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2018 Franchise landscape
Brought to you by the bfa and NatWest
of franchi
gional
of franchising
in the UK
din
franchising
Franchis
onships
Contents
Introduction
Key findings
The size and scale of franchising in the UK
Dynamics within the franchise industry
The economic contribution of franchising
Regional distribution of franchising in the UK
The international dimension of franchising
Franchisee recruitment
Costs, fees and ongoing charges
Franchisor/franchisee relationships
Background to the survey
Technical appendix: survey method
This report looks at the results of the 31st survey
amongst franchisors and franchisees in the
UK, conducted on behalf of the British Franchise
Association (bfa), in partnership with NatWest.
Overall, UK franchising remains in good health
and the sector continues to expand and mature.
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Introduction/
contents
Key findings
Key findings The overall findings of the report are very positive, with record
growth in numerous areas. Up 2.1 bn since 2015 Up 89,000 since 2015
+14%
Up 4,400 since 2015
+10%
The total contribution of franchising to the UK economy is +14%
reckoned to be in excess of £17 billion, up over £2 billion since
the previous stats in 2015. Furthermore, there has been
a significant increase in the estimated overall number of people
working in franchising, with over 700,000 people employed in
Dynamics within the the sector, with a little over half in full-time employment.
franchise industry
The size and scale
of franchising
in the UK
While around 70% of franchisees are male, the indications are that
around 65% of those employed within franchise units are female. rai rarer ides
The economic Furthermore, more females are becoming franchisees, with a 20% are under 30
contribution jump since the 2015 report. of franchisees claimed
of franchising profitability in 2018
More under 30s are also getting into franchising by becoming
fasianal deteutien franchise business owners, with 18% of all franchisees now under
oareanchsiy 30. Of the new franchisees under 30, 52% are female, with 37%
in the UK of all new franchisees in the last 2 years being female.
There are an estimated 48,600 franchised units in the UK, the 6 in 10 franchised
The international highest number ever and nearly two times more than 25 years units turn
dimension of ago, with the number of franchisees reckoned to be around over more than
liseli 20,000. That's because around a third of franchisees own
and run multiple units.
Franchisee One in three franchisors also have international operations.
recruitment Of those who do not currently operate internationally, 4% have
a definite business plan to do so, and a further 30% are
considering it an as option. of new
franchisees
are women
Costs, fees and . 7 7
ongoing charges The biggest growth areas for franchising remain personal services
and hotel and catering, although store retailing also shows some
ri ni Ps a +20% since 2015
growth, despite a challenging environment for retail.
Multi-unit of people employed
franchising in franchisee
is on the up at businesses are women
Franchisor/franchisee
Franchisees claimed profitability remains high at 93%, and
relationships
over two-thirds of franchised units that have been running for
five years or more report being either quite or highly profitable.
60% of franchised units turn over more than £250,000.
Failure rates for franchises remain very low, with fewer than
1% per year closing due to commercial failure.
Background
to the survey
+7% since 2015
Technical appendix:
Source: The British Franchise Association/NatWest Franchise Survey 2017
survey method if
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troduc
content
The last time the survey was conducted in 2015, the bfa made
a substantial revision to make sure that all active franchise systems
were included and all those that were no longer active were removed.
This resulted in a reduction in system numbers but an increase in unit
numbers overall. When a further revision took place this year, a net
34 systems were added. Figure 1 shows that in the 22 years since
1996, the number of active UK franchise systems has doubled.
Figure 1: Number of UK franchise systems over time
of franchising
in the UK 950 p
0s
850 F
“8
750
650 =
550 ll
firs
450
350 =
250I 4
150
50
chnical apper
Introduction/
contents
Dynamics within the
franchise industry
The economic
contribution
of franchising
Regional distribution
of Franchising
in the UK
The international
dimension of
franchising
Franch
recruitment
Costs, fe
‘ongoing char:
Franchisor/franchisee
relationships
Background
to the survey
Technical appendix:
survey method
In the past 7 years, the number of systems has only increased slightly,
from 929 to 935 (about 0.6%), whereas the number of franchised units
has increased by almost 25%. The main driver of this has been increased
growth amongst the very largest franchise systems in the hotel and
catering sector and the personal services sector over the past
5 to 10 years.
4 in 5 of UK franchise systems are run by the owner of the system.
The remainder are split evenly between subsidiaries and master licence
holder (Figure 2).
Figure 2: Ownership of franchise systems
% based on 3-year rolling averages
2009 I 2010 I 2011 I 2013 I 2015 I 2018
Wo] % [No] % [No.] % [No] % [No.[% [No]
Ultimate owner
of the system ‘78 710 77 ( 7
Subsidiary of I =
the syn
company hot = COO 10 99 11 80 9 6 10
‘owns the system
Source: Qe Bose: All franchisors
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Shop:
m Costa Coffee had just over
170 units 10 years ago, and
now has 2,300.
= Similarly, there are around
400 franchised Starbucks
stores in the UK.
