Do you want to start a business in South Africa as a foreigner? If YES, here is a complete guide to starting a profitable business in South Africa without money.
Okay, having provided an in-depth analysis of the top 50 best small business ideas in South Africa and a series of industry-specific sample business plan templates; we will now analyze in detail the legal requirements, market feasibility and every other thing it takes to start a business in South Africa. So put on your entrepreneurial hat and let’s proceed.
If you are thinking of starting a business in Africa, then you should probably think of South Africa. South Africa which is one of the most diverse and sophisticated market offers investors a great deal of stability, a vibrant emerging market, and a climate – political, cultural, social, and environment – that promotes and fosters growth.
South Africa’s location at the tip of the continent is of great asset to investors, as this means that apart from the commercial opportunities within, it also has the potential of allowing investors access other markets – the rest of the continent.
Johannesburg Stock Exchange (JSE) ranks among the 20 top exchanges in the world by market capitalization. According to the 2015 – 16 Global Competitiveness Index by the World Economic Forum, South Africa out of 140 countries was ranked 1st for financing via the local equity market. It was also ranked 2nd for the regulation of securities exchanges.
Facts and Figures of South Africa That Will Interest You as an Investor/Entrepreneur
South Africa has got many facts and figures that make it one of the best countries to do business with in the African continent. Which is why so many foreign brands have sprouted up and so many indigenous brands are going strong and becoming international brands. Here are some facts and figures that will come in handy for you;
- As at 2016, South Africa ranked 49th out of 140 countries, an improvement from 2015, where they ranked 56th out of 144 countries.
- In 2015, the Open Budget Index stated that South Africa has the 3rd most transparent budget in the world.
- South Africa is a member of G20, and the only African country.
- As at 2015, South Africa ranked 4th overall in the Ibrahim Index, which measures the quality of African governance.
- South Africa contributes 23% to the combined Gross Domestic Product (GDP) of Africa.
- South African has a modern transport network, widely available energy that is of low cost, and a high standard of infrastructure.
- South Africa contributes about 35% to the combined GDP of sub-Saharan 48 African States.
- Even though it is home to only 6% of the continent’s population, it boasts of a 45% mineral production, and 50% of its buying power.
South Africa operates a free economy where trade and industry take place. Foreigners and locals are treated alike by the courts especially when it relates to businesses. However, most business disputes are settled out of court and being resolved via arbitration or agreement between the two parties. General legal practices that are of a commercial nature and relate to transactions are of international standard and adhere to best practices.
Possible Threats and Challenges You Will Face When Starting a Business in South Africa
Every country poses threats and challenges to businesses and South Africa which is a multifaceted country is no different, here are some challenges to face when you do business there;
- Bribery and Corruption
- Black Economic Empowerment (BEE) Fronting
- Getting Electricity
- Dealing with Construction Permits
Starting a Business in South Africa Without Money as a Foreigner – A Complete Guide
1. Have the right business idea: in order the start a business anywhere, the very first step is to have a solid and workable business idea. It is best to set your eyes on niches, products or services that you already have some sort of experience in. Building a business in a field where you have no previous knowledge or experience is going to be a lot tougher.
You need to know whether or not your great idea can actually be a business. How do you know? Unfortunately, you don’t always know; some entrepreneurs have invested their life’s savings into a concept that couldn’t actually be a business. To determine whether your business idea is viable, it helps to take a step back and look at the concept objectively.
You should ask yourself the following questions;
- Does the market for this product exist and is there enough demand for it?
- Will your potential target market pay for your service or product? You have to bear in mind that at times, people will not embrace a product even if it is cheaper because they like to stick with what they know and are familiar with.
- Is your potential target market already paying for something like you are offering? Do you honestly believe they’ll switch to your product or service?
- How will you determine your offering? Will you provide everything for everyone or will you decide on a niche product or service that you offer to a select target market?
The aim of asking all these questions is to do a sort of reality check. You don’t want to invest time and money into a business that isn’t viable. Your business needs a worthwhile potential target market because if you don’t have any customers, your business isn’t going to make any profit.
