Tandem Franchising

The high investment needed to set up new outlets and the level of expertise required to manage them successfully combine to inhibit some companies’ ability to expand through franchising. For very much the same reasons, it also precludes otherwise suitable individuals from becoming franchisees. Tandem Franchising addresses all these problems and more in a commercially sound and sustainable manner.

What does the term mean?

Essentially, tandem Franchising is a standard business format franchise model but with an added focus on mentoring, support and long-term cooperation. The model is ideally suited to BEE initiatives because it enables members of previously disadvantaged population groups to enter the mainstream economy at an accelerated pace yet at significantly reduced risk.

How does it work?

The BEE franchisee purchases a minority stake in the franchise, often as little as 10% to begin with. He manages the business from day one but initially, certain limitations apply. In addition to initial and ongoing training, the BEE franchisee receives extensive ongoing mentoring. This is provided either by an experienced member of the franchisor’s management team or by a person who has been appointed for this purpose. Initially, the new BEE franchisee who still lacks broad business management experience operates the business in tandem with an experienced manager; this has given rise to the term “tandem franchising”. The basic concept can be implemented in various permutations as Figure 1 illustrates.

Figure 1

Options for the implementation of a tandem franchise model
Component	Option A	Option B	Option C	Option D
Mentorship programme	Mentor (experienced manager) appointed by the franchisor	Mentor (experienced manager) appointed by the franchisor	Existing, experienced franchisee is appointed as the mentor	3^rd party mentor programme operated by Government or an NGO
Equity	Franchisee purchases minority stake, often as little as 10%, to be increased over time	Franchisee purchases minority stake, often as little as 10%, to be increased over time	Franchisee purchases minority stake, often as little as 10%, to be increased over time	Franchisee purchases minority stake, often as little as 10%, to be increased over time
Financing/ Joint Venture	Franchisor holds majority share until bought out. The balance of capital requirement is financed by a financial institution	Majority share is held by financial institution until bought out by franchisee	Majority share is held by the original franchisee who becomes the mentor. The business remains a joint venture but the BEE partner will eventually hold the majority shareholding	Majority share held by financial institution until bought out

For the first 3-5 years, the mentor (who reports to the franchisor and/or the financial institution that puts up the bulk of the capital) and the BEE franchisee work together towards achieving two objectives:

To build a successful business
To develop the BEE franchisee to take full control of the business.

A properly structured tandem franchising programme facilitates skills transfer and transfer of ownership concurrently. The only exception is option C above because under this scenario, the original franchisee retains a minority share for an indefinite period.

Typical financial arrangements

The franchisor puts up the capital. The BEE franchisee makes a modest but meaningful financial contribution. In exchange, he/she receives shares in the business. In addition to a (usually modest) salary, the BEE franchisee is entitled to share in the profit the business generates but these profits are earmarked for the acquisition of additional shares.

The mentor can either be an employee of the franchisor or an external consultant on retainer. For best effect, the arrangement should be linked to the deferred payment of an attractive incentive bonus which becomes payable only if and when the BEE franchisee is ready to take full control of the business. This gives the mentor a strong incentive to work him/herself out of a job as quickly as possible.

Transfer of ownership

The tandem franchise model makes it possible for a dedicated and hard-working BEE franchisee to acquire outright ownership of the franchised business over a period of 3-5 years. At this point, the mentor withdraws and the arrangement converts to a standard franchise agreement.

Everyone wins

This type of arrangement has the potential to integrate BEE entrepreneurs into the economic mainstream and help them to create real wealth for themselves. However, the BEE franchisee isn’t the only one who benefits. All other participants in such a scheme benefit as well.

Mentor - The mentor has a unique opportunity to create a legacy through capacity building and exit the arrangement with a handsome bonus. Subject to every-thing else being in place, this offers exciting opportunities to recent retirees.
Franchisor - The franchisor benefits on several fronts.
- The implementation of meaningful BEE schemes in existing relatively small businesses is notoriously difficult. Tandem franchising facilitates this greatly.
- Opportunities for staff to advance their careers are usually limited, making it difficult to motivate good people and retain them indefinitely. The tandem franchise model enables the franchisor to offer qualifying individuals an opportunity to become entrepreneurs. This can do much to rejuvenate the organisation and send its expansion into orbit.
- Appointing long-serving managers who either approach retirement age or are recently retired as mentors is an ideal way to utilise their services to best effect.