Fast Food
m= KFC has also tripled in size
with regards to the number
of franchised units over the
same period.
m= Subway was estimated to
have around 1,500 units
10 years ago and now
has around 2,200.
Care Homes
m Bluebird Care has grown
from 35 to 188 units over
the past 10 years.
tm Home Instead has grown
from 18 to 190 units over
the same period.
m Anytime Fitness first
appeared in 2013 with
8 units and now has
133 units.
The size and scale
of franchising
in the UK
Dynamics within the
franchise industry
of fra
in the UK
dimension «
franchising
Fra\
ecruitment
chnical appendix:
rvey m
There are now estimated to be 48,600
franchised units in the UK
It’s estimated that the number of franchised units has nearly doubled
in the past 25 years. In recent years (Figure 3) much of this increase
can be accounted for by the hotel & catering sector. This is home to
some of the largest systems such as the big pub chains, fast food
chains and coffee shop chains. The top 10 franchise systems
account for around a third of the total number of franchised units.
Figure 3: Number of franchised units (000s)
50
406
45
40
35 Tee
30
25
20
15
10
1995
1996
1997
1998
1999
2000
2004
2005
2006
2008
2009
1993
1994
2001
2002
2003
2007
2010
2011
2013
2015
2018
The number of
personal services
franchised units
has more than
doubled in the past
years
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We monitored six business categories within franchising
For the past 17 years, we have classified franchised businesses
according to categories developed by the European Franchise
Federation (EFF). While we can see that the EFF are (experimentally)
moving towards the use of the NACE classification system, we do not
think this is a good fit at this time.
The categories we use are as follows:
Hotel & catering: which includes hotels, coffee houses, fast food
chains etc.
Store retailing: everything from travel agencies and shoe shops
to bathroom centres.
Personal services: entertainment and tutoring for children,
personal trainers, pet services etc.
Property services: including estate agencies as well as plumbing,
cleaning and gardening etc.
Transport & vehicle services: couriers, car rental, vehicle repair.
Business & commercial services: printing, office supplies, training,
recruitment, accountancy.
In this document we frequently refer to the differences between
these categories in terms of performance, structure and other
characteristics.
Dynamics within the
industry
ional distribution
of franchising
in the
The internat
dimension of
franchising
Fr h
recruitment
relationships
chnical apper
y method
eigialigigisigis &lelelaialaie
$/8)$/33/3)8)8/8 8) 2\3/3/3 & Ichange
RIRIRIRIRIR RR S/R RI S/R) SI SI since
2013
Hotel and
Catering
Store Retailing
Personal
Services
Property
Services
Transport
& Vehicle
Services
Business and
Commercial
Services
TOTAL 665 669I677\695 718 1759 781 809 838 845/900 929/930 901 935
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The number of units in personal services franchises has more than
doubled over the past 10 years and the number of units in hotel
and catering franchises has risen by 55%. These two sectors now
account for 60% of the industry by unit numbers, compared with
40% in 2008 (Figure 5).
Business & commercial services
have become less significant over
time and now represent less than
of the total number
of franchised units
Figure 5: Number of UK franchise units by category
Survey data
(3-year
rolling
average)
plus known
franchisors
(500+ units)
2003 I 2004 I 2005 I 2006 I2007 I 2008 I 2009 I 2010 I 2011 I 2013 I2015 I 2018
Data from list
of franchisors
Hotel and
Catering 9.900
Store Retailing 700 4,400 5,300
Property, 7,200 6,200
Services :
Transport
& Vehicle 2,200 2,900
Services
Business and
Commercial 6,300 5,900
Services
TOTAL £33,80531,365/33,460)33,900/36,200136,600'36,500338,60040, 100'39,000144,192I 48,588
troduction,
‘ontent
The size and scale
of franchising
in the UK
Dynamics within
franchise industry
franchising
Fra\
recruitment
It might appear surprising that in a time of relative austerity, these
service-based businesses, which could be considered a luxury,
have thrived. However, purchasing from a franchised brand could
be seen as less risky to a customer, due to perceived reliability
and consistency.
In comparison, the number of units in store retailing appear flat
over time. However, this should be viewed in the context of a highly
challenging business environment, where many of the high street's
biggest names (Toys “R” Us, BHS and more recently House of
Fraser), have struggled to compete with online retailers.
Franchising is a completely different model for retail in that the
popularity of stores tends to rise and fall more organically based
on supply and demand, rather than being dictated by a head
office strategy on the opening or closing of stores.
Around
1/3
of franchisees now
operate multiple units
Multi-unit ownership is on the up
In 2013, once starting to notice an increasing trend of multi-unit
ownership, we specifically started asking franchisees whether
they owned a single unit or multiple units.
In 2013, 25% said that they owned more than one unit. By 2015,
this had risen to 29%, and in this year’s survey, 36% said they
owned more than one unit.
