SolarWorks Namibia: Branch, Franchise or Chain Partnership
SolarWorks Namibia, based in Windhoek, has traded for three years. Turnover is NAD 2.4 million, gross margin 28% and net profit 6%. The founder is the only certified installer; she employs two technicians, and the firm's practical installation capacity is about NAD 2.6 million a year. A two-person crew can install about NAD 1.3 million a year and costs about NAD 210,000 a year fully loaded. Three growth options are on the table. (A) Open a branch in Rundu for NAD 750,000, forecasting NAD 1.2 million of first-year sales at 26% margin and NAD 240,000 of branch fixed costs. (B) Franchise: three franchisees paying NAD 150,000 each plus a 6% royalty, on forecast franchisee sales of NAD 800,000 each a year. (C) Become the installation partner of a 14-store hardware chain, which forecasts NAD 4.2 million of annual installations at an 18% margin, paid 45 days after installation. The firm has no written operating procedures; the founder signs off every design; and the bank has offered NAD 400,000 at 11%. She must choose within a month.
1. Evaluate the three options against the numbers and the founder's capability constraints, and recommend one with conditions.
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Option A - Rundu branch. Gross profit 1.2m × 26% = NAD 312,000, less branch fixed costs NAD 240,000 = NAD 72,000 before head-office charges and the founder's travel. On NAD 750,000 of capital that is a 9.6% return in a good year, with payback beyond ten years. Worse, the founder is the only certified installer and every design needs her signature; splitting her between Windhoek and Rundu threatens the quality of the existing NAD 2.4 million base. Reject in this form.
Option B - franchising. Up-front fees 3 × NAD 150,000 = NAD 450,000; royalties 3 × 800,000 × 6% = NAD 144,000 a year at high margin and low capital. But franchising sells a proven system, and there is no written procedure, no second certified installer, no training manual and no audit capability. Selling NAD 150,000 of 'system' that exists only in the founder's head invites disputes and brand damage she cannot afford. Reject now, keep as a two-year goal.
Option C - chain partnership. 4.2m × 18% = NAD 756,000 gross, against 4.2m ÷ 1.3m = 3.2 crews, each costing NAD 210,000: about NAD 672,000 for 3.2 crews, leaving roughly NAD 84,000 before head office, warranty, rework, bad debts and working capital interest of 4.2m ÷ 12 × 1.5 months × 11% ≈ NAD 57,750. Net gain: near zero, and 64% of revenue would sit with one customer.
Recommendation: none as presented. Negotiate C at 22%, phased over 12 months and capped at 40% of capacity, and use the cash to document procedures and certify a second installer - which then makes B viable.
2. What must be in place before SolarWorks franchises, and why is franchising particularly risky for this firm now?
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Franchising is not a growth shortcut; it is the sale of a replicable system. A franchisee pays NAD 150,000 for a brand, a method and support. If any of those is missing, the fee becomes a liability.
Prerequisites, in order:
- Documented system - installation checklists, design rules, commissioning and handover procedures, a quality audit form. If the founder signs off every design today, the 'system' is a person.
- A certified second installer and a training programme, so franchisees can be trained and audited without the founder's presence.
- Unit economics a franchisee can believe in. Show a real installation's revenue, gross margin (28%), crew cost and payback. A franchisee investing perhaps NAD 600,000 needs a credible return before paying NAD 150,000 for the right to try.
- Legal and brand protection. A registered trade mark, a written franchise agreement covering territory, standards, royalty reporting, audit rights, termination and non-compete, plus Competition Act and consumer protection compliance.
- Support capacity - a person whose job is franchise support, not the founder's spare hours.
Why it is risky now: three franchisees at 6% of NAD 800,000 generate NAD 144,000 of royalty - small money against the damage three badly installed solar systems do to a brand in a market where one failed installation is public knowledge, warranty claims land on the franchisor, and the founder has no capacity to fix them. Franchise when the system is boring and repeatable, not while it depends on the founder's judgement.
3. The chain offers 22% instead of 18%, with 30-day payment. Does the decision change? Show the calculation and the capacity implication.
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Per crew at 22%. A crew handles NAD 1.3 million of installations; 22% = NAD 286,000 gross. Less crew cost NAD 210,000 = NAD 76,000 contribution per crew before head office, warranty and rework. At 18% the same crew produced 234,000 − 210,000 = NAD 24,000, which would not survive a single warranty claim.
At the full 4.2 million: 4.2m ÷ 1.3m = 3.23 crews, so at least 4 crews in practice (you cannot hire 0.23 of a crew). Gross profit 4.2m × 22% = NAD 924,000; crew cost 4 × 210,000 = NAD 840,000; contribution ≈ NAD 84,000 before head office and overhead. That is thin for the management effort involved.
Working capital improves: at 30 days, receivables fall from about 4.2m ÷ 12 × 1.5 = NAD 525,000 to about NAD 350,000; interest at 11% drops from roughly NAD 57,750 to NAD 38,500 a year.
Capacity is the binding constraint. Serving 4.2 million alongside the existing 2.4 million needs capacity of 6.6 million, i.e. five crews against today's two. The firm must hire and certify three crews in a year while its only certified installer is also designing, selling and supervising. Recruitment at that pace will dilute quality in exactly the product category where failure is visible and expensive.
Decision: the better price changes the arithmetic but not the constraint. Accept a phased agreement: 1.5 million in year one (one new crew), capped at 40% of total revenue, 22% margin, 30-day payment, written service-level standards and a 90-day exit clause. Use the year to build procedures and certify a second installer; revisit full volume, and franchising, once the firm can deliver quality without the founder in the room.