The South African government has implemented many policies and programmes to promote job creation and entrepreneurship, particularly amongst the alarmingly high numbers of unemployed youth. The focus of these policies and programmes has been on the creation of start-up businesses.
Despite the vast resources committed to these programmes, their success at reducing unemployment is almost negligible.
Given that South Africa is resource strapped, does this focus on start-up creation represent the most effective policy stance towards small business? And if not, what policy measures should the government be focusing on instead?
Job creation power
The importance of small businesses overall in terms of employment is unquestionable. The Adcorp Employment Index for March 2012 shows that, in South Africa, 68% of employees are employed by small businesses employing less than 50 people, with two-thirds working at businesses that have less than five employees.
South Africa’s start-up business rate of 5.2%, as per the GEM 2011 Report, is notably higher than its new business rate of 4.0%, indicating that start-up firms dominate the country’s total early-stage entrepreneurial activity.
The GEM 2005 Report found that less than 4% of start-up businesses (defined as functioning for less than three and a half years) take on any staff. Mike Herrington, executive director of the Centre for Innovation and Entrepreneurship at the UCT Graduate School of Business, points out that this means that for every 100 new small businesses, only about 10 additional jobs will be created.
On the other hand, further evidence from GEM shows that established small businesses, those that have survived for three and a half years or longer, are the ones that create jobs. The GEM 2011 Report states that these businesses create 3.2 jobs on average, and further states that established small businesses create 32 times the employment opportunities that start-up businesses do.
The GEM 2011 Report indicates that South Africa has an established business ownership rate of 2.3%, which is substantially lower than the average of 7.2% for all participating efficiency-driven countries. In terms of established business activity, South Africa ranked 52nd out of 54 countries.
This suggests that to create more jobs government policy should focus on supporting established small businesses rather than start-ups.
Interventions for sustainable job creation
While the government’s New Growth Path (NGP) targets for job creation appear ever more unlikely to materialise, it is essential to identify the interventions that are most likely to lead to sustainable job creation.
Focus on established businesses with potential for considerable growth
Most often it is the operation that employs around 10 people that is ready to cope with expansion. These are the businesses that should be receiving the bulk of our support services in the form of incentives, grants, export assistance, access to new markets, mentorship for the processes of business expansion, and even subsidies for selected essential services such as financial and HR consulting.
Agencies such as the National Empowerment Fund (NEF) and the Industrial Development Corporation (IDC) should actively court these small businesses and provide them with proposals for expansion. Private sector agencies and banks should aggressively target this sector. In addition, giving procurement preference to this sector would assist suppliers with capacity building.
Relax labour policies
A working paper published by the African Development Bank in October 2012 states that:
Firm level surveys indicate that the single greatest impediment to the more rapid growth of outward-oriented manufacturing in South Africa is the high level of real wages relative to productivity levels. […] Labour market regulation – in particular the “extension provision” which requires collective bargaining agreements to be extended to all firms in an industry, regardless of size – is inhibiting investment and growth.
Small businesses cannot currently hire staff in confidence, because it is so difficult to fire people who are not performing. The Global Competitiveness Report 2011-2012 ranked South Africa 139th out of 142 countries in terms of rigid hiring and firing practices.
While laws to protect employees against exploitation and abuse are needed, there has to be a balance that makes it easier for companies to choose and retain the best person for the job. Relaxing the current dismissal regulations for the discretionary probation period would go a long way towards addressing this matter.
The existing regulations are counter-productive. Thousands of small businesses in South Africa, in fear of the arduous and costly dismissal process, are resorting to using temporary staff or hiring people only on short-term contracts.
The Adcorp May 2012 Employment Index notes that since 2000, permanent employment has fallen from 11.0 million to 9.1 million workers, a decline of 1.9 million workers or 18.7% of the workforce. In the same period, the number of temporary workers has increased by 2.6 million workers or 187.5%.
For the people in these jobs there is no job security; neither is there an incentive to strive to become a valued member of the workforce.