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There are some interesting dynamics here which will be worth
watching over time:
mAs multi-unit franchises become more common, the bargaining
power and influence of the multi-franchisee when compared
with the franchisor is likely to increase.
m™ Multi-unit franchisees are (presumably) in a prime position to
acquire the most profitable franchised units as these become
available, further entrenching the degree of influence they hold.
A note of caution should be added around the relatively small base
size on this measure. It now appears likely that around one in three
franchisees operate more than one franchised unit (Figure 6),
with 19 of the 198 franchisees we spoke with running six or more
units. This indicates that the actual number of franchisees is stable
(at around 20,000) or perhaps even falling as the more successful
franchisees take on more units.
Figure 6: Franchise unit ownership by unit status
AllunitsI All [Hotel &I Store IPersonalIPropertyI Transport [Business/
% — I units% ICatering Retailing” Services IServicesI Vehicle I comms
(2015) I % % % % — I services* Iservices*
% (%)
Single units
Multiple units
Mean number
of other units
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duction:
ontent
The top 10 franchise systems combined account Nearly 4 in 10 systems can be operated from
for over a third of the total number of units a home office
indings
While there is a skew towards needing a shop or retail premises
Figure 7: Scale of systems by unit number (mainly caused by the larger systems in retail and hotel and catering),
Fadia aula many smaller franchises can be run from a home office with fairly
of franchising e.g. Stagecoach minimal capital requirements (Figure 8).
in the UK 500+ i 17
e.g. Snap on Tools " -
aoe Figure 8: Place the franchise can be run from
200-499 I 18
e.g. Saks Hair & Beauty Franchisors Franchisees
-199 Excluding Excluding
contribution
c ‘and Hotel ‘and Hotel
of franchising
e.g. Little Kickers land Catering jand CateringI
A home office
e.g. Monkey Music A shop/retail premises
aso SE Anofce unt
Avan
e.g. Techclean Services A factory unit/ business park
premises/ other business
21-40 premises
franchising e.g. Wilkins Chimney Sweep Source: 025;
e.g. Radfield Home Care
Warren's Bakery
Franchisor/franchisee
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troduction:
ntent:
710,000 people are now employed in UK franchising Three quarters of franchisee units employ staff
q :
There does appear to be a trend towards higher numbers employed and 30% employ six or more staff
in UK franchising and, importantly, there is a mix of both part and
full-time jobs, suitable for different working requirements (Figure 9). igure O¥NUMBaRof partimerandl rule ameremployess
The size and scale
of franchising Part-time a Full-time
in the UK " ‘ ste '
Figure 9: Total number employed in UK franchising (000s) 5 I I o 0 Hs a I g
t
710 I I 5 H
vithin the t
franchise industry ns
21821
The economic 22] ot
19
10} 149814
14
15 1614 bs
13)
in the UK 43
The in 30 129 31 278,
dimen: me
Ronehisng 23888885888 8282888
88s 88 § § § § 8 FF RR 25688842 8 at3 segzsge2e
Ses RR RRR SRS RS RRRRR SE
@All
Full-time wate 0250, Base: All franchisors/Q19a, Base: All fr
Figure st 6-10
‘u ‘ 7 ° franchis 03-5
. 2
e1
e0
10% 65%
of franchisees are male of those employed within
franchise units are female
10
Dynamics within the
franchise industry
After an edit of the list of franchise systems in 2015, fewer revisions
were required in 2018 and only seven systems have been removed
(Figure 11).
Figure 11: System level churn: 312
er nchtl de new entrants and withdrawals
franchise industry 279
The economic
franchising
Fran
004 2005 2006 2007 2008 2009 2010 2011 2013 2015 2018
423° 441° -4320«4428-« «432047457429 33486
Net Position
@ New entrants
@ Withdrawals
vey method
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There's little or no evidence that franchisees
are being forced out of business
Levels of churn at a unit level (reported by franchisors) remain low,
with just over 2% experiencing forced change during the past few
years (Figure 12).
Figure 12: Proportion of UK franchised units experiencing change
0}
71s 9}
54
4.0]
3.2 5.2 61
B2
lol
isa 3.6]
a3
uu 24
Y: 48 46
ex reeeosorages espe eouae
eEeEeseeESsSssssssssssgs
SASS 58 88 SR RRRKRARRKRARKRAAN
@ Forced (%)
© Voluntary (%)
11
f franchising
in the UK
Dynamics within the
franchise industry
The nc
ontribut
f hisi
distribution
of franchising
in the UK
The international
dimension of
franchising
Franchisee
recruitment
Franchisor/franchisee
relationships
Low failure rates for franchise SMEs
Statistics show that around half of all non-franchised start-ups
fail within five years. It’s unsurprising that banks in the UK have
typically favoured lending to franchised businesses over other
stand-alone small businesses. Franchised businesses have the
benefit of an established brand and a proven business model and
are therefore much less likely to fail, as Figure 13 below illustrates.
