BFA Survey

Highlights from the 2011 NatWest / BFA franchise survey

The annual NatWest/BFA franchise survey monitors the performance, attitudes and opinions of the franchise sector and, thereby, builds up a larger picture of the contribution of franchising to the British economy.

The results from this survey are based on the previous year, in this case 2010, with fieldwork being undertaken mainly during January 2011. In recent years it has shown steady growth, a fact that is unchanged with the latest figures.

Summary

2010 saw record figures in most of the key findings, which is very good news given the economic situation during the year for most other sectors of business.

Turnover
Franchisors
Franchisees
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 £12.4 billion (£11.8bn in 2009).

Franchisors

• Using a strict definition of business format franchising, the number of active franchises identified was 897. This represents an increase of 55 franchisors, however this hides the fact that there were 28 departures during the year and 83 new concepts. Of the departures none were due to financial reasons but just withdrew from franchising.
• 78% of franchisors operate an independent system, 12% as a subsidiary of a parent company and 10% on a master licensee basis.
• On average franchise systems have been operating for 10 years, though 1/3 have been operating for over 10 years, reflecting the large number of new entrants keeping the average the same on 2009.
• The cost to a business in setting up as a franchise in the first year ranges from £20,000 to £900,000, with the average being £150,000 - £170,000 that has remained fairly static at this level for a number of years.

Franchisees

• The number of non-dairy franchised units is estimated at 36,900.
• The mean average annual sales per unit were £335,000, the same figure as 2009 and similar to 2008, not surprising given the economic situation. However this remains only the sixth time £300,000 was breached. This however reflects a wide range in individual unit turnover.
• Overall franchisee ‘churn’ was 8.8%. This was made up of financial failure (3.1%), Dispute (0.8%), Realising Investment (1.2%), Retirement (1.1%), Ill Health/Domestic situation (1.4%) and ‘Other’ (1.2%). This failure rate was slightly higher than 2009 (2.6%). It is fair to say that these units have been restricted to a small number of franchisors.
• 34% of those who responded operate on a sole trader basis, 14% partnerships and 52% limited companies.
• The average age of a franchisee is identical to the last 2 years at 47, with those having just started having an average age of 39 (down from 42 last year). 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 8.4 years (having been 7.5 in 2008 and 2009).
• Interestingly 11% of new franchisees came from an Asian background and typically British Indians.

Checks taken by a potential franchisee prior to purchasing a franchise

Franchisees now undertake a number of activities before purchasing a franchise, which include making an assessment on whether fees are value for money (74%), assessing the impact on their family (72%), asking existing franchisees whether their business was profitable (70%) and asking their accountant (67%).

Interestingly 39% seek advice from a non-BFA solicitor and 20% from an affiliated one, where our advice is always to ask an affiliated lawyer. Worryingly this figure is down from 50% and 25% on last year and perhaps indicates franchisees are not taking proper legal advice before buying their franchise.

Employment

The employment generated by franchising is at the core of its contribution to the economy as a whole. It is calculated that some 521,000 people are directly employed in the franchising sector, an all time high.

Profitability

The proportion of franchisees reporting profitability in the survey was 90% (compared with 70% in the last recession of the 90’s). This is good news when looked at in conjunction with the low failure rates. However 28% of franchisees in their first 2 years of trading reported losses, the highest figure for many years. Last year this figure was 14%, 19% in 2008 and 12% in 2007 – before the recession started. This may mean that franchisees are utilising their own cash resources to continue to trade or more reliant on borrowed funds to live. If the current economic cycle continues for too long these businesses may continue to trade.

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.
• This year the biggest barrier to a franchisors growth is the lack of suitable franchisees (61%) the lack of investment/financial backing (56%), and third the economy (50% - though up from 44% last time).

Regional Distribution

This year’s figures again 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 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 £81,900, though again this varies dependent on the sector.
• Finance is needed by 61% of franchisees when setting up. Banks continue to be the most important overall source of finance (81%).
• The average amount borrowed, by those that do, was £66,500, with 20% needing to borrow in excess of £100,000
• The average ongoing Management Service Fee is 8.4% (11.2% in 2009, 8.2% in 2008 and 7.5% in 2007); showing that the high figure last year was perhaps a blip and now back to the normal figure of c. 8%. The average advertising levy is 2.3% (2.6%, 3.9% and 1.9% in last 3 years) of franchisee’s turnover respectively. Overall ongoing costs reduced to 11.1% down from 13.3% last year.
• The average franchise fee is now £14,600, the average investment £46,600, though in the Retail sector it is £98,000 and £22,000 in the personal services sector.
• NatWest remains the market leader for franchisors and franchisees banking.

Franchisor-franchisee relationships

Franchisor-franchisee relationship is of great importance in determining the success of the business and reassuringly 89% of franchisees regard their relationship as satisfactory (84% in 2009). 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 74% of franchisors (78% in 2009 and 55% in 2008) and 52% of franchisees (55% and 35% respectively) forecast an improvement in their business. These are similar figures to 2009.

Overseas trading

One third of franchisors have an operation elsewhere in the world.

Notes

Note 1: The information in this document is extracted from the 27th annual research study sponsored by NatWest. Copies of the survey are available from the British Franchise Association, telephone number 01865 379892.

Note 2: The above information can be utilised in press articles, project work etc. subject to an acknowledgement of the source.