Do some background research into your potential target market and determine if they will make a feasible customer base for your business.
- Economic Analysis
Even though South Africa might not be the easiest of places to start a business in due to its multifaceted culture and history, it is still ranked by the World Bank and International Finance Corporation (IFC) as the 39th best place in the world as regards the ease of doing business. South Africa is also regarded as the powerhouse of Africa and is tipped to boost the continent’s growth by 5%.
As at 2014, the South African economy was forecast to grow to 2% by 2015. The forecast was also expected to improve further in 2016 and 2017. South Africa is regarded as the most sophisticated and developed economy in Africa with some indigenous big brand companies in finance, real estate and business services, manufacturing and wholesale and retail trade. South Africa is also regarded by the investors as a gateway to Africa due to its ease of doing business, comparative sophistication, and continental expertise as compared to the rest of the African countries.
South Africa’s business environment challenges are pale when compared to other developing nations in the world, especially as the country has a well developed transport infrastructure, robust financial and legal frameworks, as well as sound macro conditions. South Africa’s weather condition is also fair and the country has an abundance of natural resources.
2. Determine the type of ownership structure that is best for your situation: is the business going to be owned by only you (sole proprietorship), or will you own it alongside other people or a group of people? It is easier to determine ownership right at the beginning of a venture than to try and bring someone in half-way, or even after your business is up and running.
If more than one person is involved, you will have to determine the percentage of ownership for the business. Will you own the majority or will you spilt it evenly between yourself and your partner(s)? You should also determine exactly what each person will do and how much weight each person’s decisions or inputs will matter. Will the ‘ideas guy’ have more equity than the partner funding the operation? It’s hard to determine, which is why you should hash it out before you start your business.
Remember, sweat equity can count for more than money invested if the person has made real strides in building up your business with you. All of this is completely up to you, though. You ultimately choose who you want to involve in your business.
The Best Legal Entity to Use for Business in South Africa
It doesn’t matter the kind of business you intend to run, you would need a legal structure. A business that has a legal entity is one that has the legal capacity to litigate and also the competence to contract contracts. Here is a list of entities in South Africa to guide you;
- Sole Proprietorship
This is the simplest business entity where the owner of the business trades under his or her name with no separation of assets and liabilities. This means the sole proprietor does not enjoy unlimited liability as he can be held liable for any debts that might be incurred during the course of the business.
- Private Company (Pty) Ltd
In this kind of business entity, which is also known as a One-Man Company; the business is founded and managed by one director. The business must have at least a shareholder and if it has to take on more shareholders, the numbers must not exceed 50.
- Personal Liability Companies (Inc.)
In this kind of business entity, both the current and previous directors can be held liable for acts such as debts and liabilities that occurred during their time in office. Most firms where this kind of business entity is used are mostly that of professionals such as doctors, lawyers and accountants.
- Public Companies (Ltd)-: This is a kind of business entity where shares are issued and most times listed on the stock exchange. This kind of business is usually liable to shareholders and the management of such businesses is invested in a Board of Directors.
- State Owned Companies (SOC)-: This is a business entity that is owned by the state.
3. Putting the details in writing: when you have determined how much equity that will be shared among the parties involved, you will then have to put it in writing. This will help you in the long run should anyone misunderstand their position in the business or argue that they deserve more equity.
What you want at the end of this step is a simple agreement, without a lawyer or legal language. The agreement should display: percentage of ownership, money invested, time invested and who owns what.
List of Legal Documents You Need to Run a Business in South Africa
There are several documents that are needed to run a business in South Africa. Having the documents will save you from a whole lot of hassles from the government agencies that are in place to check defaulters. Listed below are some of the documents that you will be needing;
- Certificate of Incorporation
- Business Plan
- Insurance Policy
- Contract documents
- Business License
4. Get a business name: You could just use your own name as your business’ name, but the process is more involved than that. There are multiple stages to reach before you can complete this step, such as:
- Coming up with a creative idea
- Checking your potential name for availability
- Registering the name to make it legally yours.
