For aspirant black entrepreneurs with access to capital, buying into an existing franchise system may be a less risky way of starting out in business."Franchising is a good model for the development of black entrepreneurs," says Bendeta Gordon, CEO of Franchize Directions, a service provider to the franchise industry. "Each franchise in a system works off a proven business model, with established processes and procedures and protocols for skills transfer."
Typically the franchisee pays an upfront licence fee - which starts at R70 000 and can reach R2m - to use a company's branding and intellectual property. In addition, the franchisee pays to the franchise holder an advertising levy, and a percentage of turnover each month or a "management services fee".
"We prefer this expression to royalty' because it implies that proactive management and services are provided to the franchisee," says Gordon.
The failure rate of new franchises is surprisingly low: 6,5% of new franchises have failed in the past three years, she says.
According to a research survey conducted by Franchize Directions seven times since 1994, franchising has grown from 156 systems in 1994 to 531 today. A franchise system is defined as one chain, like KFC or Fast-Fit. "Many businesses are looking at franchising as a means to expand their own businesses," says Jack's Paint & Hardware operations director Chris Russell.
Franchises have sprung up in every category of business, from automotive after-service, health & beauty and real estate to business services and fast food. According to the survey, 71 000 new jobs and 4 000 new businesses have been created in the past two years.
Though it may seem that franchising offers black entrepreneurs an ideal leg-up, the percentage of black-owned franchises has merely kept pace with the growth of the overall industry - 32%, unchanged from two years ago.
"The biggest hindrance to black entrepreneurs is access to capital," says Ditabe Chocho, a chartered accountant who co-owns the Nando's franchises in the Jabulani and Maponya malls. "To ensure that you don't kill the business before it starts, the entrepreneur must put in the right equity in relation to the debt."
And that is difficult for obvious reasons. "Black economic empowerment funding deals, in my experience, are seldom well-structured deals that benefit the entrepreneur," says Nando's franchise director Paul Dean. "Because entrepreneurs are often looking for close to 100% finance and are perceived to be high risk, many financing arrangements are more expensive than traditional loans."
At the current 15,5% prime interest rate, loan repayments are around R25 000/ month per R1m of debt. "In most businesses, you would need a highly successful operation and an often higher-than-average turnover to make enough cash to repay a loan at that level, or at any other level relative to a low cash injection."
Franchising does provide opportunities for black entrepreneurs, says Shoprite CEO Whitey Basson, "but there are no free rides. A franchise must be viewed in terms of the capital requirements. As you move up the scale, so the capital requirements and risks increase."
The two difficulties that Shoprite faces in its franchise efforts are finding suitable sites and ensuring that financial disciplines are consistently applied. Its OK division franchises have five different types of retail and one wholesale outlet, each offering different shopping facilities - OK Foods, OK Grocer, OK Minimark, OK Value, Sentra, Megasave and Enjoy.
Shoprite, which prefers to keep its core brand under corporate control, now has an agreement with Khula Enterprise Finance, an agency of the department of trade & industry.
Khula finances the fixed assets of the OK franchises, while Shoprite finances the stock. More importantly, says Basson, Khula provides the entrepreneurs with extensive financial management support, while Shoprite provides the merchandising and operational expertise. "Government assistance is essential if we are to roll out franchises to black entrepreneurs," he says.
But Dean remains concerned. "There is no substitute for cash in a business. Though guarantees and indemnities assist in securing loans for otherwise disqualified entrepreneurs, the cost of this funding is usually at a premium."
In addition, he says, the success of the business (and both the entrepreneur and the brand under which they operate) must always be the driver.
There is a need for a far higher level of financial management training and general mentoring in most candidates. "If this is not recognised and dealt with, the result is a broken and demoralised entrepreneur and a damaged and reluctant brand."
IDC franchising head Christine Schreuder counters: "We structure the repayment terms to suit the cash flow. We see franchising as a key route to support entrepreneurs and to bring more of them into the market."
To deal with the lack of retail skills and sector-specific skills in entrepreneurs, some franchisers - like Jack's Paint - have set up accredited academies to develop technical expertise in promising staff and selected outside applicants.
One franchise system that is succeeding in developing black entrepreneurs is the Hot Dog Cafe, run by Derek Smith. But it has the support of Massmart and the Umsobomvu Youth Fund. With them on board, Smith has helped establish 30 independent hot-dog barrow owners; 10 owners of Hot Dog diners, which are more formal eateries; and six owners of The Coffee Stop, a new concept also supported by Massmart.
"The traditional way of thinking is that if the business owner does not put his or her own money in, then they have less to lose and thus less to work for," says Smith. "Our approach says if you work a particular site for six months, then I will organise loans."
Part of the success of the project lies in the softer loans and support from Massmart. "If you fund a business to 100%, it is over geared and something will give," Smith says. "Massmart gave the barrow owners preferential rental and we secured finance at prime, which is a good rate."
Softer loans are one option, agrees Chocho. Another is loan holidays.
"From the word go, the business has to service the loan obligation, which can be testing while you are ironing out operational issues. So many things can go wrong in a business start-up that to have a period of grace in the first six months is helpful."
This is useful, however, only if the loan is advanced at a preferential rate, he says. If not, the debt will climb to an unsustainable level.
Certainly franchising provides entrepreneurs with the back-up of a strong brand, a proven business model and tried-and-tested systems.
On the other hand, there are no free lunches. Success will come to the entrepreneurs with the will to work hard and the savvy to work smarter than the competition. It will also come a lot faster to those who have some means of putting their own equity into the business.
