Erasibo Consulting

Here’s whats being said on twitter about South African media freedom and the ANC’s  moves to “deter” the media.
http://search.twitter.com/search.atom?q=%23zamediafreedom

Please don’t let them take me to Mpumalanga.

There is mounting evidence that political pressure lay behind the arrest this week of Sunday Times journalist Mzilikazi wa Africa, despite furious denials from police top brass.

http://supportpublicbroadcasting.co.za/

SABC CRISIS DEEPENS – PARLIAMENT MUST INVESTIGATE, BOARD CHAIR MUST RESIGN OR BE REMOVED

6 AUGUST 2010

The SOS Campaign representing trade unions (including Cosatu, Fedusa and Bemawu), NGOs (including Media Monitoring Africa, the Freedom of Expression Institute and Misa-SA), CBOs, industry related bodies (including SASFED), academics and freedom of expression activists notes with dismay the seemingly endless governance problems at the SABC.

From media reports it appears that the Chair of the Board, Dr Ben Ngubane and the CEO, Mr. Solly Mokoetle are again involved in decisions that flout good corporate governance practices and procedures. It appears that the CEO, Mr Solly Mokoetle, without Board approval, has authorised additional bonuses to staff. These discretionary bonuses related to the World Cup are reportedly costing the public broadcaster R4.5m – and this at a time of great financial strain for the broadcaster. Further, there seems to be some controversy around whether these payments were in fact in lieu of overtime.

The interim Board of the SABC arranged a R1.47bn government guarantee in 2009 to pay back the SABC’s debts and further to assist with the implementation of a much needed turn-around strategy. The understanding from National Treasury was that the starting point was that all unnecessary spending would be strictly curtailed. So even if the CEO did not require specific Board approval for the World Cup bonuses, the wisdom of the decision must surely be questioned.

The Coalition believes that the ongoing crises at our public broadcaster have become so serious that urgent intervention from Parliament is, sadly, once again required.

We believe the following interventions should be undertaken by the Board:

1)    First, the Board needs to pass a resolution of no-confidence in the Chair for non-compliance with Board procedures and decisions.
2)    Second, the Board needs to pass a resolution to send a formal letter to the Speaker of Parliament requesting the National Assembly to initiate an enquiry into the alleged misconduct of the Chair with a view to removing him from the Board on the grounds of misconduct in terms of the sections 15, and 15A of the Broadcasting Act.

If the Board is effectively paralysed and cannot act in the ways we suggest, then we call upon Parliament to act. Parliament must (as it is legally entitled, indeed required, to do in times of crisis involving the SABC) initiate its own enquiry into what appear to be serious violations of corporate governance processes involving the Chair of the SABC Board. If after due enquiry it is clear that such violations have taken place, then Parliament must act to remove the Chair. Parliament cannot afford to drag out these crises in the same way it did over the crises that plagued the previous SABC Board.

SOS notes that the Board has been in office for the last seven months and yet we have little to show for this.  No new vision for the SABC appears to have been crafted and the much-talked-about turnaround strategy is still not forthcoming.  Further, communication with the general public in terms of its numerous corporate governance breaches and crises has been grudgingly scarce. For the most part the public has been forced to rely on media leaks.

SOS reiterates once again the critical importance of the SABC fostering a culture of transparency and communication. As a public broadcaster, the SABC’s main stakeholder is the public. Hence the SABC needs to ensure that its decision-making and governance processes – and the details of the crises and how they are being handled – are effectively communicated to the nation.

Further, SOS is considering taking up the numerous corporate governance breaches with the Public Protector. It is critical to restore the credibility of the SABC and this may be one important way.

Finally, SOS notes the comments made in today’s Mail & Guardian newspaper that there are further crises around the appointment of the Head of News and that allegedly divisions have arisen in terms of the disciplining of the CEO, Solly Mokoetle. SOS believes that this further confirms the need for the proposals we have outlined above.

