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These are the just-released results of the third franchise survey conducted by the Franchise Association of South Africa (FASA). Sponsored by Sanlam, the 2014 survey aims to build up more substantial data on this part of the small and medium enterprises (SME) sector that can be used to benchmark trends and future growth.

“Given South Africa’s current unemployment rate of around 25%, the franchise sector is key to driving future economic growth and creating employment opportunities. The sector contributes more than 10% of our gross domestic product (GDP) – we therefore take this sector very seriously and are committed to assisting them,” says Jannie Rossouw, head of Sanlam Business Market.

The study found that 75% of respondents have been in business for more than six years, and 44% for longer than 12 years. “This is testament to the sustainability of the franchise model and is partly why many people perceive franchising as an easier and less risky route to self-employment than starting a business from scratch,” says Rossouw.

FASA remains steadfast in its belief that this small business sector forms a vital part of the backbone to any economy. “Franchising is under-utilized in South Africa and is not given enough credit for its role in stimulating economic recovery through its tried and tested business format,” says John Baladakis, FASA’s newly elected Chairman. “The spin off in terms of skills development, job creation and more importantly in generating sustainable income streams that feed into the tax coffers, is ultimately what will grow South Africa’s economy.”

A ‘serious lack’ of financial planning

Rossouw expressed concern, however, that the survey revealed a “serious lack of holistic and integrated financial planning” among South African franchisors. Just over half of franchisors (53%) claimed to have some form of continuity planning. Of these, a third said this was in the form of surety protection. A further quarter claimed to be able to finance a buy-and-sell agreement and 18% said they would be able to finance the replacement of key people. Only 15% had addressed retirement in their financial planning, 14% have funeral cover and 13% had taken out healthcare cover.

“Franchisors face a multitude of financial challenges, and not many realise the extent and complexity of their financials. They also find it very difficult to engage with their business financial planning needs if they can’t put it into perspective of how it fits the business as a whole. Franchisors need to sit down with a qualified financial planner, who will help to ask the right questions and do the math,” says Rossouw.

Other key findings

  • South Africa has over 600 franchised brands, and 17 franchise business sectors (there are 70 in the US)
  • The largest sector is the fast foods and restaurant category (25%), followed by retail (13%) and business-to-business services (12%)
  • Building, office, home services, automotive products and services, and childcare, education and training occupy 27% of the franchise market (9% each)
  • The sectors with the highest incidence of female ownership are childcare, education and training (61%) and health, beauty and body culture (59%)
  • The total number of employees in the franchise industry is estimated at 323 519, with 40% employed in retail, 28% in fast foods and restaurants, and 15% in the automotive sector
  • 60% of franchisors have business units/stores in shopping centres and malls, and 52% have them situated in high streets, where most passing trade occurs
  • 40% of the franchisors interviewed claimed to have stores outside of South Africa – most of these were in Namibia and Botswana and were most likely to be fast food outlets or restaurants, retail stores or in the automotive sector
  • The main challenge facing franchisors is related to finding franchisees with the right skills set, and the right staff
  • Other critical issues are finding the right location for stores, and having franchisees maintain standards.

Financing your franchise

  • The survey found that the average upfront franchise fee required is R200 280, with amounts ranging from R400 487 for a business-to-business franchise to R54 032 for a personal services outlet
  • Marketing and advertising levies would cost a franchisee, on average, 1.9% of turnover, with the figure rising to 5.0% in the leisure and entertainment industry and dropping to 1.0% in the personal services sector
  • One in two franchisors estimate that it takes up to six months before a new franchisee breaks even and a further 26% mentioned that it could take up to a year.
Sanlam Life Insurance is a licensed financial service provider.
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