Many franchisees taking risks by not opting for comprehensive cover

Nearly half a million South Africans are employed by franchisees, indicating the importance of this type of business model to the South African market. However, recent research has indicated that many of these businesses do not have specific insurance in place to cover the unique risks that these types of businesses might face.

According to Jonjon Smit, Director at CIB Insurance Solutions, franchise businesses are a crucial component to the South African economy. “Franchises are a rapidly developing business model and are perfectly suited to the entrepreneurial spirit in South Africa. However, while this sector is expected to continue to experience strong growth over the next few years, our research suggests only between 20 to 30% have specific franchising insurance cover.”

Recent research by Standard Bank suggests that franchising is contributing an estimated R256 billion annually to South Africa’s gross domestic product. It was also found that during 2008 there were 26 000 franchise outlets in South Africa employing about 460 000 people.

Smit says CIB has specifically designed an all encompassing insurance product designed to give the franchisees peace of mind in the event that they need to make a claim. “The franchise business model encompasses a range of vastly different businesses; however there are some key challenges that may be common between them. Because of this we have specifically designed this product to cater for certain key benefits that a normal commercial policy would not cover at extremely competitive pricing fore this niche market.

Smit says some of the key benefits included automatically in the franchising product include deterioration of stock, malicious damage to property, and franchise specific liability covers. “These are major risks that can seriously derail an emerging franchise if there is not sufficient cover in place.”

He says another very crucial benefit that is included in the franchise insurance product includes loss of income, which can be extended to cover franchise royalties. “Franchisees are required to pay an ongoing royalty payment to the franchisor for the right to use the brand. However, if the franchisee defaults one is often immediately in breach of their franchise agreement, so this kind of cover can be vital in sustaining a franchise business in difficult times.

Smit says it is important for franchise business owners to take the time to speak to their broker about the specific threats their business may face and to ensure they have coverage that suits their needs.

“Advice is paramount when insuring a business. It is vital that franchisees speak to a broker who has the expertise to advise them on all the risks they face and to recommend an insurance policy that can guard against these risks,” concludes Smit.