?
It is a business arrangement between a franchisor (the owner or holder of a business concept, brand or an arrangement) and the franchisee (who acquires the rights to operate in accordance with a franchise agreement.) The franchisor allows the franchisee the right to use its trade name, business methods and know-how. In return, the franchisee, accepts certain restrictions on the way he or she conducts their business. The franchisee also undertakes to make royalty payments (franchise fees) to the franchisor.
What are the advantages of a successful franchise?
It is an easier way for the inexperienced entrepreneur to enter the business world. Instead of re-inventing the wheel, a business concept is offered that has been proven over a period of time. It increases the chances of making money although it is not guaranteed.
Raising finance is easier than a non-franchising operation. Business Partners and the commercial banks will consider franchise operations in a different light to a start-up operation that is unknown. Funding is not guaranteed, but it makes the entry easier.
It is normally easier to sell a franchise operation. The buyer knows what the business or brand is about and makes the selling process easier.
The back-up, training, support and expertise offered by a good franchisor is invaluable to the new entrant.
The established brand and the marketing efforts introduced by the franchisor, alleviate the pressure of the marketing responsibilities.
The franchisee can call on fellow franchisees to exchange views, share concerns, discuss problems and seek solutions. They have so much in common and it often acts as a sounding board with someone in the same business.
Is a franchise cheaper than a non- franchise business?
There are various franchise or licence agreements in place today. Many have a charge (franchise fee) which various from R10 000 to R75 000 for the well-known restaurants/food outlets. What you get in return for this is firstly the concept. A franchisor is selling a winning and proven business recipe to the franchisee. Many franchisors offer training as part of the deal. They are also instrumental in site selection, lay-out, sourcing suppliers of equipment and material.
This is not available to the non-franchise operator. What many franchisees complain about is the monthly fees. The franchise fees are often based on a percentage of turnover (5% is a popular figure) as well as an advertising fee (often 2%). The franchisee gets some back-up in return and corporate advertising.
It is a judgement call whether it is expensive. If you are a new entrant in the market place, franchising is an attractive option and we also recommend this route.
Is a franchise offering me a guaranteed return on my money?
No, it is for the entrepreneur (franchisee) to go out there and make money. The franchisor gives the basis, offer back-up and training, but success remains in the hands of the operator.
There are continuously new franchise concepts entering the market place. Some will be successful and others not. The entrepreneur has the responsibility to evaluate the franchisor.
How do you evaluate a franchisor?
You are making an important decision when you tie-up with a franchisor. The wrong decision will result in sure failure. Here are a few indicators to evaluate a franchisor:
Track record. Is it an established brand that has a successful track record in the market place? How many franchisees are operating? What does the franchise offer?
Consult already establishes franchisees. Call on the operators with a list of questions and possible concerns.
Financial strength. You can call for the financial statements of the franchisor. You will recall that a well-known pub franchise actually ran into financial difficulty some years ago. This left the franchisees in a predicament.
Where can I find more information on available franchises and what the cost?
There are a few available sources. The well-known franchisors have brochures and information leaflets and a telephone call will give you access to the information. The internet is also a handy source.
The FASA (Franchise Association of Southern Africa) year book that is available from many bookstores and news agencies is probably the easiest and quickest method of evaluating what is available.
Who is FASA?
It is a non-profit organisation established in 1979 to uplift the franchise industry in the country. Not all franchisors belong to FASA.
FASA offers information on franchising, act as mediator between franchisor and franchisee, promote franchising and in general want to ensure a high level of business ethics relating to the franchising industry.
Many well-known franchisors are members of this association which give some credibility but also some comfort to the franchisee and potential franchisee. FASA operates from Johannesburg (Tel. 011 615 0359). The website offers a host of information and is worth clicking on. (www.fasa.co.za)
Which products or services can be franchised?
Many new products, business concepts and services or those currently on the market, can be franchised. A prerequisite to be a successful franchisor is the ability to offer the entrepreneur a proven business concept. This includes the product range or the service to be offered.
Many potential franchisors contact the organisation with the view of franchising their product, but few are actually “franchisable”.
