South African Small Businesses

• Small business is independently owned, operated for profit, and not dominant in its field.
• Small businesses are important in the South African economy.
• Small businesses play a key role in job creation.
• In the first quarter of 2019, South Africa had 2,550,540 small businesses, providing 10,839,819 jobs.
• Small businesses comprise 98.5% of all formal businesses in South Africa.
• Small businesses contributed 28% of the country's turnover in the first quarter of 2019.
• 74% of small businesses were started with the aim of contributing positively to society.
• Small businesses employ 29% of all South Africans.

Industry Group-Size Standards Based on Annual Turnover

• Agriculture: Medium (R35 million), Small (R17 million), Micro (R7 million)
• Mining and quarrying: Medium (R210 million), Small (R50 million), Micro (R15 million)
• Manufacturing: Medium (R170 million), Small (R50 million), Micro (R10 million)
• Electricity, gas, water: Medium (R180 million), Small (R60 million), Micro (R10 million)
• Construction: Medium (R170 million), Small (R75 million), Micro (R10 million)
• Retail, motor trade, repair: Medium (R80 million), Small (R25 million), Micro (R7.5 million)
• Wholesale: Medium (R220 million), Small (R80 million), Micro (R20 million)
• Catering, accommodation, other: Medium (R40 million), Small (R15 million), Micro (R5 million)
• Transport, storage, communication: Medium (R140 million), Small (R45 million), Micro (R7.5 million)
• Finance and business services: Medium (R85 million), Small (R35 million), Micro (R7.5 million)
• Community, social, personal service: Medium (R70 million), Small (R22 million), Micro (R5 million)
• Small-business size is usually defined by the number of employees or average turnover.
• The National Small Business Act has established four widely used size standards: medium, small, and micro.
• High unemployment and a shortage of jobs in the formal sector cause many South Africans to seek employment in small businesses in both formal and informal sectors.
• The informal sector is made up of largely subsistence businesses operated by entrepreneurs not registered with formal structures like SARS and CIPC.
• They make up the 'shadow economy' and employ approximately one third of all South Africans.
• In the second quarter of 2019, the Quarterly Labour Force Survey showed a 4.4% increase in the number of SMMEs in South Africa.
• 70% of small businesses in South Africa fail within the first two years due to mismanagement and lack of business know-how.
• Industries with low initial investment and special skills/knowledge tend to attract new businesses.
• Knowledgeable entrepreneurs tend to choose familiar, established industries.

Categories of Industry

• Distribution includes retailing, wholesaling, transportation, and communications for moving goods from producers to consumers.
• The service sector sees an increasing number of unemployed South Africans starting businesses from home.
• Production includes the construction, mining, and manufacturing industries.
• Researchers suggest personal factors such as entrepreneurial spirit, independence, desire for self-determination, willingness to face challenges, family background, age, and motivation drive people to start a business.
• 28% of entrepreneurs are between 25 and 44 years of age.
• Women face challenges entering business ownership in South Africa due to domestic responsibilities, lower education levels, unequal social status, less capital, fewer role models, and cultural discouragement.
• High-tech teen entrepreneurship is increasing.
• Entrepreneurship is growing among immigrants.
• 70-80% of South African small businesses fail within the first two years.
• Reasons for failure include lack of capital, cash-flow problems, poor management skills, and overexpansion.
• Small firms produce 2.5 times as many innovations as large firms relative to employment size.
• This is particularly important in developing nations like South Africa where there are skills shortages in science, technology, engineering and mathematics.
• Over half of the major technological advances of the 20th century came from individual inventors and small companies, like air-conditioning, FM radio, helicopter, instant camera, and the personal computer.
• South Africa's National Development Plan aims to create 11 million new jobs by 2030, expecting small businesses to generate 90% of these.
• Small businesses hire a larger proportion of workers that are younger, older, women, or who prefer part-time work.
• More accessible training and mentorship can help small businesses succeed and create the jobs needed for the South African economy’s steady growth.
• Small businesses drive larger, established businesses to become more efficient and responsive to consumer needs.
• Small businesses provide goods and services to one another and to much larger businesses.

