FRANCHISING DEVELOPMENT FOR SMES IN NIGERIA THE ROLE

FRANCHISING DEVELOPMENT FOR SMES IN NIGERIA: THE ROLE OF VENTURE CAPITAL Presented by: Mr. Kayode A. Ayeni MD/CEO, First Funds, Nigeria. At the International Seminar On Franchising by the Joint Africa Institute, Rabat, Morocco November 13 -17, 2006

Outline Of Presentation o o o o o 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 o o o o 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 < N 1. 5 billion (excluding land 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 o Introduction of SMEEIS has given birth to a new Venture Capital (VC) industry in Nigeria. o SMIEIS is set up for investment in equity, which has forced the acquisition of equity investment skills by banks (distinct from lending skills). o 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. o Some other banks have engaged independent VC fund managers to invest their funds.

Benefits of Venture Capital o Impacts discipline and more accountability in company. o Risks are shared equally by all shareholders. o Source of medium to long term capital. o Investment is not secured (no need for collateral). o No interest is paid on Venture Capital funds. o Institutional partners lend credibility and acts as a positive signal to other stakeholders. o Venture Capitalist adds value in providing financial, technical, advisory and managerial support.

Why Is Franchising Good For SMEs o By nature & origin, business arrangement designed by entrepreneurs for SMEs. o Quick replication of a good business idea o Easy start-up opportunities. o Facilitates institutionalisation of business. o Global success reports on franchising in development of small businesses o 17, 500 franchise systems, 1. 2 million franchisees & 12. 5 million employees in franchise business globally. o 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) o U. S franchising industry estimated at US$1 trillion in 2001. o Industry growing at rate of 10 -12% per annum. o MC Donald’s : 1998 – 16, 000 franchises; 2002 – 22, 000 franchises. o Estimated failure of franchise outlets in U. S. less than 5%. o Estimated failure by fifth anniversary of new businesses in Nigeria more than 80%.

Financing Franchising With SMEEIS Funds o o SMEEIS Funds can support franchising. Each franchise outlet – an SME- limited liability company with at most N 1. 5 Billion asset base (excluding land working capital). o Resulting benefits to Venture Capital Fund. o Benefits also to Franchisor/Franchisee (Promoter).

Benefits To Franchisor o Quick business rollout possible o Easier start-up opportunities o Creation of model outlets o Possibility of unlimited growth o Strong institutional partner o Upon exit of Venture Capital Funds, shares can be sold to Franchisee (s)

Benefits To Franchisee o Leverage existing franchise goodwill. o Reduction in learning curve. o Easier break into relatively captive market- confirm/maintain (rather than build) existing franchise reputation. o Training & technology transfer by Franchisor. o Strong institutional partner. o Tried and tested systems plus independence of self employment.

Benefits To SMEEIS Fund Manager o o Facilitates deployment of funds. Facilitates geographical spread of investments. o Reduces risk of business failure. o Provides good exit opportunities.

Conclusions o o 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 Us All enquiries should be directed to: MD/CEO First Funds Limited Bull Plaza (Con. Oil Building) 9 th Floor 38/39 Marina Lagos Tel: 234 -1 -2665211, 2665214, 2665250 Fax: 234 -1 -2660784. Website: www. firstfundsltd. com

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