Although we are currently in the middle of challenging times from an economic perspective, there may still be entrepreneurs out there who are looking for business opportunities.
For many, buying into a franchise may seem like an attractive option but, as with any business decision, it’s important to know what to consider before making such a big commitment.
In this article, we discuss what you should take into consideration when purchasing a franchise.
A franchise is defined as a method of distributing services or products that a franchisor has developed and implemented. The franchisor establishes the brand’s trademark and business system and then sells this intellectual property to a franchisee.
The franchisee pays a royalty and an initial fee to purchase rights to do business under the franchisor’s name and business system.
Franchise agreements are legally binding contracts that cover protection of personal information, intellectual property, consumer rights, restraints of trade and trademarks.
It is extremely important for franchisees to understand the implications of all the legal clauses in the franchise agreement. Understanding the legalities of the contract will ensure that the franchise will be as profitable as it can be.
When looking at the franchise agreement, it should be both fair and mutually beneficial for both parties to the contact (the franchisee and franchisor).
Furthermore, the franchisee should seek sound legal advice before signing contracts with the franchisor, employees, and suppliers.
Adequate training plays a fundamental role in the franchise’s success and it’s important that enough emphasis is placed on this stage of the business.
Initial training as well as ongoing upskilling of the franchisee must be facilitated by the franchisor. Such training usually covers theoretical classroom type training as well as practical “on the job” training.
In addition, compliance matters such as occupational health and safety are also covered during training.
Store set-up costs, joining fees and ongoing fees must be paid by the franchise owner. Ongoing fees include marketing fees, royalty fees and often a volume-based fee.
Because the lease of a premises will increase annually, it’s important that the franchisee negotiates a low base rental when taking on a premise.
In addition, monthly operational costs include equipment repair and maintenance, vehicle hire, staffing, electricity, and insurance to mention just a few.
Staying on top of all these costs is the responsibility of the franchisee and is essential for the profitability of the business.
Franchise owners have an obligation to facilitate, participate in and assist with local marketing for their stores. This is in addition to the national marketing fund.
Franchisees need to understand the importance of their role in raising public awareness of their stores which ultimately results in the growth and success of their store.
To avoid territorial conflict, it’s important for franchisors to have a thoughtful and strategic approach when setting up new branches.
This is usually done by allocating a specific radius within which franchisees can trade and this will be clearly stipulated in the franchise agreement.
Trade territory depends on numerous factors such as brand rules and demographic density and this franchisee would have exclusivity within that area or first right of refusal if a new store applies to open in the same area.
Because disputes can arise if franchises are too close to each other, it’s important that this part of the franchise agreement is clearly understood by all parties.
Buying a franchise in South Africa is a big financial step and it is therefore crucial to understand the legalities of a franchise and the financial implications that comes with this decision.
Our financial advisors can help you navigate the ins and outs of buying a franchise in South Africa, along with additional financial advice to make sure your business venture is profitable.
Are you thinking about buying a franchise? Feel free to contact our financial advisors in Johannesburg for more information on how we can help you make wise business and financial decisions.
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