Why invest in a franchise?

Tony da Fonseca

Planning to start a business but not quite sure whether you should go it alone or invest in a franchise? If so, you are not alone. It is safe to assume that franchising has the highest public profile any business model has ever had. That’s why many prospective entrepreneurs see investing in a franchise as a passport to instant riches whilst a few are convinced that franchises are a con. Both groups are wrong. This article explores the pros and cons of becoming a franchisee.

What does the term ‘franchise’ mean?
The modern definition of franchise is “being in business for yourself but not by yourself.” For a franchise to exist, it must be based on an existing and highly successful business. Several other criteria apply and will be discussed in another article. Let’s just say at this point that a mere idea can never form the basis for a franchise.

How does franchising work?
The main stakeholders in a franchise relationship are the franchisor and the franchisee.
The franchisor is an entrepreneur who has built a business up from scratch and is now ready to expand it. After examining various options, the entrepreneur decides to go the franchise route. Before taking this step, a responsible franchisor will have perfected the product, systems and procedures that have made the business successful. Having registered a brand and established an excellent reputation in the marketplace are other prerequisites. In addition, the franchisor will have created detailed guidelines for future franchisees to follow. These items can be grouped together as the franchisor’s intellectual property.

The typical franchisee is an individual who wants to become a business owner without making all the mistakes newcomers to the business world usually make. Investing in a franchise offers this individual access to the franchisor’s intellectual property plus extensive initial and ongoing business support.

Why offer franchises?
Offering franchises is one option for expansion but there are many others. For example, an entrepreneur could set up branches, enter into distributorship agreements etc. Entrepreneurs go the franchise route because they know that an individual who makes a sizeable investment into the business in exchange for retaining the profits the business makes is more likely to achieve success than a salaried manager.

Does a franchise come with guarantees?
In a word, “no”. In fact, success guarantees should be viewed with suspicion. Achieving success in business depends on many factors, some beyond the franchisor’s control. The need for the franchisee to follow the blueprint and work extremely hard is but one example. But whilst no responsible franchisor will offer a success guarantee, it is reasonable to assume that if a franchisee puts the necessary work into the project, success should be achievable.

How does the process work?
We decided to seek an answer to this question directly from the horse’s mouth. In this case Tony da Fonseca, managing director of the highly successful OBC Group and current chairman of FASA. We approached Tony because his brand is frequently in the news, and for all the right reasons. It is also the winner of numerous business awards, including the coveted FASA Franchisor of the Year award, twice!

Q: What prompted you to choose the franchise route for expansion?
A: Before I answer this, and any other questions you might have, let me make one thing clear. Although I have served on FASA’s Exco for several years, currently as its chairman, my answers will focus on the way we do things at the OBC Group. I do believe, however, that the underlying principles apply to any franchise.

Although the OBC Group owns and operates a good number of OBC Chicken and Meat stores, we drive growth through franchising. We do so because experience has taught us that the combination of our brand, our systems, procedures and trade connections and the presence of the owner-operator behind the counter add value beyond the sum of its parts.

Q: Why should an individual consider investing in a franchise?
A: In the free enterprise system there are no guarantees but individuals joining an established franchise network like OBC Chicken and Meat operate their businesses under a respected brand from day one. This shortens the period until break-even is reached. They also have access to the know-how and trade connections we took over 30 years to establish and perfect.

Q: What should a prospective franchisee look out for when evaluating franchise offers?
A: First and foremost, the soundness of the market the business operates in and the sector’s potential for growth. The OBC Group’s target market are LSM segments 3 to 6. We offer our customers access to daily necessities in a welcoming environment and at highly competitive prices.

Secondly, the prospect should look for the franchisor’s willingness to form long-term relationships with franchisees. For example, should the franchisor appear over-eager to sign up a prospect without doing any background checks it should set alarm bells ringing. The OBC Group has a clearly defined process in place that covers everything from first contact to signing the franchise agreement and beyond. This process is documented on our website – www.obcgroup.co.za – for anyone to see.

Q: Do you provide funding to franchisees?
A: No, providing funding is not our function. However, we maintain good relationships with various funding institutions and are able to facilitate introductions if required. However, before entering into serious negotiations with a prospect, we require proof that at least 50% of the total are available in the form of own unencumbered funds. Exceptions may be made if a funding institution is prepared to extend the repayment period beyond the five years commercial banks normally insist on.

Q: Are you looking for franchisees?
A: To be honest, every franchisor I know of is looking for quality franchisees and the OBC Group is no exception in this regard. However, for us it’s a matter of quality over quantity. We have absolutely no wish to accept a franchisee into our network unless we are as certain as one can be that this person is likely to succeed. Not only are franchise failures a human tragedy for those affected, they also reflect badly on the brand. We are working hard to avoid this.

Q: Tony da Fonseca, thank you very much for providing these insights. Any final remarks? 
A: Franchises are offered in many different industry sectors and investment ranges vary widely. The SA Franchise Warehouse as well as the FASA website list many of these opportunities. I would recommend that newcomers to franchising cast their net wide at first, then gradually hone in on the opportunity that’s right for them. Above all, don’t allow yourself to be pressurised into signing an agreement and/or paying over monies. Rather, investigate before investing!