Expert advises on franchise business pitfalls
Isaac Pinielo | Wednesday June 22, 2016 15:03
Giving a presentation at the Franchise Expo Botswana held in Gaborone last week, Kurt Illetschko of the Franchise Association of South Africa (FASA), said although franchising is regarded as a safe and potentially profitable business, it also has its own downsides.
Franchising is described as a long-term cooperative relationship between two entities, a franchisor and one or more franchisees, that is based on an agreement in which the franchisor provides a licensed privilege to the franchisee to do business.
He said most people make the mistake of thinking that owning a franchise is a soft option, whereas it is not.
“In most cases franchisors will charge new franchisees a lump sum to startup a business using their brand name,” explained Illetschko.
He also indicated that many franchisors will insist that one purchases most of the materials they need from their own pocket, and that some will demand that one has a certain amount of working capital before they are even considered to be a suitable candidate.
Despite gaining training and guidelines on how the business should be run, Illetschko said a franchisee may feel that their entrepreneurial creativity is somewhat restricted.
“The lack of actual control you have over your franchise means that even if you run a profitable outlet, you could still lose everything if your franchiser makes bad business decisions and the firm fails,” he said.
He also said those who take on a franchise under the impression that the franchiser will do all of the hard work for them while they sit back and watch the money roll in, they will be in for a nasty shock.
He said working weeks of 60 hours or more are not unheard of among franchisees attempting to get their business off the ground.
According to Illetschko, if a franchise is used haphazardly or fraudulently, it will disappoint. He indicated that the franchiser grants the franchisee the right to duplicate a business model and that in the hands of a craftsman, it will deliver on its promise.
He advised people to look out for a business format franchise, stating that franchising is not just about food.
He mentioned sectors that offer franchises as automotive, bakery, building, home and office services, business to business services, childcare, education and training, fast food and sit-down restaurants, health, beauty and body culture personal services.
Baatlhodi Molatlhegi, a senior partner at Monthe Marumo and Company said Botswana has no franchise legislation, but the Competition Act may impact on franchise arrangements.
A franchise and retail specialist at ABSA-Barclays South Africa, James Noble, said there is a certain criteria that banks use for assessing the franchisor such as requesting the organogramme of the franchise company and latest disclosure documents or a business plan.
There should also be a franchise agreement and latest financial statements and management accounts on the franchisor among others.