UK franchise industry continues to flourish

Mark Scott, NatWest’s Director Franchise Development, looks at some of the key points revealed in the latest survey about the UK franchise industry.

The latest NatWest/British Franchise Association (bfa) Survey for 2012 has discovered that the franchise industry in this country continues to buck the trend when compared to the economy as a whole.

Some of the most noticeable figures for comparison are that the sector employed a further 73,000 people while the number of those unemployed rose by 183,000 during the same period, and whereas UK GDP rose 0.7 per cent, the franchise sector increased by eight per cent. The figures overall in these two areas now stand at 594,000 people employed and annual turnover of £13.4 billion.

While other sectors contracted over the year, nine out of 10 franchise businesses posted a profit; reducing loss-makers to pre-recession levels. Further growth is also likely as 76 per cent of those surveyed expect business to improve in the coming months – compared to only 44 per cent of all small and medium size enterprises (SMEs). Most – 80 per cent – believe that franchising gives them a competitive advantage over other small businesses as they have the support of a larger brand.

While there remains a risk of failure to franchise businesses – typically dependent on whether a franchise owner follows the tried and tested system or not – the failure rate of franchise owners again remained low at 2.6 per cent. For franchisors, this figure was even better as there were no failures during the year, which is not unusual in the sector. This again highlights the benefit of belonging to a large brand, rather then going independent.

The number of franchising systems operating right across the UK increased to 929, with 40,100 franchise owners in total employing 594,000 staff. The number of larger franchise units employing more than 11 members of staff rose by 30 per cent in the past year according to the survey.

Strong export activity for goods and services may also have helped franchising weather the economic downturn better than most, with one in three already trading overseas. Franchising also looks to be setting the pace for future export growth, of those non-exporters, 38 per cent plan to do so in the future compared to only 22 per cent of SMEs not already trading abroad.

Perhaps not unexpectedly, the average age of a franchise owner rose slightly to 49, though the average age for a franchise owner that joined in the last two years was 39. This reflects the average time a franchise owner has held their franchise, which is 8.4 years. It should be remembered that in 1992, the figure was less than four years. This statistic, the fact there are more franchise systems with more than 100 franchise owners than ever before and franchisors are more established than previously – with the average time established being nine years – confirms that the sector is becoming increasingly mature.

For a potential franchise owner, they need to look at the fees being charged by their potential franchisor and consider whether these are in line with the industry norm. The latest survey found that the typical franchise fee was between £10,000 and £25,000 and that the typical Management Service Fee is a fraction under 10 per cent.

For a new franchise owner taking on a franchise there are two considerations:

  1. Is the Franchise Fee value for money? Why is it higher or lower than the norm, perhaps it is a strong household brand if higher?
  2. If the fee is lower than the norm, is the franchisor satisfactorily resourced to support you as a franchise owner?

In terms of finance, 54 per cent borrowed to set up their franchise, with the average being £22,000. Of those that borrowed, 84 per cent do so from banks.

Pleasingly for NatWest, we continue to be the market leader for the banking of franchisors and franchise owners and indeed we are most recommended by franchisors as the bank to refer their franchise owners to.