Why upskilling and legal formalisation is key to a stronger SME economy
JOHANNESBURG – Trying economic times in South Africa over the past decade have made doing business across the country particularly difficult for SMEs and entrepreneurs. According to official figures, 60 percent of South African SMEs fail within the first two years of their establishment.
Experts believe this is due not only to a lack of access to contracting markets, but also a lack of funding as venture capitalists become increasingly risk-averse as the economy continues to contract.
However, Nicolene Schoeman, founder and Managing Director of SchoemanLaw believes that a lack of legal intervention and a shortage of key business development skills among entrepreneurs play a critical role in why startup businesses are unable to go the distance.
“There is a definite link between business failure and a lack of legal intervention. Typically, entrepreneurs wade into their vocations without having so much as a grasp on the legal aspects of their business. “They tend to seek legal guidance and counsel when things turn sour, particularly in terms of client and employee contracts,” says Schoeman. “It’s this sort of reactive approach contributes to the failure of so many SMEs. It’s especially alarming, considering how reliant our country is on small businesses and enterprises.”
Presently, the SME sector accounts for 47 percent of the country's formalised workforce, contributing more than 20 percent to GDP and comprising approximately 6 percent of corporate taxes. But, despite representing a substantial component of the country’s economy, South Africa’s SMEs face significant challenges compared to other African nations and global emerging economies.
According to The World Bank Doing Business 2020 report, South Africa ranks 84th out of 190 countries, in terms of overall ease of doing business, falling beneath other BRICS partners Russia (28), India (63) and China (31). Furthermore, in terms of ease of starting a business, South Africa ranks 139th globally, again, beneath its respective BRICS partners Russia (40), China (27), India (136) and Brazil (138).
The report further stated that South African start-ups also take longer to establish themselves compared to their international counterparts. It takes 40 days, on average, to start a business in South Africa compared to nine days in China, 10 in Russia, 17 in Brazil and 18 in India. South Africa also falls beneath the sub-Saharan Africa average of 22 days, while ranking 47th out of 54 on the African continent.
Schoeman, whose boutique law firm has a client base consisting of 95 percent of entrepreneurs, says that while government’s solution to South Africa’s economic woes is to encourage entrepreneurship, more needs to be done in terms of skilling and educational development in order to make starting a business a viable and sustainable option.
“Broadly speaking, there is a massive shortage of critical skills and business management, not to mention financial literacy skills. It’s easy to encourage people to make their own way by way of entrepreneurship, but not all people are born entrepreneurs or have the passion and drive to become one. Government’s response to unemployment is often that people need to go and start a business, but it requires means, often specific education and a dedicated mindset. There are exceptions, of course, but they tend to be few and far between and there certainly aren’t enough of them to sustain the economy.”
SchoemanLaw Inc has seen a steady increase in cases concerning liquidations, business rescue applications, debt collections and employment disputes - signs, she says, of a stagnant or regressing economy. But Schoeman further argues that SMEs and entrepreneurs need to take greater cognisance of legal safeguards as part of their initial business plans.
“The moment you’re seen as not having made an attempt to mitigate your risk, such as having contracts in place, registration, tax clearance - all these legal compliance issues, that’s the moment funders and venture capitalists walk away,” Schoeman says.
“A shortage of financial literacy and business management skills can exacerbate this, meaning that you’re setting yourself up to fail in dramatic and expensive fashion. Funding is often needed urgently, so there’s no time to address all of these issues at once. That’s why it’s important to seek advice and get all your legal ducks in a row from the offset,” says Schoeman.
Schoeman points to 100 percent not-for-profit social enterprise Relate as an example of how careful planning and ongoing legal compliance has helped the business to weather 10 years of economic storms while conserving its employees and business relationships.
“Relate has a phenomenal model, which is not only sustainable but also circumspect. Although the non-profit model doesn’t translate directly to that of an SME, the principles of sustainability and longevity as a result of legal formalisation are the same for all businesses.”
Relate CEO Neil Robinson echoes this sentiment.
“As a not-for-profit enterprise, we share many business characteristics with SMEs, such as having to exist on limited resources and meeting targets with limited funds. Similarly, we have a board, management and tiered staff levels in order to run our business effectively and competitively. But Relate would not have survived through the past decade without legal formalisation,” says Robinson.
“SMEs and entrepreneurs thrive on networks, collaborations and partnerships. But without legal compliance, a single SME can detrimentally impact all other similar-sized organisations within their network. A massive proportion of South Africa’s economy relies on informal sectors, from which many SMEs originate, but informal sectors are not sufficient to stabilise our economy. It’s vital that government encourages formalisation, through resourceful facilitators such as SchoemanLaw, to sustain a more equitable and competitive body of economic contributors, which in turn can only lead to greater scope for job creation,” concludes Robinson.