Figure 13: Unit changes reported by franchisors
Changed I Bought I Closed
TOTAL I % All Units
Franchisee I _ Back Down
All Reasons:
Commercial failure
Dispute
Realising investment
Retirement
W heakhidomestic
Other reasons
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Roughly half of all franchised businesses are resales,
and this proportion appears to be stabilising
Logically, as there are more mature systems in franchising, many
new franchisees take over existing businesses rather than starting
up in a new territory from scratch.
Figure 14: Predicted level of resales for the next year (%)
Year of Forecast
2006 2007 I 2008 2009 [2010 I 2011 I2013 [2035 I 2018
% franchise
systems expecting
to offer resales
Average no. of
resale units
per system
Estimated total
no. of resale units BRU) 0 3 1,829 2,274 1,932
next year
Base: All frat
Source: Q7, Base: All franchisors
12
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The economic contribution Over half of franchised businesses now turn
tas over more than a quarter of a million pounds
of franchising 4 P
In 2018, 6 of the franchisees we spoke to reported turnover
Franchising’s contribution to UK plc in excess of £2m (Figure 16). 2 in 5 stated that their turnover
is now estimated to be over was more than their franchisor led them to expect.
Cc I / bn Figure 16: Franchise unit turnover
f eats 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2015 2018
ranchise industry
The overall figure for the contribution of franchising is calculated
The economic based on the average turnover for franchisees, multiplied by the
contribution number of units (adjusted for franchisor businesses themselves
of franchising and the dairy industry). The steep rise is therefore directly related
to the somewhat larger franchised businesses we are seeing on
average in the survey.
in the UK
het enna Figure 15: Franchising industry turnover (£bn)
dimen: 18
franchising 7.2
16
14
12
Tie
10
8 2 8222s 88 & 8 8 8 & & 8
6 § § 8 § & § ee ee gE SE
4 5 oa Mean
i @ Over £500k
@ £250k-£499k
o os @ £50k-£249k
@ Less than £50k
a
13
troduction,
ntent:
franchise industry
The economic
contribution
of franchising
Business sector, predictably, is a key influencer
on typical revenues
While this data is based on averages and is therefore subject to
variation (between the mix of larger and smaller businesses in
each sector), it does illustrate that most franchised businesses
are sizeable enterprises.
Figure 17: Annual turnover of franchise units by sector
Hotel & Store Personal Property Transport Business &
Catering Retailing Services Services & Vehicle communications
services
14
£627,363 £625,570 £344,288 += £240,278 += £292,707 £282,847
Mean
@ Over £500k
@ £250k-£499k
@ £50k-£249k
@ Less than £50k
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Profitability levels remain high and the proportion of
those claiming to be highly profitable is the largest
on record at 14%
The saying goes that while turnover is vanity, profit is sanity.
Looking at the more established franchises that have been going
for 5 years or more, 2 in 5 are highly profitable and only 2%
are loss-making (Figure 18).
Figure 18: Franchisee claimed unit profitability
2018 Time
Held Fronchise
1990 1991 199282002 2003 2008 2005 2006 2007 2008 2009 2010 2011 2013 2015 2018
Toto! ;
prostate [76] [73] 2) (3) 4) fe) (>) fo} x) (2) 7) be)
4 4
8 6 5
Upto 3-4 5+
2yes yrs yrs
® Loss-making
© Marginally profitable
© Quite profitable
@ Highly profitable
14
duction,
‘ontent
in the UK
Dynamics within the
franchise industry
The economic
contribution
of franchising
franchising
Fra\
ecruitment
chnical append
y mi
There are no significant differences between smaller
and larger businesses in terms of profitability
When we look at profitability at a sector level we see that:
1 96% of hotel & catering franchises are profitable.
™ Business services and retail have 76% and 78% profitability
respectively.
1 93% of businesses operating from a shop or retail premises
are profitable (and almost half of these are quite or highly
profitable). 73% of businesses operating from a home or
home office are profitable.
m Franchisees running multiple units tend to report higher
profitability in general.
m While there are no significant differences between smaller and
larger businesses in terms of profitability, those who have invested
more than £20k when setting up the business tend to have higher
profitability than those who have invested less.
Overall this is a very encouraging set of figures for the sector,
with only 3 of 198 businesses surveyed saying that they were
definitely ‘loss-making.
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Brexit nerves? Franchisees and franchisors remain
confident in their own businesses but are less confident
about the economy
The data shows that it’s not unusual for those in the franchise industry
to feel more confident about their own businesses than about the
economy in general. However, it is a bit unusual to see a rise in one
measure and a fall in the other (Figure 19).
Figure 19: Business and economic confidence %
expecting improvements over next 12 months
100
90
80
70
60
50
40
30
20
10
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2015
2018
@ Franchisors - economy generally
@ Franchisees - economy generally
@ Franchisors - own business
@ Franchisees - own business
ronchise e: Q16/Q17, Base: All franchiso
15
troduction:
nten
findings
Regional distribution
of franchising
in the UK
tional
Regional distribution of franchising in the UK
Franchising is becoming more widespread
Historically, franchising was highly concentrated around the South East and West Midlands,
but over the past two decades it has become more widespread across the country (Figure 20).