Advantages of Small Businesses

• Personal relationships with customers and employees.
• Ability to adapt to change.
• Simplified record keeping.
• Independence.
• Profit retention.
• Ease and low cost of entry/exit.
• Ability to keep business information secret.

Disadvantages of Small Businesses

• Risk of failure.
• Limited potential.
• Limited ability to raise capital.
• Angel investors are private individuals who invest money for ownership, expecting to sell their stake for profit.
• Crowdfunding is a non-traditional financing method where entrepreneurs describe their project online and invite people to contribute, with contributors typically receiving a reward.
• Examples of crowdfunding platforms: Kickstarter, Indiegogo
• A business plan is a carefully constructed guide for starting a business.
• A business plan serves three purposes: communication, management and planning.
• Communication: It serves as a document for potential investors to assess whether to invest.
• Management: It helps track, monitor, and evaluate progress, establish timelines/milestones, and compare growth projections.
• Planning: A business plan guides a businessperson through the phases of business.

Components of a Business Plan

• Introduction: Basic information, date, and statement of confidentiality.
• Executive summary: A one- to two-page overview justifying why the business will succeed.
• Benefits to the community: How the business impacts economic, community, and human development.
• Company and industry: Background, legal form, information on products/services, potential customers, competition, and the business’s future.
• Management team: Skills, talents, job descriptions, managerial compensation, training needs, and professional assistance.
• Manufacturing and operations plan: Facilities needed, space, capital equipment, labour force, inventory control, and purchasing requirements.
• Labour force: Quality of skilled workers, training, compensation, and motivation.
• Marketing plan: Markets, market trends, competition, market share, pricing, promotion, distribution, and service policy.
• Financial plan: Investment needed, sales and cash flow forecasts, breakeven analysis, and funding sources.
• Exit strategy: Succession plan or going public.
• Critical risks and assumptions: Weaknesses/plans to address business problems.
• Appendix: Supplemental material like resumes, advertising samples, or an organization chart.
• A business plan should address the nature/mission of the venture, why the enterprise is a good idea, the businessperson's goals, and the new venture’s cost.
• The Department of Small Business Development (DSBD) aims to lead and coordinate an integrated approach to promote and develop entrepreneurship, small businesses, and cooperatives. It also ensures a supportive legislative and policy environment.
• The DSBD offers programs such as the Black Business Supplier Development Programme (BBSDP), Cooperative Incentive Scheme (CIS), National Informal Business Upliftment Strategy (NIBUS), and the Shared Economic Infrastructure Facility (SEIF).
• SEDA (Small Enterprise Development Agency) is an agency of the Department of Small Business Development.
• SEDA's mandate is to implement the government's strategy for small businesses and consolidate all government-funded support.
• SEDA programs include the Export Development Programme, Supplier Development Programme, Enterprise Development Tools, and National Gazelles.
• The National Gazelles program identifies promising small businesses with high growth potential, providing financial and non-financial support through training and mentorship.
• Other support sources include friends, family, other entrepreneurs, customers, employees, suppliers, the owner's knowledge/skills, associations, educational institutions, and professionals.
• Additional government support includes the dtic's Technology and Human Resources for Industry Programme (THRIP), the Support Programme for Industrial Innovation (SPII), the Industrial Policy Action Plan (IPAP).
• Other institutions that help include the National Youth Development Agency (NYDA), Industrial Development Corporation (IDC), National Enterprise Promotion Agency (Ntsika), and the National Empowerment Fund (NEF).
• Commercial banks in South Africa can offer business loans to small businesses with sound plans.
• The Small Enterprise Finance Agency (SEFA), owned by the IDC and reporting to the DSBD, provides accessible funding to establish, grow, and develop small businesses/cooperatives.
• Venture capital is money invested in small businesses that have high potential.
• A franchise is a license to operate an individually owned business as if it were part of a chain of outlets or stores.
• Examples: McDonald's, Nando's, PostNet, Pick n Pay, Spar
• Franchising is granting a franchise.
• A franchisor is the individual or organization granting the franchise.
• A franchisor supplies a known business name, management skills, training materials, and a business method.
• A franchisee is the person or organization purchasing a franchise.
• A franchisee supplies labour and capital, operates the franchised business, and agrees to abide by the franchise agreement.

