Why funding failures sink franchises

Franchise opportunists who don’t do their homework before venturing into this sector will fall horribly short, according to a Standard Bank executive.

“They don’t necessarily do their homework around why they want to get into that particular franchisor or franchisee,” Ethel Nyembe, head of small enterprises at Standard Bank, told Fin24.

“Most of the time, they choose one that they . . . use on a daily basis or they quite like, without understanding what the real . . . factors that they need to consider from finance, how it performs, and talking to other people that are have those franchisees.”

Funding is one of the most important critical of this process.

Nyembe said there were various ways people could get funding for a franchise.

Friends and family

“Many potential franchise owners turn to family and friends for finance,” said Nyembe.

“This is one of the most common forms of financing a business, but should be undertaken with caution.

“Family relationships can be tested and even destroyed if the undertaking does not thrive as planned. Even though franchises have a much higher success rate than start-up SMEs, there is no guarantee that they will prosper.”

She said two factors should be considered when approaching family or friends for loans:

◆ The unstructured nature of family loans can cause future problems. Often, money is lent on the understanding that it will be repaid – with or without interest – but no repayment date is set. This can lead to resentment on the part of the lender and disputes.

◆ If loans are accepted from a number of family members, keeping track of the repayment terms for each could be challenging. It is therefore important that all agreements are put in writing.

A business partner

Finding a business partner to invest in the franchise and take a stake in its future is a viable financing alternative.

“A partner should share your values, passion and determination to make the franchise succeed,” said Nyembe.

“All aspects of the partnership agreement, share allocation and profit sharing should be placed in contractual form, so that future misunderstandings do not occur.”