You don’t have to legalize the name just yet, but start with ideas and discuss it with your business partners or friends and family. There are several misconceptions with it comes to what you can and can’t do with names. Don’t waste your time with those misunderstandings. Ask people what they think.
5. Sales forecasting: Your business won’t succeed without sales forecasting. You can’t calculate your business’ expenses, as well as your initial cash needs as part of your start-up costs without knowing potential sales.
There is a misconception about sales forecasting that many budding entrepreneurs believe: ‘It is a scientific process that I don’t know how to do’.
Actually, a sales forecast is an educated guess. A normal forecast would take into account previous months’ sales, but since you haven’t sold anything yet, you can’t really forecast it. What you can do is break it down into pieces by organizing it into a spreadsheet over a 12-month period to make your estimates for each month.
Consider how many expenses and steps will go into this process over those 12 months. Then take into account how much you’re going to charge per item or per service. Multiply those units by the rands per unit and you have a sales forecast.
6. Budget for expenses: Your expense budget layout, like your sales forecast, should be represented in a spreadsheet over 12 months. Consider how much you’ll be paying for rent, utilities, marketing and payroll, then include those costs into your expense budget.
Keep in mind that these figures are set in stone, so you could even try to reverse engineer your sales forecast based on what you need to make to cover all of these expenses. Also, keep in mind that you and your partners’ salaries will also feature on this report, so don’t forget to set money aside to pay the wages.
7. Estimate the needed startup costs: you can start by listing out the expenses you will have before you start the business and the expenses you will incur after you have set up the business. Expenses can be anything from legal costs, renovations, setting up your website as well as inventory.
It’s challenging to determine how much capital you’ll need to support your business until you break-even or make a profit. You’ll need to plot this month-by-month while comparing your sales to your expenses and keeping an eye on how money flows in and out.
Keep in mind, with a majority of business-to-business models, you have to wait an agreed upon amount of time before you get paid (30/60/90 days). Take this wait into account to mitigate cash flow challenges later.
A lot of times, start-up entrepreneurs make the mistake of trading from their personal bank account and as such, it can make it very difficult to differentiate between personal and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
8. Marketing: next, you will have to plan your marketing strategy. Here your aim is to target your ideal customer. The more detailed your picture of your target audience is, the more impact you will have on them. Consider his or her:
- Marital status
After you’ve determined who you’re sending the message to, you need to create the actual message. What is your message going to be? Is it something you can say in a single sentence? Where would you send that message for the greatest impact?
You’ll need to carefully consider your marketing strategy. Ensure that you’re targeting the correct audience and that you understand the strategy and how much work it will be to take your business to market. If traditional marketing like radio, print and TV is too expensive for you, explore digital channels – as these platforms are growing in popularity anyway.
9. Refine your vision: In this step, you can start developing how you want your company to look and feel from your consumers’ perspectives. What will your logo represent? What message will it actually convey? Every business has a brand identity, what will your business’ look like? Will your customers understand your message? Is there a difference between what you think your branding means, and what they think it means?
Start developing consistent logos, signs, letterheads, and graphic standards for your company’s look and feel. These will help your target audience feel connected with your brand and increasingly associate your products or services with your business.
10. Create a website: any business that is serious should have a website. Being connected to the internet is an important factor for your business. Unless you’re running an e-commerce business, you can build a website quite quickly.
Decide on the various elements for your website, and launch your website with the just the basics about you, your company, your products and services, if you have to. You can now use templates to speed-up the process even more. You can even leverage programs such as TypePad and WordPress. These sites were built for blogging, but you can use them to create your website. It involves little to no formatting work to help you save on web development costs.
11. Develop an invoicing process: you will have to consider how your customer will make their payments. Do you want to sell directly to your customers? If so, you will need to establish a merchant account so you can accept credit cards. Online suppliers have created a lot more options: you can set your business up with web stores, such as Amazon or Takealot, which can handle digital transactions with your customer.