For more information please contact:

Kate Skinner – SOS Coordinator – 082-926-6404
William Bird – Executive Director Media Monitoring Africa – 082-887-1370
Siphiwe Segodi – Freedom of Expression Network – 072-655-4177
Matankana Mothapo – Spokesperson Communications Workers Union – 082-759-0900
Hannes du Buisson – President Broadcasting Electronic and Media Workers Union – 082-920-8669
Marc Schwinges – Communications SASFED – 083-901-2000
Ayesha Kadjee – Executive Director FXI – 083-500-7486

“It was noted that South African banks weathered the global financial crisis well, due to a strong regulatory environment and sound risk management practices.”
- Meeting between Minister of Finance and Bank CEO’s 31 May 2010

Small, medium and micro-enterprises (SMMEs) represent an important vehicle to address the challenges of job creation, economic growth and equity in South Africa. Around the world, one finds that SMMEs are playing a critical role in absorbing labour, penetrating new markets and expanding economies in creative and innovative ways.

The availability of finance is important for SMME business development. In South Africa the major banks have for years tried to limit their exposure to previously disadvantaged communities and SMME’s. The public relations spin, which is directed to us by the banks and their communications specialists, simply don’t live up to the spins promises. Banks say they are your “partners”; they are here to help with your “dreams” etc. to the point of nausea.

In my opinion, the apathy shown by the commercial banks towards the SMME sector is surprising, the banks talk a good talk about “development” and “empowerment” but have delivered very little in real terms to South Africans. Recently I interviewed a leading economic analyst to the government of South Africa, who pointed out to me the following perspective: “ there are two sides in South Africa; the banks and their interests and the rest of us”. Here is an excerpt from the Competitions Commission about the Banking Sector from their annual report 2008-2009:

Competition concerns in this sector arose from the fact that concentration was very high in almost all banking product categories with little evidence of rivalry between the four largest banks which accounted for 86% of total deposits and 99.7% of transactions through the payments system. Fees were also high and increasing rapidly with the incidence of costs falling particularly heavily on low-income customers and small businesses. There was also substantial public concern regarding the level of bank charges and other providers of payment services to consumers. The sector is of particular significance as more efficient and competitive financial services would reduce the cost of capital to SMME’s and all consumers. Lower bank charges and fees would also make banking services more affordable to low income earners

Read the National Treasuries: Facilitating the implementation of the Recommendations of the Banking Enquiry Panel report which is available at the National Treasury via this link http://bit.ly/9PQuz1

In researching this article it was very difficult to ascertain exactly what percentage of the major banks loan books are extended to SMME’s. Add to this the fact that the major banks coerce you as an SMME to enter into contracts which gives them all the protection whilst exposes you to all the risk and you start to see the banks for what they really are: profit at all costs.

A South African bank in 2010 is not your partner; it’s a line item for which you need to carefully budget every single month. The courts are filled with examples of what kind of partner’s banks are. You need to realize that when a bank evaluates your business idea what they are actually looking at is not the viability of the business, but whether or not your personal net worth will cover their loan, so that in the event of a recession, crime, malpractice on the part of the bank or even an act of God they will get their money back from you, even if it leaves your family destitute.

Here are some alternative sources of funding that you may want to try out first, before handing over your life to a major bank.

I find that the reason so many SMME’s don’t approach alternative funding partners is because:

• They don’t know what’s out there in the way of alternative funding
• They don’t know how to access and interact with these funds – this is more to do with the maturity of the individual applicant and less to do with the agencies procedures albeit that they are sometimes cumbersome; what did you think borrowing money was going to be easy?
• They prefer approaching the major banks because the marketing of the major outshines the alternative funders marketing and they find the major banks processes to be easier. In affect many people will take the riskier option of a commercial bank simply because the banks process faster by demanding higher risk burdens to be borne by the lender.
• They assume that these alternative funds are only for “blacks” – for the 2008/2009 period Khula Enterprise Finance allocated 52% of its funding to “black” business’s meaning the other 48% went to non black business. These alternate institutions don’t help their cause by not being clear on this message.
• Alternative funders don’t seem to have tailored the products as attractively as the commercial banks have i.e. where commercial banks will have specific products for franchising, financing of private schools, the funding limits are below the market value of viable business ventures such as franchises etc.

