Supporting New Franchisee Businesses

Given the high failure rate of SMMEs, franchising is seen as a means of enhancing a business’ chance of success. The Jobs Fund is supporting an initiative to expand the franchise sector by helping targeted beneficiaries access the capital, skills and support needed to establish and sustain a franchise enterprise.

SMMEs comprise a significant proportion of enterprises in the South African economy, contributing to economic growth, creating jobs and driving more equitable wealth distribution. But the success of small businesses is inhibited by several factors such as lack of capital, high levels of debt, poor business management skills and lack of access to markets.

Franchising overcomes some of these challenges because it gives a small business owner (the franchisee) the right to sell a product or service as an independent business, while operating under an agreed set of principles and processes set out by the franchisor (the brand owner). Under this incubating model, the franchisor provides the franchisee with well-developed business systems and brands, marketing, oversight and monitoring support.

Through the Jobs Fund’s Enterprise Development window, grant funding has been provided to a project between Business Partners and the South African Franchise Warehouse to support franchise development. The project seeks to improve the success of franchisees over a three-year period, establishing 125 new franchisees and creating 717 jobs. This initiative aims to lower business and operational risks, and address the financial gap for franchisees.

The project was established at an opportune time, when one of the largest public funders for franchise businesses left the sector as a result of a strategic shift in focus. The project follows a multi-stage process. First, potential beneficiaries complete a mandatory five-day business management training programme, which gives them the business skills necessary to develop a viable business plan for their chosen franchise. Approved business plans move on to the second stage, in which they are considered and approved for funding. Once the business is established, the franchisee receives ongoing support from both the franchisor and the project.

Midway through the project, the implementing partners and the Jobs Fund team made some changes to improve project performance. The team broadened its portfolio of franchisors and restructured the funding model. The Jobs Fund portion of the funding for start-up franchises was structured as “equity” for the period during which the senior debt was to be repaid. The project team also identified an opportunity for greater risk sharing across financier, franchisor and franchisee, especially when targeting mid-tier franchisors that are focused on expansion and who may therefore be more amenable to alternative funding and ownership models. The franchisors are encouraged to take an equity stake in the franchisee over the short- to medium-term, giving the franchisor a greater incentive to adequately support the new franchisee. This lower debt-to-equity ratio, along with the technical assistance, training and mentoring offering, immediately attracted more tier-1 franchise brands to the project.

To date, 25 franchise outlets have been opened, 8 of which are tier 1. These franchises have created 322 jobs and trained 189 beneficiaries.

Franchising is a useful model for SMME development, but it is not without its challenges. It is important that the intervention is correctly designed, partners and beneficiaries are carefully selected and that the right barrier is being addressed. Some critical design and market factors for effective franchisee support include the provision of upfront franchisee fees, lowering the cost of capital, reducing business risk for new franchisees, offering business support and mentorship, and selecting franchisors that have well established systems and effective brand support.

Read the summary of the evaluation report prepared by DNA Economics for the Jobs Fund on supporting franchisee development in South Africa here: