2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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%.

9. 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).

10. 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)

11. 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.

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

13. 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.

14. How to Contact Us All enquiries should be directed to: MD/CEO First Funds Limited Bull Plaza (ConOil 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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