Franchise / Branch Advice please?

[pietpetoors]

I know absolutely nothing about franchising and how it works.
Seems to me like each person can make his own rules.
I need some advice from those with experience.
This is why I want to do it and I also list my concerns and the picture I have how it should work in my case.

I would value all input, advice and criticism, I love critic that is the only way we learn so if you think I am dof please tell me.

Reason:
My business is growing and are becoming a household name in the 4x4 Industry.
I have an online shop and also two walk in shops, one in Cape Town and one in Langebaan.

I get extremely many request from people in Gauteng to open a branch in Gauteng.
Most of my web orders comes from Gauteng.

So opening a branch in Gauteng became a must for me.

My problem is that I am not a people's person. I have people working for me but that is not my idea of fun.
I already have problems managing the staff I have although they are actually wonderful, mostly self efficient staff. They are doing very well, but managing people is not my thing.
So if I look at how I feel about my two existing branches I cannot imagine having my own branch in Gauteng, managed by somebody I have to check up on all the time and sitting down here worrying if they are doing things the way I want it to be done. It will cost me a fortune flying up and down managing the shop.

My idea is to have a shop there which is run by somebody who owns it, thus have a big interest in it. That is why a franchise came to mind.

My problem with franchise:
I have friends who sold their franchises (one in Ocean basket Harties and one in Cattle Baron Langebaan) for the sole reason that the franchise fees were killing them. They felt they have to do all the hard work, take the risk, battle with staff and the franchisor just collected the money.

So I do not want to do that to other people. I feel something like that will discourage my shop owner and make him negative which will reflect negatively on my own brand.

Personally I stay away from any form of leaches. There are for example software companies who will offer you a good software deal but they want to charge you per item you use their system for. So if you work hard and grow your business they want to piggy back on your success and suck you dry. I see a franchise business as the same scenario.

My Idea:
This is where I do not know what is the difference between a franchise and a shop I sell to somebody and allow him to use my brand.

I want to have the shop opened by somebody who owns it.
Will prefer that the shop owner does his own shop fitting and buy his own equipment (please advice if this is a good way or will I have more control doing it myself)
Part of his purchase will be initial stock to stock his shop.
Sign a contract that he must purchase certain stock only from us and I will sell it to him at maybe cost plus 5%. Reason for such low profit is because we supply both wholesale and retail, if my markup is too high the shop owner will loose out on the wholesale side of the business which currently is my biggest turnover.
Charge him a small monthly license fee, like R5k per month, for the privilege to use our known brand and he will immediately get exposure from the web site.
I also consider letting the Gauteng branch send out parcels from online orders for Gauteng from Gauteng which will mean he will immediately start to get orders based on 4 years of business building from our side.
The R5k/month I will push 100% into advertising.

As I see it, if I make cost plus 5% on the product I supply, it is the same as charging a franchise fee but because we import most of our products directly the shop owner will not get the products for cheaper anywhere in the country so there is at least a great advantage of paying the 5% markup.

My questions:
How do I structure this? Franchise, sell a shop? how do one go about doing this?
Am I too modest in my figures, does it makes business sense? For me it is more about having a shop in Gauteng without having the expenses, staff problems, rent, etc to worry about.
Is my cost plus 5% good?, what does franchisors do? Do they charge their franchise fee plus sell stock/consumables to the franchisee at a profit?

[sterne.law@gmail.com]

You could use a licensing agreement.
In terms of franchising, the fees need not be exorbitant.
The key is the control of brand integrity and overall standards and perceptions.

Franchising was originally a form of financing rather than a business model.
There are also management contracts.
Possibly what you need to consider is if you would do more branches, in Gauteng and other.
If you think your product/market is such that it only needs a shop or two in each region, then a management contract or licencing may make more sense.

[Hannes Botha]

I dunno hey. I see it this way. I would rather charge him a percentage of sales making up a larger amount than R5k, say up to R9k and drop the idea that he has to buy from you.

Why? It won't be long untill reps start showing up at his door with the goods at the same price you are getting it. So it won't be long till he starts resenting you, and think that he can get the product cheaper and make an extra 5% margin. Plus 5% on all cost of sales sounds like an exorbitant amount to me. I own one of the top tyre franchises in the country and we pay R9k a month. Not tied into sales at all though.

If he has to pay you R5k and cost plus 5% on a R800k a month business running at 40% margin means he could be paying almost R30k a month. In my opinion a bit high

[CLIVE-TRIANGLE]

Hi Hannes
All franchises have different rules, different charges and different loyalty programmes. All of your concerns are able to be addressed in a franchise setup.

The requirement to buy from you is basically motivated by two things:
Firstly it is there to increase your buying power which is supposed to lower your cost and that of all the franchisees.
Secondly so that inferior goods do not damage your goodwill.

If neither of those elements are present, then do without it. But from what you have written, it is possibly a factor. Many franchises soften the blow by then offering an annual rebate, but that's about it.

The makeup of the franchise fee, in it's many guises, is largely dependent on what the franchisor is doing for the franchisee.
This often includes advertising, IT systems and services and then obviously branding.

So I think at the outset, before you even consider the many charges and levies that can be used, you need to consider and itemize what it it is you are contributing and then only consider how to recoup it.

Most successful franchisees also bitch about the franchisor's fees, but ultimately they stay in the franchise because they get value. The unsuccessful ones usually bail in the first 12 months and the reason is almost always that their fees are far in excess of the perceived benefit.

[sterne.law@gmail.com]

Ditto Clive.
The monthly fee is relevant to what the franchisee gets, value for money.
Some guys cap it or set at rates.
The first question Oscar what vehicle to use, then the costing can be done

[wynn]

A franchise is a more complicated license, also they are supposed to offer research about foot traffic, cost to sales ratio, shopfitting etc.
In your case that is not what you need to do so I would just tie him up to a license agreement where he trades off his own bat under your name (Piet Petoors Pretoria?) and pays you a net fee every month for the privilege, stock that is hard to get or that offers better rebates if purchased bulk can go through you but everything else is for him to source.
Make sure there is a very strict no trading in the same market for X years clause, in case he bails after learning the tricks of the trade.

[pietpetoors]

Thank you.
The idea of the shop buying whatever he wants where ever he wants can or cannot be good.

1. It cannot be good because he must have the same in his shop as what we have on the web site.
2. It can be good because he can explorer products we not currently selling because we are not aware of their potential and we can add them to the range if we see it is a good product.

Unless he must sell at least everything that is on our web site and if he wants to add other products he can do so, but those products will not be added to the web site unless all branches are selling the same product.

[mosescapetown]

Hi Piet.

I know I am new to this forum but please allow me a small opinion.

Without giving away all our trade secrets(if you can call it that) there is a way for you to have a franchise type setup without the restraints of a real franchise.

The new company Law actually allows you to control branches of your company as subsidiary companies by provisions in the MOI's of each company. In this way you can sell branches(separate companies) to new owners and control the branding and other requirements through the MOI.

I personally believe that the new companies act might bring a definite change in how business views franchising in the future.

My 2 cent