NatWest Notes on Franchising

Winning Franchise Formula Still a Safe Bet (3 March 2003)

Franchising is still a safe bet for many budding entrepreneurs, according to the 2003 NatWest/British Franchise Association (BFA) survey, with 91% of franchisees claiming that they made a profit in 2002.

The industry now has an annual turnover of £9.5 billion and the average franchise generates £299,000, an increase of 2% from 2001. The amount of turnover however, varies greatly depending on the type of franchise operation.

As the franchise industry is maturing, so are the new franchisees, with nearly 70% over the age of 40, an increase of 20% since 1992. The average length of time for which franchisees have held their business has also increased from 3.9 years in 1992 to 6.3 years in 2002 and the average initial cost of starting a franchise is now £59,200.

Franchisors remain positive about the future and prospect of expansion, with 79% of franchisors and 62% of franchisees expecting their business to improve in 2003. The average number of franchises operated by a franchisor increased by 9% in 2002 to 49 and this year growth expectations are again high, with the average number franchises predicted to increase by 15% to 57. Training is also now provided by 99% of franchisors, a huge increase from the 68% reported in 1992. Despite their optimistic outlook however, two in five franchisors state that they may not be able to realise these high expectations due to a lack of suitable franchisees.

Mark Scott, National Franchise Manager, said: "These figures underline the immense contribution that franchising makes to the UK economy. It is encouraging to see that the industry is both profitable and is maturing in terms of both length of service and age of entrepreneur."

Sir Bernard Ingham, President of the BFA, said: "Two facts from the 19th annual NatWest/BFA survey show how important this sector is. First, the sector is a major employer with a record 326,000 people earning their living in it. Second, its turnover is at a record high £9.5 billion.

"What is more, franchisors and franchisees alike are very optimistic about the future of their business. With 91% of franchisees reporting they are profitable, franchising would clearly be growing faster if only franchisors found it easier to recruit suitable franchises with whom to develop their businesses."

Key Findings - NatWest / BFA Survey 2003


General

There are an estimated 677 franchise systems in operation in the UK

There are an estimated 326,000 people employed in franchising

The initial cost of starting a franchise is £59,200 on average

91% of franchisees claim to be profitable

On average franchisees pay an estimated 7.2% of their turnover in recurring fees to their franchisors


Relationships

40% of franchisors report that a lack of suitable franchisees continues to thwart their plans

Relationships between franchisees and franchisors continue to be healthy, with 87% reporting satisfaction in their dealings


Profile of franchisee

It is becoming less common for franchise development managers to specify particular characteristics when looking for franchisees, with 83% not specifying an age range and 94% not specifying gender

Self motivation remains the most important attitude sought (57%), although there has been a marked increased in the number of franchisors looking for candidates who are hard working (20%) and have a hands on approach (13%)

85% of all franchisees are married

74% of franchisees are male

The average age for a franchisee is 45

Two thirds of franchisees were in salaried employment before taking out their current franchise


Other

Training is now provided by 99% of franchisors, a huge increase from the 68% reported in 1992


NatWest franchising checklist

Take a critical look at your strengths and weaknesses - are you sure you have the capacity, temperament and skills to run your own business? Marketing and selling skills are becoming more important in running a franchise

Make sure you have the full support of your family - the additional responsibilities and demands on your time will inevitably cause some strain

For new franchisors, check they have run a pilot, how long did it operate, is it still trading and what has it achieved in financial terms? If no pilot was operated, how does the franchisor know the franchise and therefore will you be successful?

Examine how well known the franchise and its service/product are. A good reputation is a head start in business

Look at the market as a whole - find out who your competitors are and how strong their position is

Examine costs closely, in particular the franchise fee and monthly management fee, and whether they are reasonable and value for money; will the margins be sufficient to support the business after payment of regular fees to the franchisor? As a guide, the average franchise fee is £20,000, although this is skewed in view of a small percentage of higher figures. Ongoing fees average 11.4%

Is the training provided by the franchisor sufficient to enable you to run the business successfully?

Seek professional advice from an accountant about income and profit projections and from an accountant about income projections and from a solicitor about the legal agreement. Both should have a good understanding of franchising and preferably be affiliated to the British Franchise Association

Talk to the NatWest Franchise section about the financial aspects of running a franchise and ask them to put you in touch with your nearest area franchise manager


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