I prefer alternative funders to the banks because:

1. they take on more risk,
2. they don’t tie you as heavily to personal sureties (some in fact don’t ask for personal surety at all),
3. they do a an actual due diligence on the business you want to acquire, and
4. if you negotiate your contractual terms correctly you can get them on as backup should your deal go sour – and this is not be underestimated.

The organization listed below in my view are the best alternative funding options that a South African SMME / entrepreneur from a working class or previously disadvantage background has:

How should you go about engaging with these potential funders? Potential funders are an essential element to your business network. Businesses cannot survive in isolation, especially SMME businesses.

Consider the following diagram, it illustrates where the commercial banks fit in servicing the South African market. Identify where you fit and begin an engagement process with the institutions that are targeting you.

There is no secret formula for successfully approaching a funder. There is not guarantee you will get the financing you require.  Your best chance of success with a funder is to firstly know your business and your environment; if you are a going concern you must have stable financial results and you should know how your potential funders would react to your business and its environment.

Your engagement process with funders should not start with the initial loan application. I would suggest following this elementary engagement process

Collate all your information: you will be asked by a funder to submit along with a business plan, financials and application forms, the following:

1. All company registration document
2. Place of residence and operation (typically a municipal account
3. Detailed CV’s on yourself and partners
4. Tax Clearance certificates if you are a going concern and are registered for tax with SARS
5. A detailed business plan with financials and projections – most funders have their own formats
6. Know your industry – collate as much information and interpret it about your industry, what are the drivers of your industry and where do you fit in your industry.

Pre-Application: Send out requests for information packs to the list of potential alternative funders. I would suggest learning as much as you can about the various funders and then selecting who to apply to:

• Ask for a complete profile on their products and services as well as application packs, and
• A detailed explanation  (most do not have these detailed) on the application process including what happens if you are successful and what prejudice will you face if you are rejected.
• Ask for a meeting with an account manager. You need to build personal relationships with these people. Funders receive thousands of requests a year, its best to try to differentiate you as best as possible; start with a handshake
• Enquire about whether or not the funder will take ownership in your business and what the pros and cons of this are.

Application: My best advice to you is to sit down with the funder (actually schedule time with someone) to walk you through the application process and the development of your business plan. This is one of the big differences between commercial banks and the alternate funding agencies; the agencies will assist you develop your business plan more than a commercial bank will.

Securing funding is no mystery. It’s just very difficult. If you speak frankly with knowledgeable account mangers in the lending game they will tell you, that ideally a SMME should start off with out any need for financing, financing can kill a good business idea. You really need to know what you need the money for and be disciplined to follow the application process and if you are lucky to secure the funding (by being pedantic about the detail) you need to be disciplined about how you spend that money, ensuring that you repay the funder.

Our post “Why be the first franchisee” has been published in Your Business magazine (Volume 15 No.1).  Not a bad start to 2010.

This is the presentation delivered by Prof Haroon Bhorat at Parliament earlier this month (should have put it up earlier), he and his collegeaues used the 1995 and 2005 Income and Expenditure Survey reports to give an overview of inequality and poverty over the past ten years in South Africa.

Their research shows that:

• Inequality in South Africa increased in the period 1995-2005.
• Absolute levels of inequality remained high and race as well as gender was still critically associated with poverty.
• Income inequality was rising and was very high by international standards and income inequality between African and white people were driving the overall inequality.
• Since 1995 a disproportionate share of economic growth has gone to the top of the income band and social transfer programmes were a key source of rising incomes at the bottom end of the income band.
• South Africa was entrenching its reputation as a very unequal society.
• Social grant transfer programmes were a key source of rising incomes at the bottom end of the income band
• The international trend showed a declining share of national income across a number of countries.