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Import needed skills
The concern that foreign workers will take jobs away from local people is misdirected – a lack of skills inhibits job creation because without a skilled workforce the economy cannot grow. When intellectual capital flows freely, it supports growth; yet current policies deny South Africa the benefit of an influx of skills, further stifling our economy.
Brazil, which has the world’s sixth largest economy, has traditionally had a permissive immigration policy. Its booming economy is now attracting growing numbers of Portuguese speaking immigrants from job-starved Europe.
Entrepreneurship is flourishing in Brazil– its Global Entrepreneurship Week in 2010 attracted 50 000 entrepreneurs, compared with the 8 000 who attended South Africa’s.
Open up access to African markets
Intra-African trade is tiny relative to what it could be. Given a giant market on our doorstep (up to 30% of Africans are now middle-income earners)South Africa fails to compete with suppliers from abroad. Indian, Chinese and South American products are flooding into Africa– where are the South African goods?
Our potential exporters are hampered by old trade monopolies, cumbersome Forex regulations, corruption, cross-border nightmares and a lack of infrastructure.
Government is not working hard and fast enough with its African trading partners to ease the trading environment, improve capacity at border posts, and clear the obstacles to a smooth movement of goods. South Africais ranked as 115th out of 185 economies for ease of trading across borders in The World Bank’s Doing Business Guide 2013. This is a regional problem that is stifling cross-border trade: Sub-Saharan Africa on average ranks 137th.
Focus on entrepreneurial education rather than start-up financing
Contrary to popular opinion, lack of access to finance is not the primary obstacle to small business growth. More money won’t solve the problem. A bigger concern should be entrepreneurial skills development and education.
A Development Bank of Southern Africa working paper published in 2011 summarises the South African government’s youth entrepreneurship programmes as follows:
The NYDA is responsible for overseeing and monitoring these interventions for young people, including the provision of loans for young entrepreneurs, business development services, potential support for youth cooperatives and the introduction of youth entrepreneurial training in schools. However, the number of young people accessing these services in 2010 was almost negligible. Hence, there is a major gap in youth entrepreneurial training, which needs to be addressed if self-employment is to provide a pathway into employment for young people.
Emerging entrepreneurs urgently need to learn to understand the concept of a commercially viable business. A legacy of our failed education system and the previous deliberate marginalisation of black entrepreneurs is that the majority of emerging entrepreneurs have not had exposure to the complexities of building a viable and sustainable business.
They also often have no experience in identifying viable opportunities and developing these into sustainable ventures.
Banks would love to lend more money if it meant that they could get a competitive return on their investment. There is a great deal more money chasing good ideas than there are good ideas trying to get funding. Again, the solution is to give targeted support to those businesses that have the right potential, and the funding would follow.
Here, the private sector could make a strong contribution in the short-term by deploying skilled personnel (even for a few hours a month) to mentor smaller companies within their supply chains.
Whatever the problems in the small business sector, South Africans are enterprising. With the correct support directed at high potential established small businesses, a lighter corporate governance load and entrepreneurially friendly legislation, entrepreneurship can be the solution to reducing poverty and increasing job creation.
How Schindlers Attorneys Became Involved In The Landmark Cannabis Case
Everything you accomplish accumulates and eventually comes back to assist you further along in your career. This is how a final year LLB assignment became the basis for a Constitutional Court case.
Schindlers Attorneys are the law firm that were involved in the landmark Constitutional Court judgement on cannabis use within a private space. Paul-Michael Keichel, Partner at Schindlers Attorneys shares how they came to be the foremost legal experts on cannabis and how they became involved in the Constitutional Court case:
How the journey began
“In 2005, my first year at Rhodes University, whilst studying for Intro to Law, it occurred to me that there were strong constitutional points that could be raised to objectively justify the decriminalisation of cannabis in South Africa,” explains Paul-Michael Keichel.
“In my final year LLB, 2009, I took Constitutional Litigation as an elective (largely motivated by the creation of a timetable clash, which meant that I’d not have to sit another semester of lectures for a module that I had failed the previous year). This provided me with the opportunity to write an assignment titled “A Critical Analysis of Prince and an Objective Justification for the Decriminalisation of Marijuana in South Africa”, in which I composed my argument (based on the right to equality in our Constitution).”
