Not for the faint hearted, but potentially extremely rewarding, Alec Hogg finds out what it takes from a financier (FNB), a franchisor (Sorbet) and the association set up to guide franchising principles in South Africa (FASA). A fascinating insight into what it takes, what it costs and where to go for help. – CP
ALEC HOGG: The theme across our shows this week: weâre looking at the rise of the small business sector. If youâre in small business, one relatively low risk area to get involved in is franchising. The franchise industry is said to be an effective contributor to economic growth and development in South Africa. Joining us to give us some greater insight into the industry and maybe some practical tips if youâre keen on getting involved there, is MornĂ© Cronje whoâs the Head of FNB Franchise. Heâs on the line from, I suppose, Bank City down in the middle of Johannesburg. In the studio, we have Ian Jacobsberg who is the Chairman of the Franchise Association of South Africa and Ian Fuhr, whoâs Founder and CEO of an operation where you can go and get franchised, which is Sorbet.
IAN FUHR: Sorbet. Thatâs right. Itâs just like the ice cream, but itâs a beauty salon.
ALEC HOGG: Is it the only franchise you have?
IAN FUHR: Yes.
ALEC HOGG: Why this one?
IAN FUHR: Why this one? In terms of beauty, I can tell you why. I was lying on a massage table one day and the beauty therapist said to me âwhy donât you look into the beauty industryâ. I had just sold my previous business to EDCON. I was in the retail business and it seemed like a good idea. I just couldnât quite connect my face with the beauty industry but nevertheless, we decided to look into it and we found there was an opportunity. It was a very fragmented industry. There wasnât really a branded chain of any kind. We started buying up a couple of independent stores, learned the business, and launched the Sorbet brand in 2005.
ALEC HOGG: What was her name?
IAN FUHR: It was Liz Goldberg.
ALEC HOGG: Liz Goldberg â your inspiration.
IAN FUHR: My inspiration.
ALEC HOGG: Did you bring her into the business?
IAN FUHR: Yes. In fact, she was the person who started it with me but unfortunately, because of her home pressures and children etcetera, she wasnât able to continue but she certainly inspired the brand and the start of the whole process.
ALEC HOGG: Itâs an interesting name.
IAN FUHR: Sorbet. Yes, itâs fresh. Itâs tantalising. Itâs fun. Itâs funky. Itâs colourful. We tried to do something that completely differentiated ourselves as a beauty salon business from the norm out there. One of those things was the branding of the business and the whole look and feel of the beauty salons.
ALEC HOGG: Did you structure it from the outset, to be a franchise?
IAN FUHR: Yes, we hoped it would be and we went for some consulting in franchising to learn it, because Iâd never been involved in franchising before. All my other businesses had just been normal. Iâd never been a franchisor or any kind. We went to somebody, called Franchise Directions. They helped us with the concept but it took us 22 company-owned stores before we had the credibility and the brand was sufficient established, to be able to go out there and franchise. I think the important thing there (quickly) is that you have to make sure that the business is viable for both the franchisor as well as the franchisee, and the model had to be right. It took us 22 stores to get that right and once we did, it was fine.
ALEC HOGG: Ian Jacobserg, how many members of the Franchise Association have a similar story to Ianâs in that they began it with the intention of being able to franchise their idea?
IAN JACOBSBERG: Well, not everybody starts with the idea of franchising. Many people do, but franchising becomes an option when youâve expanded to a certain level. As the Franchise Association⊠People in the franchise industry generally regard/take the view that one shouldnât start with the intention of franchising. One should start a business, make it successful, develop your formula, and then, when youâve gotten it to a stage where itâs ready to expand; franchising may be the right way to expand it.
ALEC HOGG: Once youâve gotten to 22 company-owned stores⊠That sounds like quite a serious investment.
IAN FUHR: It was a big investment. It was a much bigger investment than I had planned. You have to build the credibility of the brand, so we kept reinvesting in the brand. Until such time as you have that credibility, itâs just not going to happen. We tried to franchise, but nobody was interested. Now we have 110 stores of which, 104 are franchised.