It is advisable to establish a track record and understand the business inside out. Open at least one outlet before considering multiplying the concept.
What are the disadvantages of franchising (from the franchisee’s point of view)?
The franchisor sells the entrepreneur a business concept. This comes with stringent rules and guidelines. The franchisee must comply with this and the franchisor can act should this not happen.
The freedom of entrepreneurship is now restricted and the franchisee needs to stay within the parameters of the franchise agreement. It often has to have supplies from a specific source, sell a prescribed range of products and conform to predetermined quality standards.
The franchise route is regarded as expensive. They also accuse the franchisor for not offering “value for money” in terms of the franchise fees payable.
The franchisee is in the hands of the franchisor and if the product, brand or advertising campaign fails, it may have a detrimental effect on the business.
World entrepreneurship day a rallying call to aspiring SA entrepreneurs
Aspiring South African entrepreneurs need to take note of the successes being celebrated by their global counterparts on World Entrepreneurship Day (WED), 15 April 2012, as well as use the day as motivation to get better at spotting and taking advantage of ‘entrepreneurial gaps’ in specific industries, in order to create sustainable businesses.
This was the message from Nimo Naidoo, project manager of the Sanlam / Business Partners Entrepreneur of the Year ® competition, in the run-up to WED, who says that South Africa’s economic prosperity relies heavily on the actions and successes of the country’s existing and future entrepreneurs.
“The Global Entrepreneurship and Development Index (GEDI) recently revealed that South Africa’s global entrepreneurial ranking has fallen from 39 in 2011 to 45 in 2012, losing pace with smaller GDP countries such as Colombia and Peru. Entrepreneurship serves as a catalyst for economic growth and national competitiveness, and for an emerging economy such as ours this ranking is simply too low,” says Naidoo.
She says that in order to foster a culture of entrepreneurship locally, prospective entrepreneurs need to overcome barriers such as fear of failure and funding. “Tackling the first barrier is not always so simple, as South Africa’s society has a culture that neglects entrepreneurial activities, especially individuals who have failed in the past.”
Naidoo suggests that more needs to be done to identify and profile entrepreneurial role models, in order to give aspiring entrepreneurs an idea of the rewards and benefits of enterprise creation and reduce the stigma of failure.
“Initiatives such as entrepreneurial competitions, formation of bodies, government-sponsored awards and recognition from the private sector would all contribute to raising the profile of South Africa’s most innovative and successful entrepreneurs. In addition, these actions would also assist with creating a society that values and respects entrepreneurial spirit.
“Initiatives already in place to promote and grow entrepreneurship, such as Global Entrepreneurship Week in November and The Jobs Fund, under the custodianship of the Development Bank of Southern Africa, which co-finances projects by public, private and non-governmental organisations, have already had a positive effect with regards to job creation and entrepreneurial spirit in South Africa.”
She adds that role models are also key to educating South Africa’s youth about entrepreneurship. “There is a great opportunity for our youth to choose entrepreneurship as a career and become job creators rather than job seekers. Our education system should also promote entrepreneurship as a career. Entrepreneurship will then also address unemployment issues at a youth level by providing an outlet for the talents of many highly educated young people, such as college and university graduates, especially in globally-growing industries such as information technology.”
On the barrier of funding, she says that more support and attention in fiscal and government policy is necessary to stimulate entrepreneurial activity, which can ultimately lead to the country’s economic recovery. “We also need to investigate the implementation of new finance models and methods in order to broaden the access of finance to more entrepreneurs.”
Naidoo adds that the inclusion of structural policies that determines and clarifies the overall economic framework in which the local business sector operates, such as policies affecting labour markets, tax, competition, financial markets and bankruptcy laws, will also be conducive to entrepreneurial growth.
“As a group, entrepreneurs represent the best hope of creating sustained economic growth in South Africa. As we celebrate WED, we can see the tangible economic benefits that pro-entrepreneurial policies in emerging economies such as Brazil and India have achieved.
“It is now our country’s turn to create an entrepreneurship climate to create employment and build sustainable, high growth companies,” concludes Naidoo.
