In some shape or form, this has happened to you. You’re in a city that isn’t home, sitting in a restaurant, coffee shop or walking through a great store. You’re loving the service and the vibe, and then it hits you: this place would do so well at home! “Hey!” you say to whoever you’re with, “we should open a franchise!”
Sometimes the thought stops with a couple of “nice idea!”-type comments and a few good-humoured smiles. Sometimes it translates into late night googling and a few jotted notes. But occasionally those thoughts become meetings, market research, fund-raising and a trip to head office. For Joanna Meiseles, a fruitless search for a hairdresser that catered to her children became the latter. Now, as the owner of Snip-its Salon franchise, she offers some insights around sussing out a good franchise opportunity. We’ve taken some of her advice and coupled it with our own.
As an entrepreneur or business owner, it’s a good idea to rope in a finance expert to help you work through the maths upfront. For cost reasons, we recommend bringing on a part time financial director – someone with the strategic understanding you need who doesn’t come coupled with a full time salary. These thoughts are given with that assumption in mind.
- Determine the (estimated) return on investment. Upfront, your part time financial director will need to get a feel for the anticipated ROI. “This is the key factor — without a proven and strong economic model, there is no point in going any further,” says Meiseles. It differs from one industry to the next, but generally, business owners will be looking for a 15% ROI. If you’re outlaying R500 000, that means you should expect to receive at least R75 000 in profits by the end of the second or third year. “Also, keep in mind that a franchisee has to pay royalties, so that [money] is harder to come by for a franchisee than it is for a non-franchised business,” says Meiseles. Your franchisor will have historical figures to offer, but it’s a good idea to run your own evaluations.
- Make sure the base model has been tested. Advice website for franchise owners, FranChoice.com, makes this point: “Before New York Broadway producers bring a production on the road, they’ll test it in a few smaller cities to see if the humor or pathos translates well to different audiences. After all, not every town sees life in the same way as New Yorkers. A similar comparison could be made with franchised businesses. A concept that does extremely well in one location may not have the same appeal in a different part of the country.”
Meiseles’s opinion mirrors this. Great success in one unit is not enough to guarantee success in another. She recommends that franchisors test the concept in at least three different locations. In every instance, your part time financial director should estimate ROI, margins and how long they think the company will take to start bringing in a profit.
- Have a realistic idea of your access to capital. Your head office will provide you with a certain leg-up to get the ball rolling. But just because your start up is somewhat less capital-intensive than others, don’t underestimate the amount of money you’ll need. Have your part time financial director determine approximate costs for legal fees, marketing fees and setting up inventory and computer systems. Then, enlist your part time financial director in making a strong case (through a business plan and investor marketing material) to raise the capital needed.
- Explore what it will mean to be in a 10-year relationship with your franchisor. “Franchising is really all about relationships, and most franchise agreements are 10 years in length, so you should be sure you are committed to long-term relationships — both good and bad,” says Meiseles. As a business owner, start out by making sure you have things working well internally. The part time financial director who gives you advice upfront should ultimately be the person who sticks with you for the duration of the agreement, and whose insight grows along with the franchise. Do you work together well enough for this to be the case? After this, consider your collective relationship with the franchisor. Not only will you need the resolve to stay steady in that relationship despite all difficulties, your part time financial director will need to be able to do the same.
If you’re looking for a part time financial director who can help you make the right call about franchising options and establish relationships that will last throughout the period, contact The Finance Team. Our finance executives can assist you on a part-time, interim or ongoing basis depending on your needs.