ALEC HOGG: So when are you listing?
IAN FUHR: Iâm scared of that.
ALEC HOGG: Good for you. Stay away from it. NoâŠsorry. Donât stay away from it. Weâre sitting in the JSE today. MornĂ© Cronje, coming from your side, you know Ian Fuhrâs story, of course. What do you guys look for at the bank before youâd be prepared to fund a potential franchisee?
MORNEY CRONJE: Good afternoon, guys. Just latching on to what Ian was saying, I think the word âcredibilityâ is extremely important. From the bankâs side, we see too many guys â and I donât simply want to call it âfly by nightsâ – people who have an idea and want to franchise an idea. Franchising is not about that. Itâs about taking a sustainable model, approaching the bank, and growing the brand. Iâm not saying that 22 is the way you need to go but unfortunately, in many cases it takes a lot of hard work and the bank does look at credibility and the sustainability from the franchisorâs side.
ALEC HOGG: Just be practical. What do you mean by that? If I came to you and I wanted to start a Wimpy, and Famous Brands were prepared to let me have a good site, Iâm sure you would support me. Where do you draw the line, though?
MORNEY CRONJE: I think itâs important to do your homework. Too often, we see people who venture into business, not doing their homework, taking for granted whatâs been told to them, and ultimately, lose a lot of money. I think Ian will also vouch for when I say you need to do your homework. Plan. Make sure that everything you do, you do with the proper planning. We would obviously look at the person behind the venture and then make sure that whomever is involved with that person or his management team, can build a good profitable and sustainable business.
ALEC HOGG: How much equity does the entrepreneur have to put in and how much debt will you put in?
MORNEY CRONJE: Look, it depends from brand to brand. Currently, the norm in the industry is about 50 percent. We call it onus-unencumbered cash that needs to be put into the business. I wonât say itâs easy, but itâs a nicer way of the bank to become involved with funding entrepreneurs, to say that youâve already put in 50 percent onus contribution so the bank can fund the difference. It shows a hell of a lot of commitment that goes into this business.
ALEC HOGG: You must have some pretty wealthy guys in your association. I was talking to a friend over the weekend who was telling me about KFC and how they print money, and how one guy owns 24 stores so if you get into a good franchise early on Ian, it can be a pot of gold.
IAN JACOBSBERG: It can be. Different franchise companies have different policies. KFC have that model where they will give a particular person a region and allow him to open as many stores as would be feasible for the region. Other franchises prefer owner-managed businesses, so theyâll be lessâŠ
ALEC HOGG: They would only want one.
IAN JACOBSBERG: They would want the owner to devote his attention to that outlet.
ALEC HOGG: So what about Sorbet?
IAN FUHR: We have a similar type of thing. We prefer the owner to be involved. In fact, when we sold the 22 company-owned stores: every time we sold one to a franchisee, the turnover would improve on average, by about 25 percent and it was a no-brainer for us. We had to sell everything and just become a pure franchisor. We didnât want to own company stores.
ALEC HOGG: Thatâs interesting. The managers therefore learned â almost on-the-job training â in company stores and then bought the stores from you.
IAN FUHR: No. The managers didnât buy. External franchisees would come and buy the store.
ALEC HOGG: What happened to the manager?
IAN FUHR: They stay on.
ALEC HOGG: As a manager?
IAN JACOBSBERG: They stayed on as a receptionist, because itâs more of a receptionistâs function than a managerial function. Itâs the front desk/front-of-house operator we work with, but once the franchisees are in and theyâre committed, you can see a remarkable difference in the performance of the business.
ALEC HOGG: Is that a common experience?
IAN JACOBSBERG: I think it is. Many companies do have this âowner/managementâ policy, as Ian just said.
ALEC HOGG: But these arenât owner/managers. These are other franchisees coming in.
IAN JACOBSBERG: When I say owner/manager, I mean owner-run businesses.
IAN FUHR: So the franchisee runs the business as opposed to a manager running the business.
IAN JACOBSBERG: He works in the business so that he can actually, oversee the business. Heâs personally involved. Heâs not an âat armâs lengthâ investor in the business.