The start of the partnership
“Fast forward to 2013 and the Dagga Couple find themselves at Schindlers (where I am a first-year associate) to register their NPC, “Fields of Green for All”. The attorney handling the registration (who I’d also bored with my argument) suggests to the Dagga Couple that they speak to me. It turns out that they already knew of me, because my assignment had (unbeknownst to me) done the rounds on the underground cannabis networks. We get chatting and I rope-in my brother, Maurice Crespi, the managing partner of Schindlers,” explains Keichel.
“We are the only firm out of many approached by the Couple who are willing to take on their trial action against 7 state departments and Doctors for Life to push for a declaration of constitutional invalidity of the laws prohibiting cannabis use/possession/dealing in South Africa. We decide to run the challenge for them pro bono.”
The Cape ruling that started it all
“Prince and Acton et al have their matter heard in the Cape, which resulted in the 2017 Judgment. We run a portion of our trial (including expert evidence from international scientists and doctors – the best in field), but it is rendered part-heard. We then heard that Prince and Acton et al’s matter will be heard by the Constitutional Court in November 2017 and we decide, with the Dagga Couple, to intervene in that matter, upon which it is confirmed that my 2009 assignment forms the on-record basis of a major chunk of Prince and Acton et al’s arguments in support of legalisation.”
“Our involvement in the Constitutional Court was such that we provided clear legal argument and authority to support and expand upon what Prince and Acton et al were trying to say to the Court. Ultimately, much of what we submitted has found its way into the judgment of the Constitutional Court.”
How a final assignment became the foundation for a Constitutional Court case
“So, an idea (bolstered by wanting to create a timetable clash) resulted in an assignment, which provided certain credibility and impetus to cannabis activists. Two of these activists ended up being our clients, which, despite being handled pro bono, has brought Schindlers immeasurable positive publicity, and which, ultimately, contributed to the decriminalisation (and potential future legalisation and commercialisation) of cannabis in our country.”
“Schindlers now has a dedicated “Medicinal and Recreational Cannabis Law” department, through which we will continue to make submissions to parliament, apply for licenses on behalf of our clients, support those who have been arrested and charged.”
6 Ways To Win A Better Deal
Be proactive not reactive by working through these six critical elements of your strategy.
By far, the majority of our clients start the journey of selling their business by working on a very reactive basis. Most business owners going to market say they just want to ‘see what happens’. But this means you are starting the process on the back foot.
This approach automatically takes the control of the business sale out of your hands and puts it into the hands of the market. Keeping control is a critical element in selling your business for maximum value.
Letting the market tell you what they think about your business and what they want from you means that straight away the acquirers set the hoops that you need to jump through.
They tell you what they want. Any engagement is on their terms.
You have not defined terms or standards to use as a yardstick for what the market is saying. So you are much more likely to find yourself boxed into a corner, forced into the role of price taker rather than price maker.
Taking the time to define your ‘go to market’ strategy is a critical factor in achieving success for yourself, what you want for your business and how the market aligns to this.
Be proactive not reactive by working through these six critical elements of your strategy:
1. Define your non-negotiables
We all have certain non-negotiables in our lives and you must think through those that you want to apply to the sale of your business.
Spend quality time working out what your personal and business non-negotiables are. Then make sure that they feature prominently in your deal strategy. Examples could be:
- I am prepared to stay on for only 18 months after the sale conclusion.
- My staff need to be looked after as they have been with me for 20 years and are like family.
- I want to sell 100% of my shareholding on Day 1.
- I am not prepared to warrant future profits.
When you start out on the selling journey, this list will probably be a lot longer. Usually, it will reduce as you travel further and further down this road but you may even add new non-negotiables once you climb into the trenches and take control of the process.
Don’t be shy about presenting your list of non-negotiables to prospective buyers. They will certainly be putting forward their own list as well.
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2. How ready and committed are you to sell your business?
Selling your business is one of the biggest decisions that you will take in your life. It is an emotional rollercoaster. You will face more questions than answers as you progress down this road. Nobody can ever be 100% ready but you can help yourself prepare as much as possible by asking yourself the following questions:
- Do I know what my business is worth?
