Franchising When Youth and Size Do Matter

Yes, the days of predictable long-term employment are gone forever, and the need to take charge of one’s own future demands one of two strategies. Either, instead of being ‘employed’, one becomes ‘employable’, which takes a certain dedication to ongoing training. This could be rather costly, guarantees no success, and could seriously cut into one’s leisure or family time. Alternatively, you venture out on your own and become your own boss and master of your own destiny.

The first couple of years with any new business are fraught with risk. Despite the conventional wisdom of keeping family and friends apart from the dangers of one’s own ambitions, most new smaller businesses have nowhere else to turn to but these parties as the source of start-up investment for their ventures. There goes another good friendship, as there are significant liabilities associated with both the youth and size of a new firm. Most new ventures survive the first two years, yet might only do so because they are busy depleting these hard-earned funds committed by friends, family or other investors. Once the start-up nest egg is gone, it is only a small percentage of firms that continue to flourish. That is why the franchising concept is so attractive. It offers solutions to most of these initial liabilities.

The word ‘franchise’ originates from the French language and means ‘privilege’ or ‘freedom’. In this sense, franchising offers people the freedom to own, manage and direct their own business. Franchising offers people the opportunity to be in business for themselves but not by themselves. The franchisee owns the business, but the franchisor remains in the picture, providing ongoing training as well as other services. Three immediate benefits become evident.

Firstly, research on entrepreneurial characteristics shows that typical entrepreneurs are completely over-optimistic. They see the same opportunities as other people, yet have a somewhat misguided confidence that they can make things work where others will fail. Working within the franchise fold, this over-optimism is modified by the experience and guidance of the franchisor. Having been there many a time with new franchisees, the franchisor can offer a far better assessment of the market opportunity, the projected stream of revenue, and the level of investment required to get going - and more importantly - to survive and flourish.

Secondly, joining a franchise instead of venturing out completely independently allows the entrepreneur access to the benefits of size and scale that cannot be enjoyed as a stand-alone start-up. The franchisor can negotiate better finance or trade terms on behalf of the group, and can leverage the collective strength of the multiple smaller members into truly visible advertising. When you join a franchise, you buy a piece of an established brand, which saves an enormous amount of money and effort as one does not need to educate the consumer from scratch. Most often, it’s a case of ‘you build it and they will come.’ Perhaps the most underrated value added by the franchisor is the benefits of collective learning. When there are 50 or more people running the same business concept across the country, someone is bound to stumble onto or develop the optimal way of structuring business

processes, personnel policies, or the likes. And these lessons are learned time and again on behalf of everyone in the group, as the best ideas are quickly disseminated by the franchisor. Think of this as having expensive school fees split equally amongst all franchisees, making learning and business improvement far more affordable.

Thirdly, franchise groups and specialist franchise finance companies make it possible to secure financing from sources other than family or friends. Admittedly, one of the tests of the entrepreneur’s commitment that most franchisors use is the level of personal investment by the new franchisee. However, these specialists have an excellent understanding of both the risk and revenue potential of the franchise outlet, allowing them to assess and support the entrepreneur’s early hunger for funds. Furthermore, whereas a specialised franchise finance group such as ABSA has a vested interest for their repeat business in the success not only of the single entrepreneur, but rather of the franchise group as a whole, the young entrepreneur can rely on service and rates that would simply have been out of reach for the stand-alone maverick.

The South African franchising market is still vastly underdeveloped. As a percentage of small business, we are at less than one-third of the USA’s ratio for franchising. With the local economy steaming ahead at almost 6% growth per annum, with the apparent insatiable demand of the South African consumer and our growing number of foreign visitors, and with the complexities of the labour market in a changing socio-political dispensation, it has never been a better time to start taking the first steps towards securing your own small piece of the future.