The question raised by Minister Ebrahim Patel (Minister for Economic Development) was whether the country was seeing market outcomes based on economic activities over the last couple of years, regarding rising inequality, with state interventions that partially mitigated the effect on inequality.

This study when compared against the rest of the data coming out of government’s review of its performance shows us the magnitude of the challenge still facing the country.

This is the fourth article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our other articles which sets our tone.

Continuing on our series of articles on the franchise industry in South Africa, we want to look at the Consumer Protection act and what it’s impact is on the franchise industry?

The Consumer Protection Act is the second major development in favour of consumer protection in recent years. The first being the National credit Act which is designed to improve transparency; prohibit unfair contract terms and practices; and prohibit anti-competitive practices. The Consumer Protection Act is designed to protect consumers from exploitation and unfair practices by unscrupulous businesses, and to empower consumers to make wise purchasing decisions. Together these Acts entrench the protection of consumers as prescribed under the Constitution of the Republic of South Africa.

Rights of Consumers

Under the act, franchisees are regarded as “consumers” and franchisors as “suppliers.” Franchisees are given a number of consumer rights, including the right to equality, privacy, choice, information, disclosure, fair and responsible marketing, honest dealing, fair agreements, fair value, good quality, safety, and supplier accountability. Franchisees are also protected against undue influence or pressure; unfair tactics; and false, misleading, or deceptive representations concerning material facts. This would also apply to the contracting arrangements between franchisor and franchisee.

Franchise Agreements

Under the Act a franchise agreement is defined as an agreement where a franchisor grants to a franchisee for consideration a right to carry on business under a system or marketing plan substantially determined or controlled by the franchisor. In addition, the franchisee’s business is substantially or materially associated with advertising schemes or programs or with the trademarks of the franchisor, or any combination of these that are licensed to the franchises. The agreement must be in writing and signed by at least the franchisee. The Act allows for a cooling of period of 10 business days, wherein a franchisee may cancel a franchise agreement they have signed without incurring any cost

The right to full disclosure is entrenched in the Act. This is in recognition of the number of cases where franchisees had been devastated financially after investing their life savings into franchises that were sold to them on the premise that the franchises would be far more profitable than they ever actually would be. Under the act, franchisors will be required to disclose certain information to prospective franchisees, as provided in regulations to be promulgated by the Department of Trade and Industry.

Monopoly on the Supply of Goods

Currently, franchisees in South Africa have limited protection against unfair practices by franchisors under that country’s Competition Act, particularly in relation to the tying or bundling of unrelated products by a dominant franchisor or when it comes to exclusive dealing. Complaints stemming from these activities are, however, difficult to prove, and the franchisor in question has to be dominant or have market share.

The Act has taken the foregoing prohibitions in South Africa’s Competition Act and applied them regardless of whether the franchisor is dominant. The new law prohibits bundling or tying of products by a franchisor, unless the franchisor can show either (i) that the bundling results in economic benefits for consumers or (ii) that the convenience of bundling outweighs any restriction on consumer choice. Alternatively, the bundled goods or services must be offered separately and at individual prices.

The Act guards the right to consumer choice by generally providing that franchisors must not require, as a supply condition or as a condition of entering into an agreement, that the franchisee purchase goods or services from the franchisor or from any other designated supplier. It is a valid defense to show that products or services that the franchisee was required to purchase are reasonably related to the branded products or services that are the subject of the franchise agreement. It remains to be seen how closely linked to the brand “reasonably related” will need to be to excuse such a requirement by a franchisor. As a result, many franchisors will no longer be able to be the sole supplier of goods and services to a franchisee, unless it can be shown that the products and services are “reasonably related” to the brand.

