FRANCHISING DEVELOPMENT FOR SMES IN NIGERIA: THE ROLE OF VENTURE CAPITAL

Presented by:

Mr. Kayode A. AyeniMD/CEO, First Funds, Nigeria.

At the International Seminar On Franchising by the Joint Africa Institute, Rabat, Morocco November 13-17, 2006

Outline Of Presentation

Background To SMEEIS The New Venture Capital Industry Benefits Of Venture Capital Why Franchising Is Good For SMEs Financing Franchising With SMEEIS funds Benefits To Franchisor &Franchisee Benefits To SMEEIS Fund Manager Conclusions How To Contact Us

Background to SMEEIS SMEEIS was introduced by Bankers Committee in June, 2001. SMEEIS requires banks to set aside 10% of PAT for investment in

Small and Medium Enterprises (SMEs).  SME Investment Sectors : Every legal business activity is covered

with the exception of trading/merchandising and financial services.

An SME total assets < N1.5billion (excluding land and working capital)

Funding provided shall be in the form of equity or loans, where loans are single digit (max of 9%).

Upper limit of 40% equity funding by banks shall apply. The investment can be divested after a minimum period of 3 to 5

years. Funds can be used for start-ups, expansion, working capital,

management buy-out, turn around of moribund companies, etc.

The New Venture Capital Industry Introduction of SMEEIS has given birth to a new

Venture Capital (VC) industry in Nigeria.

SMIEIS is set up for investment in equity, which has forced the acquisition of equity investment skills by banks (distinct from lending skills).

Many banks have either set up a unit in-house or set up VC subsidiaries (singly or jointly with other banks) to handle investment of their SMIEIS funds.

Some other banks have engaged independent VC fund managers to invest their funds.

Benefits of Venture Capital Impacts discipline and more accountability in company.

Risks are shared equally by all shareholders.

Source of medium to long term capital.

Investment is not secured (no need for collateral).

No interest is paid on Venture Capital funds.

Institutional partners lend credibility and acts as a positive signal to other stakeholders.

Venture Capitalist adds value in providing financial, technical, advisory and managerial support.

 

Why Is Franchising Good For SMEs By nature & origin, business arrangement designed by

entrepreneurs for SMEs.

Quick replication of a good business idea

Easy start-up opportunities.

Facilitates institutionalisation of business.

Global success reports on franchising in development of small businesses

17,500 franchise systems, 1.2 million franchisees & 12.5 million employees in franchise business globally.

In USA, half of all retail sales generated through franchised chains; 550,000 franchise outlets employing 7.1 million workers.

Why Is Franchising Good For SMEs (contd)

U.S franchising industry estimated at US$1 trillion in 2001.

Industry growing at rate of 10-12% per annum.

MC Donald’s : 1998 – 16,000 franchises; 2002 –22,000 franchises.

Estimated failure of franchise outlets in U.S. less than 5%.

Estimated failure by fifth anniversary of new businesses in Nigeria more than 80%.

Financing Franchising With SMEEIS Funds

SMEEIS Funds can support franchising.

Each franchise outlet – an SME- limited liability company with at most N1.5 Billion asset base (excluding land and working capital).

Resulting benefits to Venture Capital Fund.

Benefits also to Franchisor/Franchisee (Promoter).

Benefits To Franchisor

Quick business rollout possible

Easier start-up opportunities

Creation of model outlets

Possibility of unlimited growth

Strong institutional partner

Upon exit of Venture Capital Funds, shares can be sold to Franchisee (s)

Benefits To Franchisee Leverage existing franchise goodwill.

Reduction in learning curve.

Easier break into relatively captive market- confirm/maintain (rather than build) existing franchise reputation.

Training & technology transfer by Franchisor. Strong institutional partner. Tried and tested systems plus independence

of self employment.

Benefits To SMEEIS Fund Manager Facilitates deployment of funds.

Facilitates geographical spread of investments.

Reduces risk of business failure.

Provides good exit opportunities.

Conclusions Link between Franchising, SMEs and

Venture Capital (SMIEIS) Funds established.

Franchising is a good method for achieving rapid growth of SMEs.

Venture Capital (SMIEIS) funding is beneficial to SMEs

The combination of franchising and SMIEIS funding for SMEs is a recipe for SME success.

How to Contact UsAll enquiries should be directed to:MD/CEOFirst Funds LimitedBull Plaza (ConOil Building)9th Floor38/39 MarinaLagosTel: 234-1-2665211, 2665214, 2665250

Fax: 234-1-2660784. Website:

www.firstfundsltd.com

THANK YOU

QUESTIONS(?)