However, franchises continue to be focused around the main urban centres, where a greater
population density makes for a larger potential marketplace (Figure 21).
Figure 20: Regional distribution of franchised units Figure 21: Indexed to UK population
Scotland 5%
Northern
Ireland 2% North
East 5%
Yorkshire &
Humberside 6%
East
Midlands 7%
les 3%
Noes London 18%
West
Midlands 10%’
South South
East 19%
ky
&
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16
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Figure 22: Franchised businesses continue to make an important The international dimension
contribution to the local economy of all UK regions coe
of franchising
Presence
of All
Franchise
Regional 2015 2018 I % Change One in three UK franchisors also have
Distribution ; fi A
Systems Implied Implied I in Implied
in Region of Franchise Units I annual Aciasel aed international operations
Th T T . 5 "
Gon I dea I fone A third of franchisors award the master licences or control
Average Indexed heifi hisi f " ide the UK i dditi hei
Average I "Sony ‘on __I Franchising I Franchising I Franchising the franchising of units outside the in addition to their
2013-2018] 20.5 UK £ Billion £ Billion £ Billion UK operations.
% Popn.*
%
The regional distribution of international franchise export shows:
Other South . 2 , ™ 22% operate in Europe (including Republic of Ireland)
as
South West 111 ( ™ 4% operate in the US
East Anglia 0
West Midlands
m 15% operate in other locations worldwide
Regional distribution oe be m P ml
Me Franchising eo Miia: The majority grant a master licence or licences to international
in the UK North West J franchisees, although a number also use alternative methods
BEERS EC) _———— : to allow operations abroad:
The titration North/North 5 8
Mle drei Eost ° , i m™ 60% issue a master licence in one or more markets
dimension of
Wales
franchising Seatiand 9 0 ™ 23% direct operations from the UK in one or more markets
Northern
Ireland = 7% open an office abroad and 8% have joint ventures in
‘one or more markets
SORES el is ema SSar Ws poe en Of those who do not currently operate internationally, 4% have
a definite business plan to do so, and a further 30% are considering
it as an option.
For those looking to expand internationally, most have ambitions
in Europe (including Republic of Ireland), or English-speaking
‘or/franchisee countries (USA/Canada/Australia/New Zealand).
echnical apper
17
of franchising
in the UK
The international
dimension of
franchising
Franchisee
recruitment
echnical apper
Country-specific legislation is an increasing barrier
to international franchising
Legislation has overtaken language differences as the primary barrier
of international expansion, with a lack of suitable franchisees also
emerging as a more prominent barrier to growth outside of the UK.
Other barriers to international franchising include a lack of finance
and management resource, as well as broader concerns about
economic conditions (Figure 23).
Figure 23: Primary barriers to growth in international franchised units
Legislation in some count
S
Language barrier
Lack of suitable franchisees
Lack of finance
Lack of management resource in own company
go
g
8
8
8
3
3.
2
8
Fy
a
a
oe
3
.
3
3
=
wry
of
Wish to expand steadily/slowly
11
ible sites for franchisees
© 2018 (%)
© 2015 (%)
Q15¢, Base: All franchi
+s with/planning international op.
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Franchisee recruitment
The proportion of female franchisees in 2018 is the
highest since the survey stats began, with 30% of all
franchisees being female.
This looks likely to rise even further in the future, with 37% of
franchisee recruits in the past two years being female, a significant
rise of 20% since 2015 (Figure 24). Although there has been an
increase in the proportion of under-30s becoming franchisees, the
average age for newer franchisees remains consistent over time at
around 40 years old. The typical franchisee is in their mid-40s.
Figure 24: Profile characteristics of franchisees (%)
of franchisees 2yrs or less
2011 2011
% %
I Profile characteristics I New recruits ~ all held franchise
2005
%
2005
%
2015
7
2018
%
2015 I 2018
% %
Age
Up to 30
31-40
41-50
Over 50
Typical
(mean) age
Male
Female
Source: 32, Base: All franchisees
18
troduction:
ntent:
in the UK
vithin the
franck industry
The economic
franchising
Franchisee
recruitment
Franchisors experience a wide range of challenges
when looking to recruit new franchisees
The main reasons for not granting a franchise include the candidate
not having sufficient capital, having a lack of business acumen
or performing badly at the interview stage. Somewhat alarmingly,
over one in three mentioned candidates failing to attend
scheduled appointments (Figure 25).
Figure 25: Main reasons for not granting a franchise
Insufficient capital
61
Performance at interview
a
x
Lack of business acumen
52
Seemed to be just buying a job
Failure to turn up for appointments
Poor credit history
Inability to complete application forms
28
Lack of sales/marketing experience
Lack of experience in our sector
wey 2
i
4
§
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A broad range of recruitment channels are used
by franchisors
The method of recruiting new franchisees is changing. Over the
past 10 years, the two most consistent methods of recruiting
new franchisees have been the franchisor’s website and word
of mouth/networking (Figure 26).
Aside from these two key methods, the importance of other
recruitment channels has notably changed over the past few
years. For example, 10 years ago, magazine advertising was
still significant, with one in three franchisors mentioning this as
useful. However, in the most recent survey, only 16% mentioned
this. In contrast, social media, which wasn’t even measured 10
years ago, was mentioned by 40% of franchisors as particularly
useful in 2018.
There was a period when third-party brokers, intermediaries
and matchmaking services were significant to recruitment,
but this seemed to peak around 5 years ago, when 4 in 10
franchisors found this useful. In 2018, only 1 in 10 said this
was a useful method.
The survey also asked franchisors which websites they have used
to recruit new franchisees in the past 12 months. The bfa website,
whichfranchise.com and franchisedirect.co.uk, have been relatively
consistent performers at the top of the list during the past 10 years.
However, in a sector where there are now at least 15 websites
dedicated to the sector, there are bound to be some winners and
losers. As witnessed in other sectors, it seems to be the case that
greater competition favours the market leader.
The median amount spent by franchisors externally on recruiting
franchisees (advertising vacancies) is just over £9,500.
19
in the U
The international
dirr
franchising
Franchisee
recruitment
Franchisor/franchisee
ionships
Figure 26: Franchisors’ most useful recruitment channels
Own system's website
Word of mouth
Social networking sites, e.g. Facebook, Linkedin, Twitter
>
f=
Other franchise website
N
FS eo ew
Pa ~ FA
= = Ea
3 Bs g
3 id o
oie Be
3 a
Franchising seminars/open days
Magazine advertising
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The path towards becoming a franchisee
Up until 2015, the proportion of new franchisees coming from inside
the industry had steadily risen. However, 2018 sees this trend reverse,
as more franchisees enter from previous unemployment/having been
made redundant (Figure 27).
Figure 27: Working status prior to taking on a franchise
(those not previously employed by a franchise)
%
80
70
60
50
40
30
20
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
2015
2018
© Employed full-time
@ Self-employed (not a franchise)
© Self-employed (a franchise)
© Unemployed/redundant
© Other
20
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Introdu
ontent
In 2018, amongst those new to franchising Having a personal interest in the business field is key when choosing
in the last four years: between franchise brands, with growth potential also important
™ 28% had worked within the industry, 10%
had worked for a franchisor and 19% had
worked for a franchisee.
findings
Figure 28: Reasons for selecting franchise brand
. Interest in field of business
im Of those new to franchising, 64% had been
employed and 13% had been self-employed.
9% had been unemployed/made redundant.
m Awareness of franchising was most likely
to have come from a friend or relative (21%),
with 15% hearing about it from a colleague
and 8% at an exhibition. Specific franchise
brand awareness tends to come from
similar sources.
E> ka Bes
>Eoc Eo FR CrR~
- a = A
3 ois es
sis
2: me? ie
fa : 3 Ef
ge es ee
Fy 3 2 ie
AsO 5 Ea
m Just over half (56%) only looked at one
franchise before making their final decision, Existing franchises successful
although 2.6 brands are considered on
average. The majority look at franchises
within the same sector (60%), although
40% considered brands from more than
franchising one industry.
ry
)
Location of the business
Franchisee
recruitment
a-ha
26s
o
a
2
4
g
Specialist business knowledge of franchise
I
Recommendation from friend/family
I
Before acquiring their franchise, most did a wide range of research,
with 69% assessing whether the franchise fees were fair and value
for money, 62% seeking advice from existing franchisees about their
business profitability and 58% asking for opinions of the franchisor.
Over half (57%) also considered the impact of running the business
on their family.
21
troduction:
ntent:
in the UK
vithin the
franck industry
The economic
franchising
Franchisee
recruitment
Costs, fees and
ongoing charges
Competition for the larger franchises is fierce
Over a third of the larger (21+ unit) systems we spoke with receive
more than 400 leads annually from all sources. Most have systems
in place to filter this down to a much smaller number of potential
candidates for interview. Of those applying to become a franchisee,
only around 1% are successful.
It typically takes around 18 weeks from the first contact to the point
where a new franchisee signs a franchise agreement, and a further
10 weeks before they start trading.
Figure 29: Small systems (<20 units)
Larger systems (>20 units)
ries
21 1b/0116/0120/012b/013, Bose: All fr
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Costs, fees and ongoing charges
86% of franchisors do not charge for goodwill in the resale value for
franchisees taking over an existing territory/business. For the minority
that do, it typically represents 35% of the resale value.
The method used to calculate the resale value varies between
franchisors, with the most common method being to use a multiple
of EBITDA (25%), particularly amongst those operating in the
property services sector. On average, the multiple used to calculate
the resale value of a franchise unit is 1.9.