Franchisors should take care to ensure that products and services essential to the protection of their brand are explicitly listed in their franchise agreements, to reduce any later issues regarding interpretation. In other words, the Act suggests that franchise agreements provide for core and non-core products. Core products or services would be the primary, unique products related to the brand.

With regard to transitional provisions, it appears that the Act will not apply to pre-existing franchise agreements (or transactions) entered into before the general effective date, expected to be October 2010. However it will apply to renewals of contracts. The Act highlights a number of factors relating to fair and honest dealings and unfair unreasonable and unjust contract terms. The Act allows for the cancellation of contracts, whole or part should it be deemed to have contravened these principles as detailed in the Act.

Closing

The Act will have huge implications for the franchise industry. For while it has boomed has also become a place for corrupt, fly by night operations.  The Franchise Association of South Africa has expressed concern with regard to the implication of the Act and the burden it will place on its members. This is a concerning position as the Act can only create credibility for the franchise industry by ensuring that it closes the gap for illegitimate franchisors to operate.

Surely this would be a benefit to FASA, to cleanse the industry of undesirable operators. Franchisors who lack the capacity for adequate, transparent contracting and operations shouldn’t be selling off franchises. Organisations like FASA shouldn’t be accepting these franchisors as members or providing a potential front for their operations.

This is the third article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our other articles which sets our tone.

Commercial banks are part of legitimate business. We trust them with our savings, we store our incomes in them, and we borrow money from them, all the time assuming that the transactions are legitimate and reasonable and regulated to some extent. We rely on them for every aspect of functioning of civilised life-homes, cars, business, school fees and personal events.  We also expect that they will exercise reason in their interactions with us because their survival depends on the patronage of their clients. So their responses to us are based on good credit lending praFFrctices and when banks make errors in planning, governments are hard pressed not to finance their recovery with taxpayer’s money, as in the case of the US recently. Banks are essential to the stability of our economy; citizens and the banks share a common investment in our economic future.

But have banks gotten too big for us. Do they represent something untouchable? So when they repossess homes and cars in a panic about the money that is being lost like a waterfall without following the specified due processes outlined in those contracts is this acceptable under the circumstances or is this just a case of bullying. And what really is their responsibility as the credit provider?

In responding to this question I will share with you our own insightful experience with the banking environment recently, which has been the cause of much debate within our own inner circle.

We took out a loan to finance a franchised restaurant. After the bank evaluated our application they informed us that we were not disadvantaged enough to qualify for any form of BEE preferences (the words used were “not black enough”). This opinion of the banks was nether policy nor constitutionally justifiable. However, we were in love with the business idea, so we didn’t make a scene. We put up 40% of the financing required for the franchised restaurant we wished to buy. The bank confirmed that it had done a due diligence on the restaurant and the franchisor and was extremely happy with the results and would finance the deal.

In fact the franchisor was so highly credible to the bank, that the bank offered them great deals on banking and transacting facilities for their franchisees and they offered the group an approved financing facility for all new franchise restaurant setups. Since we knew what the obligations placed on the bank were by law to thoroughly assess any new deal we felt extremely confident in all the new “benefits” the bank was offering the franchisor.

So when the figures provided to us and the bank by the franchisor turned out to be deliberately exaggerated and show that a fraud was committed by the franchisor so as to ensnare us in the business deal the issue of what exactly is the responsibility of banks in this circumstances was raised by us. The answer apparently is that the banks have no obligation. The bank completed a FICA assessment of the franchisor; their results didn’t cry out any kind of foul – it should have. There was evidence of their foul practice’s aplenty, which at the time was outside of our sphere of access.

Now that the bank is aware that there was a fraud committed by the franchisor does it discontinue giving out loans to new franchisees wishing to purchase restaurants in the same group or does it blacklist the group? No of course it does not.