If you’re selling directly to another business, you’ll need to add invoicing and credit policies to your business’ repertoire. You’ll need these systems up and running or your business might never be paid on time.
12. Get insurance: This is the moment when you take the time to talk to an insurance broker and get your business insurance started. You and your partners have invested time and effort into this venture. You’ll surely want compensation if something goes wrong.
Ask as many questions as you can to determine what kind of insurance your business needs. Then go out and find a broker either through the web or via the phone. Always remember to ask is there anything else I need or is there anyone else I should talk to. This will make sure you’ve covered all your bases.
13. Register your Company The company must be registered with the South African Registrar of Companies in Pretoria within 21 days of the company being started. Only businesses dealing in fresh foodstuffs or health matters are required to register with the local authority.
Business Licenses and Permits That are Needed to Start a Business in South Africa
Before starting a business, you would need to be sure if licenses are required so that you don’t break the laws. However, not all businesses require a license or permit before it can be run, but if it does, you would need to get a license before you can trade. They include the following;
- Food provision license – This is for those who intend to start a business that either involves sale of meals, perishable foodstuffs or take-away.
- Health and entertainment license – This is for those who intend to own business establishments such as nightclubs, adult premises, cinemas, massage treatments, health baths, electronic games etc
- South African Regional Service (SARS) Tax Certificate – This is for tax purposes.
- Zoning permit
- Liquor license
List of Government Agencies and Parastatals that are In-charge of Registering Businesses and Issuing Licenses and Permits in South Africa
South Africa has different government agencies and parastatals that have been empowered to be in charge of registering businesses. Not registering with the companies would mean the business is at risk of closure, so business owners must ensure that they know the necessary requirements necessary to start a business with.
Here is a brief list;
- Regional Service Council
This is for specialized enterprises such as liquor stores and arm dealers. No business in South Africa requires a license to trade. However, businesses must register with the Regional Service Council (RSC) in the area in which they operate.
- Unemployment Insurance Fund (UIF)
This is a requirement for all employers of labor, which means that all employees must be registered by their employers. It is a fund that provides temporary relief for workers who for one reason or the other can no longer work.
- Department of Labor
Registering with the department of labor is mandatory especially if you have an employee or several, and regardless of your business entity. Registering with the department of labor is important in terms of the Compensation for Occupational Injuries and Diseases Act (COIDA)
- South African Revenue Services (SARS)
Registration with SARS is pertinent whether your business entity is that of a sole proprietor, partnership or a private company. SARS is in charge of taxes, and sole proprietors or partners would need to register as provisional tax payers directly.
14. Finalize your location: if you offer a product or a service, it should impact your choice of location. The location of a business determines if it will be profitable or not. When considering where to base your operations, keep in mind the following: how your business should look, where it should be situated, as well as what competition is nearby. Even if you’re starting your business at home, this is the time to ensure you’re all set-up.
If you’re in retail, an ideal workshop or office space should be near to your customers, yet, it should not have too many competitions. Find a property broker to help you with this decision. You’ll need a broker that actually listens to what you want and don’t want.
Once you’ve reached this step, you’re ready to start looking for a location. This can be as simple as setting up your home office, or as complicated as finding a building and renovating from scratch. But, now is the time to start planning your potential work space, as this will create the most lag time in the process of starting your business.
Top 5 Cities to Do Business in South Africa
Even though a country might have factors to attract investors who are willing to start a business, not all cities in the country will have all the best factors possible. South Africa is no different as there are cities where investors prefer to launch their business in due to stability, profitability, and demographic composition. Here is a list of top 5 best cities to do business in South Africa;
- Western Cape – Cape Town
- Gauteng – Johannesburg
- KwaZulu-Natal – Durban
- Gauteng – Pretoria
- Eastern Cape – Port Elizabeth
15 .Get your books in order: there are a lot of accounting software that have made it possible to track every line item, every cheque, and every invoice you receive and send out. Keep a careful record of what you’re spending on, who owes you what; and before you know it you’ll be able to do the bookkeeping.
