NatWest/BFA survey

The results from this survey are based on the previous year, in this case 2007, with fieldwork being undertaken mainly during December. In recent years it has shown steady growth, a fact that is unchanged with the latest figures.

2007 again saw record figures in all the key findings.

Summary

In 2007 the industry grew at 15% whereas the UK economy only grew by 3.1%.

Turnover

The estimated annual turnover of the business format franchise sector is £12.4 billion.

Franchisors

• Using a strict definition of business format franchising, the number of active franchises identified was 809. This represents an increase of 3% on 2007 and demonstrates the increasing choice for potential franchisees.
• 77% of franchisors operate an independent system, 12% as a subsidiary of a parent company and 11% on a master licensee basis.
• On average franchise systems have been operating for 11 years.
• The cost to a business in setting up as a franchise in the first year ranges from £25,000 to £250,000, with the average being £155,000. In the last few years this figure has ranged from £150,000 to £170,000 and has remained fairly static at this level.

Franchisees

• The number of non-dairy franchised units is estimated at 34,200.
• The mean average annual sales per unit was over £360,000, the highest recorded and only the third time £300,000 was breached. This however reflects a wide range in individual unit turnover.
• 4.6% of units experienced some form of forced change, such as ill health and financial failure (4.1%). This is an increase on 1.8% for 2006 and reflects the challenges in the wider economy. However, it should be noted that the forced change figure was higher from 1999 – 2001, a period when the economy has been buoyant. The highest figure during this period was 6.2% in 2000.
• 36% of those who responded operate on a sole trader basis, 15% partnerships and 49% limited companies.
• The average age of a franchisee is also rising. In 1992 over half of all franchisees were under 40, now it is one third. Also confirming the stability and maturity of the sector is the average time a franchisee has been running their business. In 1992 the figure was 3.9 years and in 2007 it was 7.2. In 2006 it was 6.7.
• Interestingly 25% of new franchisees came from an Asian background and typically British Indians, clearly an area franchisor cannot afford to exclude when seeking new franchisees.

Action taken prior to purchasing a Franchise

Franchisees now undertake a number of activities before purchasing a franchise, which include checking the franchisors website (70%), attend an exhibition (41%), check the BFA website (46%), attend a NatWest sponsored seminar (5%), or attend a BFA seminar (6%).

Employment

The employment generated by franchising is at the core of its contribution to the economy as a whole. It is calculated that some 383,000 people are directly employed in the franchising sector, another record.

Profitability

The proportion of franchisees reporting profitability in the survey was 91% (compared with 70% in 1991 and 88% in 2004). This is encouraging when looked at in conjunction with the low failure rates.

Recruiting Franchisees

• On average it takes a franchisee 4 months to decide to purchase a franchise and a further 2 months to be trained and set up in business. Therefore it can take a new franchisor up to 6 months to recruit their first franchisee. This demonstrates a trend towards a shortening in this period over the last few years, however it hides an underlying difference dependent on the sector. For Hotel and Catering the time is 7.7 months, reflecting the delays associated with finding/securing the premises and transport and vehicle services it is 4.2 months.
• Lack of suitable franchisees continues to be the main barrier to growth, quoted by 65% of franchisors when prompted. The other reasons for slow growth include a wish to expand slowly/steadily (44% - up from 36% last year), lack of investment/financial backing (26% - down from 33%) and lack of available sites (25% - down from 29%). This last figure is potentially higher when a number of franchises can be operated from home or van/mobile.

Regional Distribution

This year’s figures show that regional representation is now apparent across all areas of the UK. This is the first time such representation has been apparent and demonstrates the maturing of the sector.

Franchisee Profile sought by Franchisors

Franchisors do not require their franchisees to have any specific skills or experience looking for a combination of skills such as self motivation, marketing, sales, business, drive and commitment.

Finance

• The average initial outlay for setting up a franchise is £64,900, though again this varies dependent on the sector.
• Banks continue to be the most important overall source of finance. Around half of franchisees borrowed money to set up. Of these 81% borrowed from the Banks (92% when over £20,000).
• The average amount borrowed, by those that do, was £70,000, up from £29,500 in 1992 – a huge increase.
• The average ongoing management service fee and advertising levy is 7.5% and 1.9% of franchisee’s turnover respectively.

Franchisor-Franchisee Relationships

Franchisor-franchisee relationship is of great importance in determining the success of the business and reassuringly 86% of franchisees regard their relationship as satisfactory. The majority of those that were dissatisfied unsurprisingly were also loss making.

Outlook

The franchising marketplace as a whole is generally optimistic about their future, although less so about the economy generally. When asked about their expectations over the next 12 months 81% of franchisors and 53% of franchisees forecast an improvement in their business. However when it comes to the economy in general overall a balance of - 44% of franchisees and - 49% of franchisors believe it will get worse – both of these are the highest ever negative figures recorded since the late 1990’s.

Overseas trading

265 franchisors have an operation elsewhere in the world.

Notes

1. The information in this document is extracted from the 23nd annual research study sponsored by NatWest. Copies of the survey are available from the British Franchise Association, telephone number 01491 578049/50.
2. The above information can be utilised in press articles, project work etc. subject to an acknowledgement of the source.