NatWest/BFA survey

Turnover
Franchisors
Franchisees
Action taken prior to purchasing a franchise
Employment
Profitability
Recruiting franchisees
Regional distribution
Franchisee profile sought by franchisors
Finance
Franchisor-franchisee relationships
Outlook
Overseas trading
Notes

Turnover
The estimated annual turnover of the business format franchise sector is £11.4 billion. In 1984 franchise sector turnover was £1 billion

Franchisors

• Using a strict definition of business format franchising, the number of active franchises identified was 838. This represents an increase of 3.6% on 2008 and continues to demonstrate the increasing choice for potential franchisees.
• 75% of franchisors operate an independent system, 13% as a subsidiary of a parent company and 12% 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 34,600.
• The mean average annual sales per unit was over £326,000, a fall of 9% on 2008 - not surprising given the economic situation. However this is only the fourth time £300,000 was breached. There is however, a wide range in individual unit turnover.
• 5% of units experienced some form of forced change, such as ill health and financial failure (4.1%). This is on a par with the figure reported in 2008 and therefore franchising is yet to see the full impact of the recession, if it does at all.
• 31% of those who responded operate on a sole trader basis, 14% partnerships and 55% limited companies.
• The average age of a franchisee has now stabilised at 47, with those having just started having an average age of 42. 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 this time it was 7.5 years.
• 17% of new franchisees came from an Asian background and 4% were black. Clearly franchisors cannot afford to exclude any ethnic backgrounds 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 franchisor's website (43%), attending an exhibition (27%), checking the BFA website (22%), speaking to the local business link (16%) or attending a NatWest sponsored seminar (4%).

Employment
The employment generated by franchising is at the core of its contribution to the economy as a whole. It is calculated that some 467,000 people are directly employed in the franchising sector, another record.

Profitability
The proportion of franchisees reporting profitability in the survey was 90% (compared with 70% in the last recession of the 90s). This is encouraging when looked at in conjunction with the low failure rates.

Recruiting franchisees

• On average it takes a franchisee four months to decide to purchase a franchise and a further two months to be trained and set up in business. Therefore it can take a new franchisor up to six 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 and securing the premises. For transport and vehicle services it is 4.2 months.
• This year the biggest barrier to a franchisor's growth is the economy - quoted by 56% of franchisors. This is followed by the lack of investment/financial backing (53% - up from 26% 12 months before). Lack of suitable franchisees, which in recent years has been the largest barrier, has fallen back to third position (36%).

Regional distribution
This year's figures show that regional representation is now apparent across all areas of the UK.

Franchisee profile sought by franchisors
Franchisors do not require their franchisees to have any specific skills or experience and are 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 £68,300, 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, 84% borrowed from banks (92% when over £20,000).
• The average amount borrowed was £49,000, with 36% needing to borrow in excess of £50,000
• The average ongoing management service fee is 8.2% (7.5% in 2008) and the average advertising levy is 3.9% (1.9%) of franchisee's turnover. Overall ongoing costs increased from 10.1% to 12.65% in the year - mainly a reflection of the increase in the advertising levy.

Franchisor-franchisee relationships
Franchisor-franchisee relationship is of great importance in determining the success of the business. 84% of franchisees regard their relationship as satisfactory. The majority of those that were dissatisfied 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, 55% of franchisors (81% in 2008) and 35% of franchisees (53%) forecast an improvement in their business. These are significant drops on 2008 and again not really surprising in the current financial climate.

Overseas trading
278 franchisors have an operation elsewhere in the world.

Notes
The information in this document is extracted from the 25th annual research study sponsored by NatWest. Copies of the survey are available from the British Franchise Association, telephone number 01865 379892.
This information can be utilised in press articles, project work etc. subject to an acknowledgement of the source.