One could say, of course, that a franchisor is obliged to support its franchisees anyway but this would not be accurate. Given South Africa’s legacy, BEE franchisees, through no fault of their own, require more assistance than a franchisor can afford to provide in exchange for receiving standard franchise fees. A tandem franchise allows the franchisor to participate in the business’s profits during the all-important early period after start-up. This justifies the granting of additional support.

Financial institutions - Financial institutions, especially FNB Franchising, support tandem franchising. They draw comfort from the fact that in addition to the value of the brand and the regular support services franchisors provide, direct risk-taking by the franchisor comes into play. The permanent involvement of an experienced mentor reassures them further. In suitable circumstances, this makes it possible for bankers to waive some of the usual banking criteria which may otherwise limit a prospective franchisee’s chances of qualifying for bank finance.
Government and quasi-government organisations - Just like bankers, Government administrators draw comfort from the fact that the franchisor takes a financial risk and is directly involved in the management of the business. This justifies the granting of loans, loan guarantees and/or training subsidies because it is reasonable to expect that the investment will generate rich dividends in the form of entrepreneurship promotion and the creation of job opportunities.

Figure 2 summarises the benefits tandem franchising offers its potential participants.

Figure 2

Some of the advantages Tandem Franchising offers
Franchisor	Prospective BEE-franchisee	Financial institutions, government
Equity participation and profit sharing during the period until the BEE franchisee takes full ownership. Fulfilment of BEE requirements, thereby raising BEE profile of the franchise. Successful franchisees translate into a successful network	Realistic opportunity to acquire own business because traditional hurdles to access to finance are removed. Skills transfer through ongoing mentoring. Additional support provided by the franchisor through the mentor enhances success chances.	Reduced risk due to additional franchisor support. Assured advancement of objectives of the Black Economic Empowerment Charter because loans and/or loan guarantees are granted only to previously disadvantaged individuals.

What holds tandem franchising back?

Everyone seems to agree that the concept sounds good on paper and those who have applied it so far will confirm that it works in practice as well. This begs the question why tandem franchising has so far failed to take its rightful place in the mix of expansion tools that are available. In my view, there is only one problem with tandem franchising, namely that it is not properly understood. I further believe that this applies to prospective franchisors and prospective franchisees in equal measure.

Prospective franchisors

Many large (and some smaller) companies could benefit greatly from expanding through franchising and even converting existing branches into franchises because by bringing owner-managers on board, they would rejuvenate their brands. By adding tandem franchising into the mix, they would address their BEE obligations at the same time.

Unfortunately, corporate managers fail to see the awesome power of franchising. They fear that if they entrust the management of outlets to independent entrepreneurs, they will lose control. Not only is this unfounded, it is quite absurd.

If these corporate managers want to grow the business, they can rest assured that owner-operators who have their own money at stake will do a better job than the average branch manager.
A properly drafted franchise agreement, supplemented by a comprehensive operations manual, will ensure that operational standards are upheld and the brand is adequately protected.

This begs the question, “What else do they need to control?” As there is no meaningful answer to this, I can only assume that their reluctance revolves around ego. Given our country’s pressing needs, this should surely take a back seat.

Prospective BEE franchisees

There is no shortage of prospective BEE franchisees but tandem franchises are not available for the asking. In my experience, they are available “by invitation only” and I cannot see that this will change any time soon. Expecting the situation to change is simply not realistic, for the following reasons:

Initially, the franchisor would have to make a stake in a new or existing business available to an absolute stranger who is unable to make a meaningful financial contribution.
For the next three to five years, the franchisor would have to invest considerable resources to develop this stranger into a successful entrepreneur, with no guarantee of success.

In my view, tandem franchising opportunities will always be reserved to individuals who have proven their mettle, most likely as long-serving employees. I see nothing wrong with that and advise individuals who want to benefit from tandem franchising to start the ball rolling by seeking employment in the company of their choice. A few years down the line, after they have proven themselves, they may qualify for a franchise. I need to caution, though, that this is not automatic, skilled negotiation is required.

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