However, only 37% of franchisees purchase a resale, with the
majority (60%) instead starting it up from scratch. Franchises
that have employees are more likely to take over an existing
business than those who do not have any employees (40% vs. 16%).
There are also variations in the purchase strategy by sector, with
those with fixed business premises more likely to purchase a resale
(e.g. hotels and catering), while those with more flexible operating
structures (e.g. personal services sector) are more likely to opt
to start from scratch.
4in 10 franchisees needed to borrow money in order
to set up in business.
60%
choose to start their
franchise unit from
scratch, although resales
remain important in
some sectors
22
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troduction,
ntent
The franchise licence fee is the most common Mean scores only provide a very rough illustration
cost encountered by new franchisees of set-up costs; it’s better to consider some examples
findings
While the mean figure for start-up costs for franchisees is about
£100k, this conceals wide variation. Logically, the most expensive
franchises to set up (or take over) are those which require
Franchise fee considerable expense, such as refitting a building as a branded
coffee shop or taking over a hotel.
Figure 30: Financial consideration when starting a franchise (%)
in the UK
To provide some examples from the franchisee survey:
Dynamic vithin the
franchise industry
Pl
3
2.
5
a
m The cost of setting up a franchised gym business was quoted
Stock at £450,000 and the cost of setting up a care home business
16 was given as £200,000.
The economic
m Whereas, the cost of setting up a business which offers dancing
for toddlers was given as about £5,000 in total.
m
gz
c.
a
3
3
>
From the franchisors we spoke to, more than half told us that
the initial costs to a franchisee wanting to set up a franchised
business with them was less than £40,000, so there are plenty of
Mean total start up cost (new unit) opportunities out there for franchisees to start a business with
£56,500 a relatively modest outlay.
Slick reathal fea fo lsecoune Tor good ill Again, while the higher figures are skewed towards location-based
businesses and those requiring a lot of collateral (signs, machinery
etc.) or stock, there are lower-cost options available within every
*Mean total sum invested on start-up sector, including hotel & catering and store retail.
ecruitment
£100,000
Costs, fees and
ongoing charges
Working capital
ry
is}
x
23
ontent:
y findings
The
of franck
in the UK
Dynamics within th
franc
franchising
Costs, fees and
ongoing charges
Franchisor/franchisee
relationships
The relationship between franchisor and
franchisees is often mutually beneficial
The franchise structure allows access to a business model that
has proven successful, as well as the tools needed to achieve this,
such as training, marketing materials and ancillary services.
To provide these, however, many franchisors require their
franchisees to contribute towards the costs incurred, totalling
to an average of 12% of their sales. The most common fees
charged by franchisors to franchisees include:
™ Management service fee
= Contribution to advertising
mT support fee
In addition, just over half of franchisors (56%) supply their
franchisees with the stock or supplies required to carry out
their business, with 4 in 10 applying a mark-up for these
(on average 9%).
In most cases, however, the franchisor does not own the premises
from which their franchisees operate, with only 11% having some
or all of their franchisees as tenants.
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Franchisor/franchisee relationships
There is generally a strong and ongoing relationship
between the franchisee and franchisor
The vast majority of franchisees have contact with their
franchisor’s support staff at least monthly (90%), with a third
having contact most days. Franchisees are largely happy with
the support provided, with 48% rating it as excellent, and a
further 31% rating it as good. Just 5% rate the support received
from the franchisor as poor.
In addition to ongoing contact, 91% of franchisors report
that at least some of their franchisees discuss their long-term
business plans with them, most commonly around:
m Local marketing/advertising
m= Expansion plans
m Retirement/exit strategy
The individual franchisees are less likely to report discussing
long-term plans with their franchisor (58%), although the topics
of discussion are largely similar to those highlighted by franchisors.
The minority who are not satisfied with the relationship they
have with the franchisors cite a lack of direct support and original
promises not being met.
24
troduction,
nt
findings
in the UK
Dynamics within the
franchise industry
The economic
Franchisor/franchisee
relationships
The franchisee/franchisor relationship tends to be
good, particularly for franchisees making a profit
Figure 31: Net satisfaction with franchisor relationships
(‘Definitely/Mainly Satisfied! minus 'Definitely/Mainly Dissatisfied)
%
100
90
80
70
60
50
40
30
20
10
2000
2004
2005
2006
2007
2008
2009
2010
2001
2002
2003
2011
2013
2015
2018
@ All franchisees
@ High profitability
© Marginal profitability
@ Negative profitability
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A number of benefits are identified for being part of
a franchise system rather than being a non-franchised
small-medium enterprise
The top three benefits identified are the support provided,
a pre-existing perception of quality and being able to adopt
a predefined, standardised product/service (Figure 32).
Despite this, not all franchisees choose to promote themselves
as a franchise, with 39% deciding not to emphasise this to
either suppliers or customers.
Figure 32: Perceived benefits of being a franchisee (2018)
The support provided
78
Quality expectation
6
I
Having a standardised product/service
5
I
Appearing to be a larger business
Having a sustainable business
Competitive advantage
The reduced risk from not doing it alone
Limited financial liabilities
31
25
, Introduction,
findings
The size and scale
of franchising
in the UK
Dynamics within the
franchise indu
The economic
Regional distribution
of franchis'
in the UK
The international
Franch
recruitm
Costs, fe:
ongoing
Background
to the survey
Technical ap;
survey method
Background to the survey
Primary research was conducted using computer-aided
telephone interviewing (CAT!) between the end of 2018
and the beginning of 2017. Interviews were completed
with both franchisees and franchisors, speaking to directors
and managers of franchise systems in addition to owners/
partners of franchise units. This report combines these
primary survey results with external industry experts
and statistical sources.
The authors, the bfa and NatWest, would like to thank
all those franchisors and franchisees for their time in
completing the survey with our interviewers. Without the
continued engagement of these audiences, the survey
would not be possible.
Within the research agency BVA BDRC Continental, the
principal authors of this report are Richard Smith, Director
of BVA BDRC and Bethan Cooke, Associate Director.
The publishers have tried their best to ensure the accuracy
of the report, but do not guarantee the accuracy of the
data provided, nor do they accept liability for any error
contained in or omission from the report, or any loss
directly or indirectly arising from it.
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juc
ontent:
y findings
within th
franc industry
The economic
Fran
recruitment
Technical appendix:
survey method
Technical appendix: survey method
What constitutes a franchise system?
Businesses included in the bfa NatWest Franchise Survey
are based on the following criteria:
1. Businesses that involve a trademark, a method of trading
and a licence to use the trademark, which all franchisees
must adopt and pay for.
2. The franchisee is able to sell the business on to a third party
with the benefit of the goodwill derived from developing the
business over time.
3. The system is actively franchising — we exclude those who have
announced plans to franchise, but do not currently operate any
functioning (franchised) units, as well as those that have
withdrawn from the franchising format, but continue to trade
exclusively via company-owned outlets.
Within unit numbers we exclude the estimated 14,000 units
that are owned and run directly by the franchisor (and therefore
are not franchised).
Calculating the size and scale of the franchising industry
In order to understand the health of the industry, it's important
to have an accurate measure of the ‘total number of franchised
units’. Identifying this number is not straightforward due to
varying availability and unit figures published online or in
franchise directories.
In order to bridge this gap in information, the figures detailed in
this document are produced by combining our own sample database
with database sources that are available for the largest franchises.
Sources used to compile our database are diverse and include
www.franchiseinfo.co.uk and other online lists of systems known
to be operating in the UK and the proprietary databases of the
bfa and NatWest.
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From these sources and from information built up over previous
years, a ‘long list’ is compiled. This list is then subject to intensive
review by industry experts at the British Franchise Association
and NatWest's Franchise Section, until all parties are satisfied that
only active systems are included. The authors of this report would
like to thank these sources for their assistance.
In addition to this, over recent years, we have been able to populate
our own sample database with reported unit numbers from the
survey, making it the most accurate and reliable measure available
of the actual number of franchised units in the UK.
Statistical confidence
Note on statistical confidence
Much of this report is based upon the findings of survey research
studies, to which statistical confidence limits apply.
Taking the 95% confidence interval, the following indicative
ranges apply to the survey findings:
Survey findings at or about
5%/95% 20%/80% 50%
Franchisor survey (n=133) —-+/-3% +/-5% +/-1%
Franchisor survey (n=198) —+/-3% +/-6% 41-71%
Note that the finite population correction applies to the franchisor
sample. Since the sample is a substantial proportion (16%) of the
population, this enhances our statistical confidence in the
survey findings.
27
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Introduction/
contents
This report was commissioned by the British Franchise Association
in partnership with NatWest.
Key findings
About the British Franchise Association (bfa)
The bfa is the voice of ethical franchising in the UK. As well as
providing information and advice to businesses planning a franchise,
the bfa work closely with their members to help develop expertise
The size and scale
of franchising
the UK eens
he in the industry.
Dynamics within the The bfa was formed to act in the interests of the industry and to
ifenichise indkietty assess and accredit franchising companies against strict criteria.
They look at the structure of the franchise business, terms of contracts
between franchisor and franchisee, and test business systems to
The economic encourage future success as a franchise.
contribution
of franchising The bfa engage
Regional, iatrbution = Developing awareness campaigns to consumers
of franchisin ; 5 OU seae i
SORES = Launching industry recognised qualifications — i.e. the Qualified
Franchise Professional (QFP)
The international
dimension of
franchising = Launching the first UK Franchise Trust whose trustees help to
educate individuals and develop the necessary skills and capabilities
= Developing nationally recognised educational franchise seminars
Franchisee
recruitment
For more information, just visit www.thebfa.org
Costs, fees and
ongoing charges
Franchisor/franchisee
relationships
Background oh eee
to thesurvey’ Commissioned by: In partnership with: Conducted by:
b eva BDRC:
NatWest
28