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Posted: 2006-05-20 / Author: Mike Holmes

A New B E E Sollution

BEE South Africa

One of SA’s foremost franchising figures has come up with a possible solution to one the country’s most vexing economic challenges: how to boost black economic empowerment (BEE) at the individual level while transferring skills and creating jobs.

Entrepreneur and franchising consultant Eric Parker calls his concept tandem franchising. The concept puts a promising BEE candidate (emerging franchisee) and an experienced mentor (franchisor’s nominee) together in a joint venture.

Tandem franchising, he says, is designed mainly for large corporations and other successful businesses that have had little or no previous involvement in franchising.

In many cases the two most taxing questions are: how to transfer the necessary skills to individual BEE candidates, and how to fund those candidates. Tandem franchising, he believes, could well be the answer.

The franchisee may already be an employee of the successful business, in which case the transition to franchised business owner-operator should be relatively smooth. If the franchisee is from outside the business, skills transfer may be more difficult and take longer.

SA Breweries has already adopted a tandem franchising strategy (see accompanying article).

Parker sketches the scenario: the fledgling franchisee buys an initial minority stake in the venture (for example, 10%). He and the mentor – typically a member of franchisor’s management team – operate and manage the business “in tandem” until the franchisee is able to run it single-handedly. The franchisee follows the franchisor’s successful formula to continue growing the franchised business and creating jobs.

A basic premise is that the franchisee’s equity share will increase over time, and that the mentor will be rewarded based on franchisee performance, achievement of profit targets and other goals. The franchisee acts as assistant manager for the first year or other predetermined period, and during this time earns a salary. All dividends go into a fund to allow the franchisee to buy more equity.

A mentor may be a qualified manager or even an existing franchisee. While mentors need not be entrepreneurs per se, they must have all the skills needed to run the specific business and must receive appropriate incentives to keep them motivated.

The mentoring programme must be well structured to facilitate continuing monitoring of progress and to ensure that goals are met. Timeframes and objectives must be quantified and communicated.

All companies need to find ways of becoming BEE compliant, notes Parker. “Franchising may be the ideal mechanism to achieve skills transfer and real broad-based participation ownership.”

Global research has shown that entrepreneurial levels – and business start-up confidence – are lower in SA than in other developing countries. Young South Africans also appear to have less exposure to successful entrepreneurs. The ambitions of potential franchisees from previously disadvantaged backgrounds are inhibited by limited exposure to the business environment, lack of financial management skills and difficulty in finance through conventional channels.

Parker believes tandem franchising’s mentoring strategies and financing options can help overcome such shortcomings.

Financing Option A – an option in which the franchisor retains the majority share in the venture until bought out – should prove attractive to financial institutions, says a report prepared by researcher Anita du Toit for Franchising Plus, where Parker is managing partner, and the trade and industry department. “By holding the majority share initially the franchisor is virtually providing a guarantee for the business. This, together with a minority contribution by the franchisee, should provide sufficient guarantees for financial institutions to provide the balance of the capital requirement,” says the report.

The franchisor company will be committed to the success of the business since it will share in the profit initially.

This model may also be attractive to large corporations because it facilitates skills transfer from experienced managers while achieving empowerment goals. The corporation can retain experienced staff (mentors) who can be motivated by incentives to ensure that franchisees succeed.

Option B would see a financial or investment / venture capital provider holding the majority share until bought out by the franchisee. This would be attractive to franchisors not in a position to invest capital in the new franchisee’s business.

A third option would have an existing successful network franchisee being offered a second franchise as a joint venture with an empowerment partner who would, after a predetermines period, acquire a majority share in the new venture.

A final option would entail a third-party mentorship programme available to selected franchises and funded by a government agency or non-government organization. This is a model suggested by the African Development Bank.

SOURCE: Business Day

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