Sylvia Walker | 19 November 2024
Sylvia Walker is a financial planner at Andrew Prior Consultants. She spent many years in a senior management position at Old Mutual before venturing out of the corporate world. She is also a freelance finance writer and author of several non-fiction books.
Starting and running a successful business is tough – especially in economic downtimes.
The franchising business model, however, appears to have proven itself to be well positioned to help South Africans create small and medium-sized enterprises and more jobs that will, in turn, hopefully stimulate the economy.
Recent statistics about franchises show that a new franchise outlet stands a better chance of success even in tough economic times than a standalone business.
Some 70 to 80 percent of small businesses fail within the first five years, according to the University of the Western Cape.
“This is in stark contrast to less than 20 percent of new franchise businesses that fail,” Morne Cronje, franchise head at FNB Business, points out.
According to the Franchise Association of South Africa (FASA) 2023 Franchise Survey, sponsored by Absa, approximately 89 percent of new franchisees break even within the first year, and the majority of franchisees own more than one outlet of the same brand and 44 percent own an outlet of a different brand.
Franchises are also stable, as evidenced by their longevity. FASA reports that 73 percent of franchisors and 53 percent of franchisees have been in business for more than a decade. Franchisors have been in business for 21 years on average, with franchisees maintaining their businesses for an average 12 years.
Cronje believes that franchises are better positioned to deal with economic downturns such as the 2008 recession and the recent COVID pandemic. “They can withstand these challenges much better than many independent small businesses,” he says.
The numbers agree. According to Trade and Industrial Policy Strategies data, in 2022, the number of small formal businesses in South Africa reached 710 000, increasing from 680 000 in 2019. This represents a 4.5 percent increase.
FASA’s data shows that the number of franchisees grew by 43 percent between 2019 and 2023, reaching 68 463.
“The increase in the number of large franchise systems accounts for the marked increase,” explains FASA CEO Fred Makgato.
He adds that in 2022 franchises contributed around 15 percent of South Africa’s GDP.
“This excludes revenue from listed companies operating in the franchise market, highlighting the industry’s growth.”
Buying a franchise offers a proven business model, support, and branding benefits.
“While they may not be the best option for everyone, they offer a lower-risk alternative to starting your own small business from scratch,” says Sasha-Lee de Bod Smith, partner and franchise development consultant at Franchising Plus.
Before deciding whether franchising is the best option, an entrepreneur should carefully consider their financial capacity, goals, and industry preferences.
“It is important to conduct due diligence on the franchise you’re considering, as well as the industry, because not all brands and franchises are equal,” says De Bod Smith.
South African businesses have suffered greatly over the past four years. In today’s economic climate, many issues are interlinked and have a domino effect on the business.
The FASA 2023 Franchise Survey identified four main challenges for franchisees, namely financial challenges, staff issues, customers and load shedding.
The size of the business influences which type of challenge is most significant. Smaller franchised outlets face financial difficulties, whereas their larger counterparts cite high rentals and franchise fees. Larger franchisees also felt the brunt of load shedding more severely than smaller franchisees.
Buying a franchise doesn’t guarantee success, and tough economic times can magnify problem areas, leading to failure, according to FASA.
The association says one cause of franchise failure is a franchisor who hasn’t thoroughly refined their concept or is opening too many franchises in different locations too fast, so there’s no infrastructure to support new or existing franchisees.
Poor management decisions can also result in problems with cash flow, poor site selection, or lead to a new franchise being opened in an over-traded area, FASA says.
Franchisors who provide insufficient training to franchisees or do not pass on bulk-buying benefits can also be reasons why franchises fail, the association says.
Even if franchisors are providing a good model, individual franchises can fail because the franchisee underestimated the extent of his or her involvement in the business and the amount of working capital required to be successful, FASA says.
The franchisee may also lack business skills or employ unskilled employees.
When a franchise competes with independent outlets that offer the same product or service, the odds of success are also lower, especially during difficult economic times. This is because the cost of providing a product or service is higher for a franchisee than for an independent business due to franchise fees, FASA says.
It is critical to understand the dynamics of franchising and to conduct due diligence when choosing a franchisor, as the support they provide is crucial during difficult times.
The extent and quality of the support can vary depending on the franchise system, the contractual agreements, and the franchisor’s overall financial situation. This includes operational support, coaching and mentoring, site visits as well as additional marketing and advertising support.
According to FASA research, more than 96 percent of franchisees indicate that they receive support.
According to Cronje, well-established brands provide excellent support, with regional managers visiting franchisees on a monthly or quarterly basis to assess their progress and offer guidance.
“In difficult times, support may even include negotiating with landlords and, in some cases, waiving monthly fees,” he adds.