Finalist aims for the moon
The South African market presents tough economic conditions for entrepreneurs. It is therefore important to recognise and congratulate the key individuals that, despite the fear of failure, constantly overcome obstacles, while continuing to explore areas where significant growth opportunities exist.
Rina Dique, who has done just this, was a finalist in the 2010 Sanlam / Business Partners Entrepreneur of the Year ® competition and is the proud owner of Danika Spa. Danika Spa is a well recognised business that specialises in health, beauty and wellness in the North West province. Her business was named the Best Small Business in 2010 by the Chamber of Business and is in its fourth successful year of operation.
Dique has always been a natural entrepreneur and is currently managing her third thriving business. “The South African market is developing at a very fast pace and presents itself as a seemingly overwhelming place to conduct business. However, where change exists so do vast volumes of opportunity. It is essential to identify and accept the changes that surround you and adapt accordingly.”
According to Dique, as an entrepreneur challenges are part of her daily routine. “You can plan everything – and then life happens.” She explains that it is therefore crucial to proactively identify and assess potential business risks and manage them effectively.
Dique made use of the Sanlam / Business Partners Entrepreneur of the Year ® competition as a benchmark to measure the success of her business. “Competitiveness drives my business. I made use of this competition as a personal target to measure myself against.” She explains that it is essential to strive for greatness by constantly pursuing growth opportunities. “Aim for the moon, if you miss, at least you will be amongst the stars.”
Dique advises that fellow entrepreneurs enter the Sanlam / Business Partners Entrepreneur of the Year ® competition because the competition is an excellent assessment tool and assists with guidance as to what is expected of an entrepreneur. “It provided me with an indication of what needs to be considered and taken into account when entering a business. The competition also provided me with information as to how I can improve my approach to business, life and my contribution to society.”
Being a finalist in the 2010 competition resulted in respect and acknowledgement from the industry and strengthened her participation in spa industry competitions, such as the Les Nouvelles, where she has featured in the top three in both 2011 and 2010. “Being a finalist encouraged me to challenge my restrictions and continue to dream big.”
Proper cash flow management
A vital life saver to SMEs this time of year
Entrepreneurial airline, Velvet Sky’s recent cash flow issues, resulting in supplier BP calling for the company to be liquidated, are a stark reminder for South African entrepreneurs of the potential damage that an ineffective cash flow system can cause to their businesses.
The airline, which has operated for almost a year, recently suspended its operations indefinitely after several of its flights were cancelled when it failed to pay its service providers, including BP and SAA Technical.
According to Nimo Naidoo, project manager of the Sanlam / Business Partners Entrepreneur of the Year® competition, one of the biggest challenges entrepreneurs face is funding and cash flow, and the mismanagement of these vital elements is responsible for causing over 70% of businesses to failing within their first year.
Naidoo says this time of year is especially sensitive for many businesses. “As many South African businesses had to pay provisional tax by the end of February, it is very likely that entrepreneurs are currently experiencing financial difficulty. Many business owners are not aware of the tax contributions they need to make at the end of the financial year and thus do not budget for this expense. This unfortunately often leads to liquidation and businesses sinking.”
She further stresses the importance of cash flow and describes it as the financial essence of any business. “If a company’s cash flow is insufficient, the company will be unable to meet its future financial obligations and may be forced to close down. Most respected analysts regard cash flow as one of the best indicators of financial stability, while researchers have consistently found the cash flow to total debt ratio to be the most reliable indicator of financial distress.”
Naidoo explains that correctly controlling your cash flow requires basic planning and management. “Begin, by creating a cash flow plan that outlines all your cash flow expectations. Next, simply analyse and review your expenditure habits. Once this is complete, set flexible cash flow targets for your business that meet the needs of your own business and strive to achieve these goals month to month.
“In the current turbulent and uncertain global market, it is imperative that businesses make financial stability their number one priority and safeguard their future by ensuring that their cash flow needs are adequately met,” says Naidoo.
