Assessing Franchise Opportunities
Building your business into an asset of value may include expanding through franchise opportunities. This week, on The Money Show with Bruce Whitfield, we examined the key elements of what you should consider when assessing franchise opportunities:
It’s No Business in a Box
The idea of a franchise is that someone with a proven business concept creates a system that enables them to replicate it and sell the model to multiple individuals. But franchise opportunities aren’t that simple, and things can go wrong.
Franchisee and Franchisor
During the show, we chatted with a would-be franchisor, Itumeleng Mpatlanyana of Nkukhu-Box, and a would-be franchisee, Alicia Steyn, to discuss the ramifications of a franchise agreement gone wrong. Nkukhu-Box is a grilled chicken fast-food franchise chain that provides each franchisee with a stand-alone store, created out of a shipping container. At the time of writing, there are 8 operational Nkukhu-Box stores, with another 10 in the pipeline.
The Nkukhu-Box Conundrum
Alicia Steyn paid over her full franchise amount to the team in October 2016. The Nkukhu-Box team assured her that it takes just 8 weeks for a store to become operational, but a year later, Alicia does not have an operational store. Numerous delays occurred, several rounds of communication went unanswered and, finally, Alicia began to pursue legal action, to recoup the money she had spent on the franchise. Nkukhu-Box’s contractor, who was responsible for store construction had, during that time, unfortunately absconded after being paid, and the stores were not being built. Since then, Nkukhu-Box has also begun pursuing legal action against their contractor, so that they may recoup their costs. Another contractor was since secured, and construction on Alicia’s store had begun, just as Alicia began instituting legal action against Nkukhu-Box and trying to cancel the franchise agreement. Since then, the store – located in Soshanguve – has become operational, with Nkukhu-Box running it through their Head Office. Alicia has requested a share of the profits until Nkukhu-Box is able to pay her back. Nkukhu-Box did offer Alicia a settlement offer, but Alicia has – so far - refused it.
Advice for the Franchisor
Nkukhu-Box’s mission to set up a franchise chain as quickly as possible, isn’t the best way to do things and seems over-ambitious. When building towards a franchise, it’s best to begin on your own: build, own, and operate a single store or branch, for two to three years. Thereafter, your second and third store should also be owned and run by you, so that you have at least two to three owner-managed stores, long before you begin offering franchise opportunities to multiple people. And, when the time comes to build your fourth franchise, bring in a 50/50 partner so you can test your partnership capabilities and the concept of offering franchise opportunities through your business. The fifth store should be a partnership too, and by then, you should have well-tested systems. At the sixth store – that’s when you can start offering stand-alone franchise opportunities.
Significantly too, a lack of communication never ends well for anyone in business. When there is a crisis in any business relationship, communicate immediately, definitively, and speak to the remedy that you are going to implement. When things go right, trickle information and let people be ecstatic over it.
Advice for the Franchisee
Never believe what the franchisor tells you – the word ‘franchise’ is filled with promise, and the concept of a ‘business in a box’ never works out to be that simple. If you’re interested in pursuing a franchise opportunity, first ask these questions:
- Have you, the franchisor, done this before?
- How many operational stores/branches/franchises, do you already have?
- Independently, visit those stores and speak to the franchisees who are running them. Ask about their experiences, and find out more about the realities of owning this franchise.
Advice for the Would-Be Franchisee
Investing in a franchise can be a great way to exit corporate life, and helps if you have little on-the-ground business experience. Learning more about the supply, operations, and demand cycles of a business is a little easier with the backing of a franchisor. But, if you are considering franchise opportunities, regard your franchise as a start-up enterprise, and be rigorous in your research.
At Aurik, we help business owners like you discover and investigate new growth possibilities - including franchise opportunities - and help you build your business into an asset of value.