Your bank can potentially offer insights into which accounting software will be the best for your new business to avoid incompatible records. Remember though, if this isn’t you or your business partners’ area of expertise, you will need to hire someone to cover this vital part of your business.
16. Bring in lawyers: This is the step where you have everything legalized, from formalizing the ownership to registering the name of your business. This is the step where you lock in all of those decisions and have an attorney draw up legal documents to verify everything.
17. Hire employees: This is where you hire those employees and team members. Ensure you’re aware of what you can and can’t ask in a job interview. There are privacy laws to consider that could lead to the appearance or suspicion of discrimination if your line of questioning isn’t appropriate.
18. Funding: the amount of funds you will need will depend on the type of business you want to operate. Some businesses need a few thousand rands, while others need millions of rands from professional investors.
If you’re raising money, you will need to write a detailed business plan, find potential investors and sell them on your concept. If you’re aiming to get professional investors, this could take some time. You can still launch your business with the money you have, as this will make you look more attractive to investors.
19. Open your doors: A fun and exciting open day is a good opportunity to start your business marketing right. Plan your opening day and make sure everyone knows about it. Write a press release, talk to local reporters and get the message out to the general public. Ideally, you’ll want to build hype and buzz; this will put you on your customers’ radar. Focus today on getting as many customers through the door as you can. Keep a sharp eye on what works, what doesn’t and what you could improve.
Factors or Incentives Encouraging Investors to Venture into Business in South Africa
South Africa is a promising emerging market that is diverse and sophisticated. It has enormous potential as an investment destination especially as it is located at the tip of the African continent. Here are some factors that will be of benefits to investors who venture into business in South Africa;
- Sound economic policies
- World class infrastructure
- Favorable legal and business environment
- Access to markets
- Trade reform and strategic alliances
- Global competitiveness
- Industrial capability
- Cutting edge technology
Starting a Business in South Africa – Market Feasibility Research
Due to South Africa’s economic policies especially that of its Black Economic Empowerment (BEE), it has seen an increase in the country’s growth rate, thereby helping South Africa move ahead of India as a destination for foreign direct investment. This was also made possible through the help of foreign brands in the country such as Deutsche Bank, Merrill Lynch and Blackstar investors.
South Africa’s investment in its infrastructure is as a result of its needing to pave the way for sustainable growth. Also, the country’s location makes it an ideal gateway to other African markets.
South Africa is also one of the largest investors in Africa. According to a 2003 research by LiquidAfrica, South Africa was the largest investor between 1990 and 2000, and pumped back over $12.5 billion into the continent. It is also the first country to sponsor FIFA in Africa with a total investment of $65 million in the 2010 tournament.
List of 10 Well Known Foreign Brands Doing Business in South Africa
Even though South Africa is a home to many indigenous popular brands, the foreign brands have also gained a strong foothold and aren’t doing badly for themselves. Here is a list of 10 well known foreign brands in South Africa;
- Coca Cola
List of 10 well known indigenous Entrepreneurs in South Africa
Every country has indigenous entrepreneurs who are doing so well that they can compete favorably with their foreign counterparts. These indigenous entrepreneurs have so become a force to be reckoned with that they are also known outside of the country.
Here is a list of indigenous entrepreneurs doing business in South Africa;
- Elon Musk – PayPal, SpaceX and Tesla
- Mark Shuttleworth – Canonical Ltd
- Patrice Motsepe – African Rainbow Minerals
- Anton Rupert – Rembrandt Group
- Tokyo Sexwale – Mvelaphanda Holdings
- Sol Kerzner – Sun City
- Raymond Ackerman – Pick n Pay
- Cyril Ramaphosa – Bidvest group Ltd and MTN
- Herman Mashaba – Black Like Me
- Ronnie Apteker – Internet Solutions
List of 10 Most Popular Indigenous Entrepreneurs/Business Owners
South Africa is blessed to have many indigenous brands that have not only become popular within the country – from telecommunications, banks, to food and retail – but outside as well, which is a testament to how the country strives at being the best in Africa. Here are 10 most popular indigenous businesses in South Africa;