World Entrepreneurship Day a rallying call to aspiring SA entrepreneurs
Aspiring South African entrepreneurs need to take note of the successes being celebrated by their global counterparts on World Entrepreneurship Day (WED), 15 April 2012, as well as use the day as motivation to get better at spotting and taking advantage of ‘entrepreneurial gaps’ in specific industries, in order to create sustainable businesses.
This was the message from Nimo Naidoo, project manager of the Sanlam / Business Partners Entrepreneur of the Year ® competition, in the run-up to WED, who says that South Africa’s economic prosperity relies heavily on the actions and successes of the country’s existing and future entrepreneurs.
“The Global Entrepreneurship and Development Index (GEDI) recently revealed that South Africa’s global entrepreneurial ranking has fallen from 39 in 2011 to 45 in 2012, losing pace with smaller GDP countries such as Colombia and Peru. Entrepreneurship serves as a catalyst for economic growth and national competitiveness, and for an emerging economy such as ours this ranking is simply too low,” says Naidoo.
She says that in order to foster a culture of entrepreneurship locally, prospective entrepreneurs need to overcome barriers such as fear of failure and funding. “Tackling the first barrier is not always so simple, as South Africa’s society has a culture that neglects entrepreneurial activities, especially individuals who have failed in the past.”
Naidoo suggests that more needs to be done to identify and profile entrepreneurial role models, in order to give aspiring entrepreneurs an idea of the rewards and benefits of enterprise creation and reduce the stigma of failure.
“Initiatives such as entrepreneurial competitions, formation of bodies, government-sponsored awards and recognition from the private sector would all contribute to raising the profile of South Africa’s most innovative and successful entrepreneurs. In addition, these actions would also assist with creating a society that values and respects entrepreneurial spirit.
“Initiatives already in place to promote and grow entrepreneurship, such as Global Entrepreneurship Week in November and The Jobs Fund, under the custodianship of the Development Bank of Southern Africa, which co-finances projects by public, private and non-governmental organisations, have already had a positive effect with regards to job creation and entrepreneurial spirit in South Africa.”
She adds that role models are also key to educating South Africa’s youth about entrepreneurship. “There is a great opportunity for our youth to choose entrepreneurship as a career and become job creators rather than job seekers. Our education system should also promote entrepreneurship as a career. Entrepreneurship will then also address unemployment issues at a youth level by providing an outlet for the talents of many highly educated young people, such as college and university graduates, especially in globally-growing industries such as information technology.”
On the barrier of funding, she says that more support and attention in fiscal and government policy is necessary to stimulate entrepreneurial activity, which can ultimately lead to the country’s economic recovery. “We also need to investigate the implementation of new finance models and methods in order to broaden the access of finance to more entrepreneurs.”
Naidoo adds that the inclusion of structural policies that determines and clarifies the overall economic framework in which the local business sector operates, such as policies affecting labour markets, tax, competition, financial markets and bankruptcy laws, will also be conducive to entrepreneurial growth.
“As a group, entrepreneurs represent the best hope of creating sustained economic growth in South Africa. As we celebrate WED, we can see the tangible economic benefits that pro-entrepreneurial policies in emerging economies such as Brazil and India have achieved.
“It is now our country’s turn to create an entrepreneurship climate to create employment and build sustainable, high growth companies,” concludes Naidoo.
2012 EOY launch in Cape Town
The topic of conversation at this years launch was “How will the 2012 budget affect your business going forward?” This question and other issues affecting entrepreneurial growth were discussed at the Kelvin Grove Club on 9 March 2012 during the official Cape Town launch breakfast of the Sanlam / Business Partners 2012 Entrepreneur of the Year® Awards.
The seminar featured an address by Professor Matthew Lester, tackling the 2012 budget and its impact on South African entrepreneurs. Lester, whose credentials include a BCom CTA (Rhodes) and H Dip Tax Law (Wits), is a tax professor at Rhodes University and the winner of the Vice-Chancellor’s award for distinguished teaching in 2001. He also won the SAICA Southern region Honours Tie 2009. Apart from teaching at Rhodes, he also lectures to a wide range of South Africans on money matters and writes the popular weekly column ‘Tax Talk’ in the Sunday Times.