How much it costs to open a top franchise in South Africa – and how much you can earn

The Franchise Association of South Africa (FASA) has released its latest franchise survey for 2018.

Despite a challenging year, the survey found that the franchising sector continues to show growth and resilience – with an estimated turnover of R721 billion, equivalent to 15.7% of the total South African GDP.

According to the report, the number of franchise systems has risen to 865 from 843 in the last year continuing the growth trajectory with a total of 45,011 outlets, most of which are owned by the franchisees (80%).

The net number of outlets that were signed up in the last year is 2,602 – which is the sum of 3,181 stores opened, compared to 579 that were closed.

According to Vera Valasis, FASA’s executive director, the data shows that the sector is carefully and cautiously navigating the economic storms to safe-guard their businesses, supporting their franchisees whilst trying to grow their brand and contribute to the country’s GDP.

“It is testament to the entrepreneurial strength of the franchising sector that – in the face of increased unemployment to 27.2% in the second quarter of 2018 and with job losses of -35,000 in the formal sector and -73,000 in the informal sector – there has been an increase in the total number of people employed in the franchise system – from 343,319 to 369,573,” she said.

Below you can find a complete breakdown of South Africa’s franchise sector – including costs, challenges and turnover for the average South African franchise owner.

The following figures are not representative of the exact franchise make-up in South Africa but should provide a clear idea of popularity, size and pricing. Click on images to enlarge.

Performance of franchisees

• 40% of the franchisees interviewed were not able or prepared to give the annual turnover of their business. Among those who did give a figure, there was no significant difference from last year’s median (R1,733,333 vs. R1,928,571).
• Franchisees remain optimistic about the future of their businesses, with 78% expecting to see growth in the coming year.
• The median nett profit for the last financial year was given as 10.4% (9.5%).
• Within the first year of operations, it is expected that 47% (46%) of new franchises will break even.
• The results from this survey show that 36% of franchisees have been in business for more than 10 years and 67% for more than 5 years. The average number of years in business has remained consistent at 10 years.

• Initial working capital

  • The median initial working capital required is R263,158 (R397,727). 45% of the sample were unable to give this number.
  • Ownership of more than one franchised business rests at 76% (79%) of the franchisees interviewed, with the majority owning the same brand of franchise. The average number of same brand outlets owned is 2.1.
  • 7% of franchisees own an outlet of a different brand.
  • The majority of these franchised businesses are wholly owned by white business people (80% vs 86% a year ago).
  • 16% of the businesses are wholly owned by black business people and a further 4% are partly owned. This is a significant improvement in the last year (13% and 1%).
  • Franchisees experience five main challenges, i.e. the poor economy, creating good customer relationships, offering consistent good service, finding the right staff and growing the customer base.

  • Location and property fees

    • Shopping centres/malls (41%) and high streets (25%) remain the most popular positions in which franchised businesses are located. The number of businesses positioned in high streets has decreased substantially, back to 2016 levels.
    • Just on a third of the franchisees interviewed claimed to own the property on which their business is situated and an additional one in three did not know or refused to give the amount of the upfront deposit paid. The balance of the franchisees interviewed claimed that they paid an average upfront deposit of R60,669 or 2.4 months rental.
    • Other than those who owned their own premises or were not able to give an amount, the remaining franchisees put forward an average rental per square foot and an average annual percentage escalation of rentals somewhat higher than a year ago (R238 vs R167 and 8.9% vs 8.5%).
    • Lack of knowledge about the ideal rent to turnover as a percentage of sales and the difference between sales growth and the escalation of rate of rental was high (between 75% and 82%). These percentages were estimated to be 13.5% and 12.6% respectively by those franchisees who were able to give an answer.
    • The size of the business premises ranged from less than 100 square metre to over 1,000 square metres, averaging out at 348 square metres.

    • Financial and banking considerations

      • Approximately one in four franchisees make in excess of 100 payments and/or collections on a monthly basis to and from the franchise head office and to and from the franchise outlet.
      • Three in four franchisees have their businesses insured against theft and fire (95% each), and to a slightly lesser extent against public and employer’s liability (78% and 77% respectively). This insurance has been reviewed within the last year by 58% of those who have short term insurance.
      • A small but significant increase is evident in the use of FNB for business purposes (32% to 37%). As the primary business bank, the choice of ABSA/Barclays has dropped by 5% (28% to 23%). This decline is also evident the opinion of ABSA/Barclays as the bank considered best for franchisees (25% to 20%).
      • The use of FNB as the main personal bank has also grown significantly (32% to 37%).

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        Source:

      • BusinessTech