What I learnt as a franchisee

We’ve all had dreams of having a little business on the side. What a great idea to earn a little bit of extra income. Open a shop, have it run by some staff and a manager, and you simply enjoy the fruits of the business by depositing an extra R20 000 profit into your bank account at the end of every month.

Even easier, buy a franchise and all the brain work is already done. It’s a turnkey solution. As long as you have the initial capital to outlay, everything is done for you. Like magic, a month or so later you have shop-fitted store and you’re ready for business.

I’ve learnt the hard way that there is no such thing as an easy supplementary income when it comes to owning a franchise. And the reason is simple… it doesn’t run by itself, you generally have to be there. Why you may ask? Surely if you have a good manager running the store it should all be smooth sailing? That’s what I thought. Don’t get me wrong, you may be one of the lucky franchisees who is able to visit your store once a week and is getting a healthy return on investment. I don’t think it’s the norm though.

While taking a break from radio I opened a frozen yoghurt store. My intention was never to be there full time as I was still running around every day doing TV shoots and radio voice overs. My plan was to have it running on the side and earning a bit of extra money. The reality with my main line of business is that I sell my time and you can never become truly wealthy by selling YOUR OWN time. You need to sell OTHER peoples’ time without you doing all the man hours (hence, having staff working for me so that I can still be generating a profit while I’m lying on the beach in Mauritius). 

The hard lesson I learnt is that you NEED to be hand-on with your business. You are the only one that cares about revenue and expenses. I’m generalizing, but your staff don’t really care about your business, especially if you can only afford a basic wage. If you are not there, customer service goes out the window and so does turnover. My business partner and I have managed to sell our store to someone who IS prepared to be there everyday, to give the store, the staff and the customers the attention that’s needed and he has already made a difference to the bottom line.

I’ve never been in retail before and I learnt some valuable lessons, which I thought I would share with you in case you are thinking about having a “little shop on the side”:

Lesson #1: The lease is a killer.

The landlord wants to make money. If you’re a large brand where they know they’re going to score, the landlord might base your lease on a percentage of turnover. If you’re a small store, they’ll probably charge you a fixed amount per month (with an 8% or 9% escalation per year). It’s fine if you’ve done your maths and are achieving your projected turnover figures. BUT, when the feet are not coming through the door, you can cut down on staff and possibly squeeze down your cost of sales, but you STILL have to pay the fixed amount for rent. And you’re tied into that lease for 3, 4 or 5 years. If you can’t sell your business you’re in big trouble.

Lesson #2: Staff issues.

There’s always an issue. Sometimes it’s something serious like stock or money theft. Other times it’s just an employee with attitude. It’s okay dealing with it if you are making a nice profit, but if your business is not doing well and you still have to deal with staff issues it’s a headache that just won’t go away. 

If your manager is sick, who is opening your store? Often it lands up being you, which is an issue if you have another full time job (you have to do it or face getting fined by the landlord for not opening on time).

Lesson #3: Do your homework on the franchisor.

Are they registered with the national franchisor board? If not, ask them why. Even better, insist on speaking to fellow franchisees to hear what THEY say about the franchisor. And don’t just rely on the 3 names the franchisor gives you. Insist on getting the full list of franchisees and YOU decide who to call so you know they’re not just giving you the ones that will give you a good report. 

What are the franchise fees (quite often signing up is R100 000 or more and then a monthly fee)? What are their stipulations for when you want to sell the business?

Lesson #4:  What are your profit margins?

What is the cost of sales (the cost of the product to you before you can sell it on to the customer)? Once again, get this figure from fellow franchisees, not the franchisor (franchisors often say it's around 30%, but in reality it's usually 10% higher). The franchisor wants you to pay the R200 000 joining fee, so of course they’re going to say (and somehow justify) that the profit margins are good.

Lesson #5: What are all the other expenses?

Everything makes a difference if you're hoping to net another R10 000 in your bank account every month. Factor in EVERYTHING, even the small costs that all add up, like what is your monthly internet bill? How much will you spend a month on printer cartridges and till paper?

Lesson #6: Do your homework on the landlord.

How long have they been in the property game? Take a walk around the shopping mall and look carefully at the centre maintenance. How do they promote feet though the mall? Speak to other shop owners in the mall about the landlord. Are there gripes or praises? What is your annual escalation percentage on your lease and do you want to sign for 3, 4 or 5 years? 

If the going is good, it’s better to sign a longer lease as you know they won’t just boot you out, but if the going gets tough you could be in deep shit if you are making a loss and you still have years to go on your lease.

So what am I trying to say? 

I am NOT saying don’t buy a franchise. There are many very successful franchisees out there, but if you are looking to have a little shop running ON THE SIDE, think about it VERY carefully. It may be safer and more financially viable to simply invest that same money in unit trusts.

Will I ever buy into a retail franchise again? Not in a million years… even if the lease was just for one.

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