ALEC HOGG: Youâre a lawyer. What problems do you have legally, with rogue franchisees? In other words, guys who would come in there and screw the place up.
IAN JACOBSBERG: Well, the problems that franchisors usually experience are twofold, both of which I think, are probably attributable to bad management. The first one is failure to maintain standards. The essence of a franchise is the uniformity and compliance with the standards.
ALEC HOGG: But thatâs not the question. The question is how often does this happen? Youâre just telling me what I asked you now. How often does it happen?
IAN JACOBSBERG: Okay, Iâm sorry. Itâs difficult. Because Iâm a lawyer, I generally see the problems so if you ask me, Iâll say it happens nine times out of ten because thatâs when my clients will come to me. I think you should ask a franchisor. One of the large franchisors in the country once told me they have problems with about five percent of their franchisees.
ALEC HOGG: Okay. Well, then the selection criteria must be pretty good.
IAN FUHR: It becomes very important. We havenât had a single closure yet in our business, so weâre quite proud of that record.
ALEC HOGG: What about a company, called Dream Nails?  It listed on the JSE. It was a total disaster. It went into business rescue. It had many stores in the beauty business, too.
IAN FUHR: I donât want to comment about my competitors but yes, itâs a different operation altogether. Weâve been very selective and very careful with our selection of our franchisees. In addition, we have a very strong culture of service and people as opposed to profits and rewards. We believe that you come to work to serve, not to make money and if you serve really well youâll make lots of money.
ALEC HOGG: Thatâs the essence of business. MornĂ©, from your perspective, do you rate different franchisors? Do you say âwell, if they go to Ian Jacobsbergâs firm because thereâs only a five percent dropout rate, youâd be more inclined to give them fundingâ and somebody else, maybe not so?
IAN JACOBSBERG: Yes, definitely. I just want to add on to the previous conversation and say franchising is definitely an active investment. If you think youâre going to invest into business and youâre not going to be actively involved, rather stay away because franchising is 24/7, seven days per week. Itâs an investment. Talking about franchisorsâŠyes, we do. We have a grading system that we use at FNB. The most important thing is that itâs a tripartite between the bank, the franchisor, and the franchisee. We act on behalf of the franchisee and unfortunately, in many cases, people go into the business and they lose money. Weâre saying that if we put you into business, this must be a sustainable business and for you to be successful, it needs to be sustainable franchisor because thatâs franchising.
If the franchisor canât provide a service to you (the franchisee) then you wonât be able to keep your doors open.
ALEC HOGG: Iâm sorry. We are running out of time. Many people are listening to this MornĂ© and thinking âokay, thanks. I understand nowâ but Iâd like to know from each of you, very briefly in 30 seconds. How do you pick a good or a bad franchise? MornĂ©, do you want to kick that off?
MORNEY CRONJE: Yes, let me kick it off. I would say, start your investigation. Visit different brands. Visit franchisees in store and ask them one important question. If you had the opportunity, would you buy this store again? If the answer is yes, ask âwhat are the success factors that made you so positive about this businessâ.
ALEC HOGG: Brilliant.
IAN JACOBSBERG: MornĂ© has pretty much summed it up, and I would look at the franchise. Every franchisor is required to provide a disclosure document and one must do that due diligence. Look at what is disclosed. Check out that information. Donât accept it at face value.
IAN FUHR: I think weâve been quite lucky, because I think that 99 percent of our franchisees were customers of ours before they became franchisees, so firstly, theyâre virtually all women. In addition, I think itâs the passion. We look for passion. If someone loves the brand and is passionate about the brand, thatâs 80 percent. We can always teach the rest of it.
ALEC HOGG: You havenât had a blowout yet.
IAN FUHR: Not yet.
ALEC HOGG: Nobodyâs gone bung.
IAN FUHR: No, not yet.
ALEC HOGG: And what does it cost?
IAN FUHR: Itâs about R1.2m total cash investment.
ALEC HOGG: And your likely returnsâŠ
IAN FUHR: I think you can make your money back within about two to three years.
ALEC HOGG: Very nice, indeed.