Granted our matter hasn’t been to trial yet, but we can supply details (irrefutable forensic evidence) to the banks legal department and they can make a judgment about the caliber of clients they want to maintain or their obligation to new investors. If the bank continues to give out loans to unsuspecting buyers wishing to take up opportunities within the same group, would the new franchisees be able to sue the bank for facilitating a fraud since the bank has knowledge that the franchisor is suspected of fraudulent behaviour?

At the very least the bank should consider suspending any new deals pending our case going to trial and being decided on, because should we win our case the franchisor may not be able to operate anymore and new franchisees would be placed at risk of defaulting on their loans, which is a risk to the banks bottom line.

At the very minimum this franchisor has committed FICA fraud? Should the bank not have called in SARS immediately? The bank leverages their risk on personal sureties signed by borrowers – the franchisees, so whatever happens with the business, the bank will get its money one way or the other. But should they? The National Credit Act outlaws irresponsible lending and by this it means that the banks assessment of whether a borrower is suitable for credit has to do with an assessment of the borrower’s ability to pay. If the borrowers ability to pay has everything to do with the business’s capacity to generate a certain profit, and the business was in fact never able to do that as the figures provided were a fake. Is the bank not responsible for irresponsible credit provision?

I’m not suggesting that the banks share responsibility for your business decisions or mine. You go to the bank for financing not buying into your idea. But they do have a role to play in not perpetuating a fraud when they know about it and they do have a job to ensure that there facilitation is not being used for money laundering or other such activities. The new Consumer protection Act certainly talks to the issue of facilitating fraud and specifies the right to have contracts cancelled in this case. What does that mean for a bank that knowingly provides financing to fraudulent franchisors. Can those loans be cancelled and they held responsible for the transaction?

On the cross side asking the banks to take more responsibility will be ensuring that loan facilities become even harder to access and you will pay for this risk in the repayments.

If you are hoping to see your banker as a partner in your business, best check out the development bankers, such as the Industrial Development Corporation or National Empowerment Fund. Since they accept a high percentage of risk they are better at evaluating the risk with you. If the business collapses they lose their cash too. So if you have to go after a franchisor that has defrauded you have a big partner on your side and you are out a considerably less amount of cash.

This is the second article in our series on franchising (especially restaurant franchising). Best to familiarise yourself with our first article which sets our tone.

In this article we look at the rare instance of being the first franchisee. In our move into the franchise game we were approached to be the first franchisee of a new concept of stores for an established restaurant chain – the chain we are currently suing. We turned down that deal these are some of our thoughts on being the “ground breaker”

Starting a business is a tall order for most people and even a scary prospect especially for non-entrepreneurs hence the preference of starting with a proven model where the concept, business plan, and operating system are already put together in a franchise package.

However every franchise system has a first franchisee. The groundbreakers or icebreakers if we may call them, are the people who risk it all in pursuit of success and financial excellence.

And as important as success is to the first franchisee, it’s even more important to the franchise company. Their future growth will depend to a great extent on the validation and results of the first franchisee.

These are just some points to consider regarding getting involved with a startup franchise outfit, or an outfit that are expanding into new untested markets.

• Ground breaker: The first franchisee is comparable to being a first child. Being first means getting all the extra attention that normally comes with the position. The challenging thing is that the first child has to break the ice on every little thing. This makes it much easier for the children that come later, but it’s sometimes a real pain for the first child. They have to effectively train the parents to be reasonable and have realistic expectations, and this is often the same dynamic at play between the franchise company and the first franchisee.

• Acceptance of risk: As a first franchisee, you must be much more accepting of risk than a normal investor. Bold and brave, you should also be the type of person who’s willing to deal with a more fluid situation, where changing and adapting to unforeseen circumstances is a welcome part of business development. The first franchisee is usually a true entrepreneur and, much more so than later franchisees, is a partner with the franchise company in the development of the franchise system.

