Highlights from The 2007 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 2006, with fieldwork being undertaken mainly during December. In recent years it has shown steady growth, a fact that is unchanged with the latest figures

2006 again saw record figures in all the key findings.

Summary
In 2006 the industry grew twice as fast as the UK economy.

Turnover
The estimated annual turnover of the business format franchise sector is £10.8 billion. It should be noted that this figure was £1 billion in 1984.

Franchisors
Using a strict definition of business format franchising, the number of active franchises identified was 781. This represents an increase of 3% on 2006 and demonstrates the increasing choice for potential franchisees. Overall this is a 44% increase over the last decade.

77% of franchisors operate an independent system, 9% as a subsidiary of a parent company and 14% on a master licensee basis.

On average franchise systems have been operating for 8.6 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 almost unchanged at £170,000.

Franchisees
The number of non-dairy franchised units is estimated at 31,600.

The mean average annual sales per unit was over £323,000, the highest recorded and only the second time £300,000 was breached. This however reflects a wide range in individual unit turnover.
1.8% of units experienced some form of forced change, such as ill health and financial failure (1.5%). This is very much in line with recent years.

33% of those who responded operate on a sole trader basis, 17% 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 2006 it was 6.7.

Action taken prior to purchasing a Franchise
Franchisees now undertake a number of activities before purchasing a franchise, which include checking the franchisors website (72%), investigating a number of franchises (54%), attend an exhibition (30%), check the BFA website (45%), obtaining an information pack from the BFA (25%), attend a NatWest sponsored seminar (11%), or attend a BFA seminar (7%).

Employment
The employment generated by franchising is at the core of its contribution to the economy as a whole. It is calculated that some 371,600 people are directly employed in the franchising sector, another record.

Profitability
The proportion of franchisees reporting profitability in the survey was 93% (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 5 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 7 months to recruit their first franchisee.

Lack of suitable franchisees continues to be the main barrier to growth, quoted by 71% of franchisors when prompted. The other reasons for slow growth include a wish to expand slowly/steadily (36%), lack of investment/financial backing (33%) and lack of available sites (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 evenly spread across all regions, although Northern Ireland, Wales, Scotland, the Northwest, West Midlands and East Anglia remain below the population index.

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 £45,400, 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 82% borrowed from the Banks (92% when over £20,000).

The average amount borrowed, by those that do, was £50,500, up from £29,500 in 1992.

The average ongoing management service fee and advertising levy is 7.5% and 3% 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 82% of franchisors and 56% of franchisees forecast an improvement in their business.

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

Note 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.

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