Franchisee rights include:

• Use of trademarks, trade names and patents of the franchisor
• Use of the brand image and design/decor of the premises.
• Use of the franchisor's secret methods
• Use of the franchisor's copyrighted materials
• Use of recipes, processes, and methods of manufacture
• Operating per the franchisor’s methods/directions
• Guidelines for territorial exclusivity
• Rights to obtain supplies from nominated suppliers at special prices.

Franchisee obligations include:

• Operating only the approved, franchised business from the approved premises
• Observing minimum operating hours
• Paying a franchise fee
• Following the franchisor's accounting system
• Obtaining approval before advertising
• Using/displaying point-of-sale materials
• Maintaining clean premises and redecorating to the franchisor's standards
• Maintaining insurance coverage
• Allowing the franchisor’s staff to inspect the premises for standards
• Purchasing goods from the franchisor or designated suppliers
• Training staff in the franchisor's methods.
• No assigning the franchise contract without consent.

Types of Franchising

• Product or trademark franchise: A manufacturer authorises retail stores to sell brand-name items like cars, trucks, or shoes.
• Product distribution franchising: A producer licenses distributors to sell its product to retailers, as commonly found in the soft drink industry.
• Business format franchise: A franchisor supplies brand names, techniques, or other services, typical among travel-related companies (Avis) and restaurants (McDonald's, SUBWAY).
• Franchising began in the U.S. and was used by large businesses to distribute products.
• Franchising has grown steadily since the early 1900s, with major growth since the mid-1970s.
• Dual-branded franchises, where two franchisors offer products together, are a new trend.

Main Types of Franchising in South Africa

• Product or trademark franchises
• Business format franchises
• Dual-branded franchises
• Conversion franchises
• Regional master franchises
• Master franchises
• Franchises have a significantly higher success rate than independently owned small businesses.
• Franchising is not a guarantee; rapid expansion, inadequate capital/management, and other issues can cause failure for both parties.

Advantages of Franchising for the Franchisor

• Gains rapid, controlled distribution without the high costs of constructing/operating its outlets.
• Has more capital to expand production and advertise.
• Can ensure maintenance and operation standards through agreements.
• Gains from franchisees’ high motivation, leading to more sales and higher royalties.

Advantages of Franchising for the Franchisee

• Starts a business with limited capital using the business experience of others.
• Receives advice from the franchisor, often free.
• Receives advertising materials and participates in national promotional campaigns.
• Minimises costs for advertising, supplies, and other business necessities by purchasing with other franchisees.

Disadvantages of Franchising for the Franchisor

• Failure of the franchisee to operate the franchise properly.
• Disputes and lawsuits over contract terms.

Disadvantages of Franchising for the Franchisee

• Control retained by the franchisor.
• The franchisor dictating all aspects of the business
• Franchisors opening competing franchises nearby locations
• National and international economies are growing more interdependent, as economic directions change and trade barriers diminish.
• Globalisation and instant communications are shrinking distances while expanding business opportunities.
• Technology empowers small businesses to reach markets once limited solely to large companies.
• With the COVID-19 pandemic in 2020, countries had to rethink business.
• International trade is increasingly important to small-business owners due to unique challenges in the new century.
• McKinsey & Company suggests four areas in which small businesses can lessen the effects of difficult economic times by using technology, developing market access strategies, emphasizing efficiency and improve leadership/employee skills.
• International trade and world marketplace factors are becoming increasingly important to small business success
• Small businesses are expected to remain the dominant form of company organization in South Africa, having to adapt to demographic and economic shifts in the world marketplace.