• Comfortable with uncertainty: It’s essential for both you and the franchise company to understand the unique role the first franchisee plays. The first franchisee is a person who’s comfortable with the uncertainty involved in being the groundbreaker for a system. The good news is that you’re undoubtedly going to receive a great deal of extra support from very senior staff of the franchise company. The bad news is that you’re going to represent a learning environment for the franchise, and you need to be accepting of that role.

• Learn by making some mistakes: Have realistic expectations. No matter how well the franchise prototype operations have performed, it’s going to be different running the first franchise unit. You aren’t going to intuitively understand everything about the business, and both you and the franchisor are going to learn by making some mistakes. There must be a fair amount of open and frank communication about what areas of the business are set in stone, and what areas will involve testing and learning as you build your business.

• Fair deal: The reality is that the franchisor is going to be using you as a learning tool. So both sides need to be reasonable about who should pay what in terms of “tuition” for this schooling. Though the support level given to the first franchisee is typically much more significant than for later franchisees, other value factors, such as the system documentation, are probably not going to be nearly as well defined or developed as they’ll be later. When negotiating the franchise agreement and other financial considerations, you should address these factors. Both you and the franchisor must feel the deal is fair and proper.

The following are the pros and cons of being the first franchisee:

Pros

• Availability of open territories: One advantage is the availability of open territories. The market has to be completely open.Today certain markets are closed and gaining entry into them is some what cumbersome however due diligence in research, realization and utilization of open markets can bring huge success to the franchisee. Give an example. I’m not exactly sure what you mean by an open market

• Financially sound franchisor: A financially sound franchisor committed to growing the franchise, and committed to the franchisees can be invaluable to the franchisee. The franchisor’s commitment has to be unquestionable as the first franchisee would rely on their support more so than later franchisees when systems are in place. (rephrase this- and the absence of such would be a tonic for disaster.  )

• Franchisor participation in risk sharing: Your success as a first franchisee is as crucial to you as to the franchisor because not only will you provide a bench mark of proven systems you will also provide a basis for a successful track record. To this regard the franchisors are likely to shoulder a larger risk in the business and operations than they would with later franchisees.

• Investor participation in risk sharing only a private investor would come on board with an unproven concept: Investors like the Industrial Development Corporation (IDC) who come on board as partners until the loan is repaid provide the much needed security for first franchisees considering the unproven systems and franchisor inexperience in dealing with franchisees and the business expansion itself.

Disadvantages

• No proven systems: You can receive a lot of glory and recognition for your part in advancing the franchise system, but there are certainly trade offs. You won’t have other franchisees to consult with that have already traveled the path before you. You’ll have lots of support and assistance, but the support won’t be tested and proven on others, so mistakes are going to be made. You’ll have to make your decision to get involved with the franchise without the benefit or assurance provided by an existing system with a number of successful franchisees, and that increases the risk of getting involved.

• Expandable concept: The biggest thing you want to look for is a concept that is expandable; your best bet today is really researching the franchise opportunity for uniqueness. Does the concept have a niche, or is it a blatant copy of another concept? Can you set yourself apart from your competitors? Unless the concept is expandable, franchisees are not able to extract value out of the transaction. However most people looking to buy into a franchise  don’t consider such a crucial factor hence they buy into already saturated lines of business like the fast food outlets.

• Chances of obtaining finance: The chances of obtaining finance from any institution on an unproven concept are slim if not next to nothing and the prevailing economic conditions have forced the crafting of more stringent criteria for obtaining finance. A business which has less than ten operating outlets is usually not considered a bankable franchise entity hence making it difficult for first franchises.

Perhaps the best approach for expanding the franchise model is to open up these initial franchises as partnerships between franchisor and franchisee. This protects both interests. From a franchisor perspective they get to protect their investment and further expansion of a new model and for a franchisee, you get the support and investment needed to set up and test a new business concept.

The sharing of risk is the safest and fairest approach to expanding a franchise concept model.