Franchise business owners feel lockdown pinch

From negotiating rental relief with landlords and royalty fees with franchisers to asking for relaxed loan repayments with banks, franchise operators are battling to survive the Covid-19 lockdown as trade continues to be restricted. 

According to the  Franchise Association of South Africa (FASA), businesses that have been operating for less than five years are hardest hit, and many other enterprises have not qualified for emergency funding.

Businesses such as fast food retailers, restaurants, beauty salons and other non-essential goods operators suspended operations from the end of March as part of a government-imposed national lockdown aimed at mitigating the spread of the coronavirus.

The restrictions have since been slightly relaxed to allow food deliveries, but restaurant sit-downs are still not permitted under the current Level 4 of lockdown.

This, says the association’s executive director, Vera Velasis, means restaurant owners are still not generating a large enough turnover to cover costs. 

Velasis told Fin24 that although some business operators had reached an agreement with landlords for a 100{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} rental waiver for April, and between 20{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} and 50{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of the normal rental going forward, utilities still needed to be paid.

Payroll challenges

“Meeting the monthly payroll is a huge challenge, especially for franchises that have been established for less than five years,” she said, as owners had not built up significant cash reserves.

Interventions such as the R1 billon Sukuma Relief Programme, backed by the Rupert family, and a government-funded SMME relief fund, have reported an overwhelming response from business owners impacted by the pandemic.

Velasis said one of the reasons some of the members of the association did not qualify for emergency funding was non-compliance with Broad Based Black Economic Empowerment  (B-BBEE) requirement.

The issue of empowerment criteria in the distribution of Covid-19 relief funds has ended up in the courts, with Solidarity and AfriForum launching a legal challenge against the department of tourism for using B-BBEE scores as a qualifying criterion for relief funding for companies in the tourism sector impacted by the lockdown.

“The longer the lockdown measures are applied across the board, the deeper the loss would be,” said Velasis.

She said 80{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of respondents to a survey conducted by the association believed that they would not be able to continue to maintain their business beyond July, unless they can be allowed to trade normally.

Franchising is often seen as a safe business model, as operators buy into an established brand with support from franchisers. About 26{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of franchise operators, which make up the largest portion of the industry, are in the fast foods and restaurants, followed by direct marketing at 18{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}.

Leisure and entertainment, construction, personal services, and telecommunications make the smallest segment at 5{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} and lower, according to research by FASA.

The average purchase price for a franchised outlet was R1 million, with working capital of around R480 000, and the average upfront franchise fee is R135 000.

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