- Is my business ready for acquirers to see?
- Am I ready to let go of my business?
- Can my business run without me?
- What makes my business attractive and enticing to an acquirer?
- Do I have the time and skills to embark on selling my business myself?
As you work through these questions, a whole host of other questions will probably occur to you. Be decisive, objective and critical in asking and answering all these questions.
3. Put a plan together
Like any other business or strategy implementation, selling your business is a project. All projects need a plan of the objectives, timing, resources and risks required to succeed.
Selling your business is by far one of the most important projects that you will ever drive and also one with the least room for error. Your planning cannot control the biggest variable of all – how the market will react to your business. But being as well prepared as possible will help you cope with this.
4. The market wants a serious seller
The way that your business and personal brands show up in the exit process is critical. Buying or selling a business is a very time-consuming process, with both seller and acquirer committing quantities of effort, energy and resources.
The market therefore wants to deal with a committed and serious seller. Any business owner just dipping his/her toe into the water to see what happens will frustrate them and potentially damage future transactions if that toe is removed from that water.
5. Be ready for the experts
You are brilliant at running your own business, which is why you are considering selling it for maximum value. The acquirers on the other side of the table are, of course, also experts at what they do and how they do it.
Expect them to speak a different corporate language, exude negotiation and transaction skills and have mastered the ability to control the transaction. If you do not have a strategy or blueprint to default to when the heat gets too high, you will lose your way and could be blindsided into the wrong transaction.
6. Bring it all together
Work through the various steps identified above and craft your deal strategy. Let this framework be your compass during the transaction.
Always lean on it when there are too many variables being thrown at you. Having your strategy is the first step. Sticking to it will be your biggest test when the pressure is on.
Hooked On Ethics
The business that puts ethics at the forefront of its culture is the one that will shine in a landscape littered with dishonest behaviour.
There is significant research into how the work environment influences ethical behaviour. Study after study has shown how the ethical values upheld by management filter down to all employees, affecting behaviour and business practice. The biggest influence on a person’s ethics is their environment. In South Africa, the after effects of the recent political regime continue to shake both country and citizen. Corruption has seeped into almost every part of the government and in some of the country’s most prominent private organisations.
The old saying that the ‘fish rots from the head’ has never been truer, nor more obvious.
The ethical dilemma
The reality is that the government’s flagrant disregard for ethics saw corruption become a part of everyday life. This makes almost everyone ask themselves questions like – why should I pay X utility bill? Why should I pay my TV license? The money is being clearly used fraudulently. Sure, it is the law, but leadership has proven that ethical behaviour isn’t rewarded or recognised.
But it is. The value of building an ethical business and upholding a culture that promotes honesty and integrity cannot be understated.
Here are five reasons why…
- Those who skirt the edges of ethics almost always get caught. There has been a steady shift in the country’s moral compass as leadership has taken a far stronger stance on rooting out corruption and already some of the country’s biggest names have been found guilty. KPMG, McKinsey, Bell Pottinger and SAP have all had their names tarnished by the scandals that have rocked the country.
- Employees are more engaged and better behaved. A weak ethical culture filters down from the top, influencing behaviour and attitudes. If employees feel that they can get away with bad behaviour that benefits them, or if they feel that their environment encourages this, then they will.
- A strong ethical influence will dictate how employees treat customers and one another. If your company enforces and rewards honesty and integrity, then these will be the qualities that clients will perceive. Their lack may also see you lose market share and your reputation.
- Like attracts like. If you create a culture that rewards employees that work all hours, deliver the goods and commit themselves then you will attract more people with these qualities. The same applies in reverse – reward bad behaviour and the results will rapidly speak for themselves.
- Your business reputation. Trust can’t be bought. It is hard won and easily lost. If you lose your reputation then it is very unlikely you will win it back and it will follow you for the rest of your life. The same applies to your staff. If their behaviour is questionable it could damage your company. Make sure you set the rules of what is or is not tolerated by your company culture and consider investing into ethics courses that allow your teams to stay ahead of the curve.
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