South Africa's "tandem franchising" serves as an innovative business model for franchisors, builds economic empowerment



April 16, 2014

Africa Alert

Author(s): Kendal H. Tyre

“Tandem franchising,” an innovative franchise model unique to South Africa, is offering franchisors the opportunity to grow their brand, retain initial majority control of the new franchise and shares in its profits, all while working to empower communities in need of economic development. We’ve sketched out four options to consider when putting the model to work for a company.

The South African franchise industry has developed a unique form of joint venturing known as “tandem franchising”—an innovative approach that franchisors can take to empower communities in need of economic development.

Tandem franchising is a franchise model unique to South Africa and an effective tool for the implementation of black economic empowerment (BEE) initiatives in that country [1]. The basic structure involves a joint venture arrangement between a franchisor, which acts as an appointed mentor, and a new franchisee. The new franchisee purchases a minority stake in the business, often as little as 10%, and manages the day-to-day business with substantial oversight and mentoring from the appointed mentor. This new franchisee, who may lack the business management experience to operate the business alone, operates the business in “tandem” with the experienced franchisor and mentor. Initially, the franchisor retains the majority stake in the business and shares in its profits while providing management support and mentoring to the franchisee at a substantial level. Gradually, the franchisee can use its share of the profits generated from the business to purchase additional shares and slowly take control over more of the business. Eventually, the franchisee can become the sole owner of the business, at which point, the franchisor mentor exits the arrangement and the tandem franchise converts into a standard franchise arrangement.

This type of program is typically negotiated to take place over a pre-determined period of time, ranging from 3–5 years. It has become an effective tool in providing an entry into franchising for those individuals who may not possess the necessary skills, capital or collateral.

Parties to a franchise may structure a tandem franchise in various ways. However, there are typically three components in each model—a mentoring element, an equity element and a financing element. Franchising parties then have several options to effect each element. The chart below provides a quick guide to different models.

 

Option 1

Option 2

Option 3

Option 4

Mentorship Arrangement

Mentor selected by franchisor

Mentor selected by franchisor

An experienced franchisee serves as a mentor

A government organization or other group provides mentoring and support

Equity Structure

Franchisee acquires a minority interest in the franchise, which increases as time passes and the franchisee becomes more skilled.

Franchisee acquires a minority interest in the franchise, which increases as time passes and the franchisee becomes more skilled.

Franchisee acquires a minority interest in the franchise, which increases as time passes and the franchisee becomes more skilled.

Franchisee acquires a minority interest in the franchise, which increases as time passes and the franchisee becomes more skilled.

Financing Structure

The franchisor acquires a majority of the franchise and holds the interests until the franchisee purchases the interest. A financial institution may hold a portion of the interests.

A financial institution owns a majority interest in the franchise until the franchisee purchases the interest.

The franchisee owns a majority of shares and the franchisor, or other individual, continues to own a stake in the franchise.

A financial institution owns a majority interest in the franchise until the franchisee purchases the interest.

 
Although tandem franchising is certainly a promising option for franchisors, there are several risks of which franchisors should be aware. The franchisor would be required to make available a small stake in a new or existing business to a potentially inexperienced and unknown franchisee who is unable to contribute substantial finances. In addition, throughout the term of the tandem franchise arrangement, the franchisor would have to continually invest considerable resources to develop and train the franchisee into a self-sustaining and successful franchisee, with no guarantee of success. The typical attendant risks of the business would also affect the ultimate success of the franchised business.

Conclusion

The tandem franchising model provides a blueprint to franchisors and others seeking unique business partnership arrangements. These types of partnerships not only provide a source of revenue for franchisors, but tandem franchising also imparts business knowledge to entrepreneurs who may spur economic development in communities that need it.

With that said, a suitable  franchise candidate for tandem franchising, whether in South Africa or elsewhere, must be determined on an individual basis.


  1. Black Economic Empowerment (BEE) is a program launched by the South African government to redress the inequalities of apartheid by giving certain previously disadvantaged groups of South African citizens economic privileges previously not available to them. It includes measures such as employment preference, skills development, ownership, management, socioeconomic development and preferential procurement. [Back to reference]

    Additional information about franchising on the African continent can be found in Franchising in Africa 2014: Legal and Business Considerations, a book edited by Kendal Tyre, Diana Vilmenay-Hammond and Courtney Lindsay II. The book, published by LexNoir Foundation in March 2014, is a reference tool for practitioners, business people and academics. It focuses on the drafting of the relevant documents, the financing of franchise transactions in the region and the local legal issues in selected African countries.

    The chapter “Franchising in South Africa” was written by Taswell Papier in the Cape Town office of ENSafrica.

    Click here to view a video book trailer.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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