Is a franchise the right fit for you?
From sectors where franchises are flourishing to initial costs, Nedbank Commercial Banking shares research to help you make an informed decision
The South African franchise sector is by far the largest in Africa — and it continues to flourish. So much so that the Franchising Association of Southern Africa’s (Fasa’s) 2023 South African Franchise Market Survey reveals that its contribution to the country's GDP has grown from 10% to 15% over the past 10 years.
This means there is still room to grow as franchising contributes 25% to 75% of economic output in other developed and developing countries.
So if you want to start a new business, franchising is worth considering. But how do you narrow your choices and select the franchise system that’s the best fit for your passion and skill set?
To franchise or not to franchise?
Deciding on whether to start your own business or become a franchisee depends on many factors, but the most important is your personality.
With a franchise, you can be your own boss while benefiting from a proven product or service. But if needing to make decisions on every detail of a business is important to you and you have difficulty following someone else’s direction, especially when you don’t agree with them, then franchising may not be for you.
Becoming a franchisee of a solid, reliable franchise system offers many advantages over starting your own business
However, becoming a franchisee of a solid, reliable franchise system offers many advantages over starting your own business. Remember that part of what you are investing in when you join a mature franchise system is a proven operation system, making it extremely attractive in the current economic environment. So much so that, according to Fasa research, the number of franchisees has increased 43% in the past five years.
This research also highlights what a stable and robust segment franchising is, with 89% of franchisees reporting that they broke even within the first year of operation, compared to non-franchise businesses that typically take two to three years to break even. This number increased from 69% in 2019 — an extraordinary achievement given the extreme turbulence businesses endured over the period.
Decisions, decisions
One of the first considerations when selecting a franchise system is deciding which sector to buy into. Take a moment to truly consider what you want to spend 40-plus hours per week doing.
You can find franchises in almost any industry but, currently, South African franchisees that are most optimistic about future growth are in automotive products and services; building, office and home services; and business-to-business service categories.
Operators in the real estate and childcare, education and training categories are also optimistic, while those in the dine-in, fast-food and quick-service restaurant categories are less so.
Let’s talk about the money
There are franchises for every budget and costs vary significantly by industry and business model.
Many financial institutions, such as Nedbank Commercial Banking, recognise that franchises are relatively safe business opportunities, so financing is readily available
As a guide, Fasa's 2023 South African Franchise Market Survey revealed that there is a correlation between the initial price paid (usually listed as the franchise fee and cost of equipment) and the size of the outlet, with small outlets costing an average of about R500,000 and very large outlets costing in the region of R650,000.
In addition, Fasa's research suggests that average working capital costs are currently about R750,000 for a retail franchise, while an automotive product and service outlet requires about R400,000.
Fortunately, many financial institutions, such as Nedbank Commercial Banking, recognise that franchises are relatively safe business opportunities, so financing is readily available.
Go deeper
By now you should have a clearer idea of the type of business that interests you and how much you have available to invest. The next step is to research potential franchises within those parameters.
Your first source of information on a franchise company will be the company itself. It will typically provide you with material such as franchise brochures, links to franchisee testimonials and data on the industry in general. It's strongly advised that you delve deeper by doing your own research on their reputation and, importantly, speaking to several franchisees invested in the same system.
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The Fasa survey underscores the resilience of the South African franchising industry, with 53% of franchisees having been in business for more than 10 years and 80% owning more than one franchised outlet of the same brand. When one looks forward, their business confidence levels are higher than the broader economy, with 98% of franchisers and 88% of franchisees optimistic that turnover will grow over the next 12 months.
Franchising certainly offers a safer way of getting into business and becoming financially independent. The value that a recognised brand brings and the support that an established franchiser offers are significant, as is the improved access to finance. By doing your homework thoroughly upfront, you’ll be taking the first step to setting yourself up for success.
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• About the author: Karen Keylock is National Retail Services manager at Nedbank Commercial Banking.
This article was sponsored by Nedbank.