1. JULY 2016 ENTREPRENEURMAG.CO.ZA 81Readers are advised to consult their attorney and/or financial advisor prior to pursuing any investment.
EVERYTHING YOU NEED TO KNOW ABOUT
FRANCHISING AND BUSINESS OPPORTUNITIES
XX
XXXX
XXXXX
FRANCHISE
ZONE
INDUSTRY INSIGHT
A SOLID BETIs now a good time to become
a franchisee? And how should
you identify a franchise that can
weather an economic storm?
Prithivan Pillay, Nedbank’s
national manager for new business
development shares his thoughts.
BY GG VAN ROOYEN
Q&A
REMEMBER
THIS
Even though the
success rate of
a franchise is
generally much
higher than that
of a start-up,
it still doesn’t
guarantee
success. Not all
franchises are
created equal.
It is important
to do a lot of
research before
committing to a
brand.
VITAL STATS
PLAYER:
Prithivan Pillay
COMPANY:
Nedbank
POSITION:
National
Manager:
New Business
Development

2. 82 ENTREPRENEURMAG.CO.ZA JULY 2016 Readers are advised to consult their attorney and/or financial advisor prior to pursuing any investment.
FRANCHISE ZONE
QGiven the state of the economy,
is now a good time to invest in a
franchise?
There is no doubt that people are nervous
about the economy, and because of this
they will obviously be hesitant to invest a
large amount of money in anything, and
franchising has certainly not been exempt
from the current economic pressures.
However, a franchise remains a solid
investment. The industry is resilient, and the
success rate for franchises remain at around
80%, which is far above the 20% success
rate of a start-up.
QWhat do you think of the state of our
franchise sector?
South Africa boasts quite a mature franchise
sector. Established and respected local
franchisors generally have systems in place
that are on par with international brands.
I think this is evident from local franchises
going into overseas markets. Nando’s is an
excellent example. It has managed to carve
a place for itself in very saturated markets,
and that’s because the foundation of the
business was sound.
QAnd what do you think of the
overseas brands that have come to
South Africa over the last few years?
Some of these obviously represent great
opportunities for prospective franchisees,
but it is important to realise that a big
international brand doesn’t guarantee
success for everyone involved. A big
overseas brand can still fail. And what
proves popular overseas will not necessarily
be popular here. Look at the frozen yoghurt
market. It is absolutely massive in the
United States, but proved itself to be much
smaller here. You can’t assume that the
strength and recognisability of the brand
will carry it through. As a prospective
franchisee, you need to make sure that
the franchisor has done proper feasibility
studies before plunging into the market.
QWhat do banks look for when new
franchisees approach them for
finance? What is expected of a prospective
franchisee?
As a general industry standard, a franchisee
is expected to be able to provide 50% of the
cost of a franchise in unencumbered capital.
But this isn’t set in stone. For example, if
someone is trying to finance their fourth
or fifth franchise unit, they might not need
50% of the capital, since there is less risk on
offering them finance.
QWhat are some of the common
mistakes you see franchisees make
when it comes to the use of financing a
business?
It is important to understand that the
bank and the franchisor have very specific
reasons for expecting 50% of the money in
unencumbered capital. Gearing a business
too aggressively is very risky. It is very
difficult to make a success of a business and
turn a profit if is 100% financed.
It is also important to remember that
merely having the cash needed to buy a
franchise is not enough. You will also need
enough money to purchase stock, keep
the business afloat and
live off for a while. It can
take a business a while
to break even, and until
then, you will need to be
able to carry all costs.
QHow long does it
typically take a
franchise to break even?
That is difficult to say.
It really depends on the
nature of the business.
Some break even within
the first month, though
most tend to take 3 –
6 months. Some can take as long as 18
months, though, so it is important to have
a very good idea of how long you’ll have to
be able to carry expenses. The prospective
franchisee needs to speak to the franchisor
and find out what the typical time to break-
even is within the organisation.
QHow long does it typically take to see
a return on investment?
Once again, it all depends on the nature of
the business, but the average is around 36
months. What is worth keeping in mind is
that many franchises will expect franchisees
to refresh or revamp a store about four
years after opening, so there is a high
probability that you will need to put a lot
of cash back into the business soon after
seeing an ROI. You need to plan accordingly,
The South African franchising
sector is healthy and quite
sophisticated when compared to
that of many foreign markets. This
is evidenced by the fact that a lot
of large international brands are
making their way to our shores.
Starbucks and Krispy Kreme
recently arrived, while Dunkin'
Donuts, Baskin & Robbins and
French bakery PAUL will boast local
stores soon.
“It is also important to
remember that merely having
the cash needed to buy a
franchise is not enough. You
will also need enough money
to purchase stock, keep the
business afloat and live off
for a while.”

3. 84 ENTREPRENEURMAG.CO.ZA JULY 2016 Readers are advised to consult their attorney and/or financial advisor prior to pursuing any investment.
FRANCHISE ZONE
as this can be an expensive process. A
revamp can cost R1 million or more.
QWhat other advice do you have for
franchisees?
Do your research. Don’t make any
assumptions, and don’t just accept the word
of the franchisor. Research the brand and
find out who the directors of the franchise
are, as it is important to know who the
people are behind the business. Also, chat
to existing franchisees. If eight out of
10 grumble about the franchisor, there’s
probably an issue in the organisation.
One should also do research on the larger
industry. How saturated is the sector you’re
trying to enter? A franchisor might allocate
you a large area, but how many competing
brands are already active in that area? Are
there similar shops up and down the street?
You need to be confident that there is real
opportunity for your particular franchise to
succeed in your area.
QWhat about the financials of a
store being purchased? How should
a franchisee go about evaluating the
numbers?
As a prospective franchisee, you should be
provided with the financials of the business
you want to purchase.
You should use this as a foundation to
prepare your cashflow projections, ideally 3
years. These financials together with your
business plan can then be presented to
your bank for assessment to determine the
business’s viability.
QHow do you view the role of a bank
within a franchise structure?
It is in the interest of everyone involved –
the franchisor, the bank and the landlord
– to see the franchisee succeed. We are
part of a chain of support that should be
there to offer help if something goes wrong.
If a business shows signs of distress, we
want to help and see if the situation can be
rectified.
QWhat separates the great franchises
from those that fail?
A lot of it comes down to systems and
support. The whole point of buying into
a franchise, after all, is to gain access to
a proven business model, which means
proven systems and support structures.
Without those, you might as well open you
own independent operation.
Great franchises are the ones that provide
new franchisees with a lot of help and
support, and have the systems in place to
get new franchisees up and running with
ease. Running a franchise organisation
isn’t easy – there are a lot of functions
involved – so you don’t want to buy into a
small operation that’s being managed by a
handful of people. They can’t possibly keep
a handle on everything. You want to buy
into an operation that has divisions focused
on all the different functions associated
franchising, such as marketing, training, etc.
QWhat else should a franchisee expect
of a franchisor?
A franchisor should have a solid
understanding of the industry, and should
be innovating and expanding at the
corporate level. Don’t let the franchisor
perform R&D inside your store. Concepts
should be proven before they are rolled out
to franchisees. It is always a good sign if
the franchisor runs corporate-owned stores.
By doing this, the organisation gains real
insight into the issues franchisees deal with,
and can also test new programmes before
rolling them out to franchisees. EM
“Great franchises
are the ones
that provide new
franchisees with
a lot of help and
support, and
have the systems
in place to get
new franchisees
up and running
with ease.”
Some local brands, such as Nando's
have successfully moved into foreign
markets, showing that many local
franchises have the systems and
structures needed to compete
internationally.