Franchising Resilience

When the going gets tough, the smart businessman wants to be in franchising. This in essence is the message from the 2012 NatWest bfa franchise survey. Using statistics gathered in respect of the 2011 calendar year, the survey highlights the internal and external factors which have affected the franchising sector during the year, as well as commenting on trends which are evident in key measures. For example, since 2008, the survey has incorporated the impact of the global financial downturn on UK franchises.

Amid a period of general gloom for UK business, it appears that the franchise sector continued to expand. According to the NatWest bfa survey, 2011 saw a net increase of 29 franchisor businesses leading to a 4% increase in franchise units. This increase, taken together with the growth of existing franchise units has resulted in a 14% increase in employee numbers, and an overall contribution to the UK economy of £13.4 billion.

Having said that, franchises are not immune to the general economic conditions and overall business confidence has slipped with only 1 in 5 franchisors and franchisees expecting business to improve in 2012. However, confidence in respect of the robustness of their own franchise business is higher than confidence in respect of the general economy. In fact 47% of franchisees believe that they have a “big competitive advantage” over other comparable small businesses, simply as a result of the brand value attributed to being part of a franchise business.

So what lessons can franchisors draw from the NatWest bfa franchise survey? Interestingly, one of the key reasons why franchises may be holding up so well is the care which franchisors take when appointing new franchisees. The need to ensure that the franchisee both has the necessary capital and will work to promote the brand culture has led to franchisors carrying out extensive recruitment processes. Whereas once all a franchisee needed was the necessary capital, now they need to be able to convince the franchisor that they also have the ability to meet franchise expectations.

In the NatWest bfa Franchise Survey, the majority of franchisors estimated that they weeded out nine out of every ten candidates as being unsuitable. And whilst lack of sufficient capital came top of the list at 71%, worryingly 21% of candidates failed to complete the application form properly and 25% failed to turn up for appointments. The actual recruitment process can take between two and five months from first contact until the signing of the franchise agreement. In the process, in addition to financial reviews, business acumen tests and interviews, many franchisors will also expect candidates to sit a psychometric test.

Once a suitable candidate has been identified, the hard work begins. Robust franchise contracts are needed to cement the relationship and these are best drawn up by a specialist franchise solicitor. The franchisor also needs to take ongoing legal advice on matters such as intellectual property, copyright law and the risk of company identity theft; all areas identified by the NatWest bfa survey as being of prime importance to the ongoing success of the franchise operation.

Also high on the list of learning points is the level of contact which franchisors maintain with franchisees. The NatWest bfa survey revealed that whilst 80% of franchisees are satisfied with the franchise relationship, those who were dissatisfied cited lack of support and lack of communication as the chief reasons. Overall 81% of franchisees are in contact with field support staff once a month, with 47% of new franchisees receiving contact on a weekly basis. For the franchisor there can be a fine line between providing support but letting the franchisee get on with running the business and providing so much support that the franchisor is effectively running the franchise operation in its entirety. Here again a qualified franchise solicitor can help to provide guidance on where the duties of the franchisor end and those of the franchisee begin.

Interestingly, whilst lack of support is cited as one of the main reasons for a breakdown of the franchisor/franchisee relationship, only 8% of franchisees list the support package as one of the key benefits of being a franchisee. For franchisees, competitive advantage, having a standardised product/service and appearing to be part of a larger organisation all stand out as key benefits. Franchisors agree although they do place more importance on the provision of back up with 27% considering this to be one of the key benefits.

When looking at the results of surveys such as these, we have to remember that results can vary widely between sectors. For example, 48% of franchised retail stores have turnover in excess of £500,000, compared to just 12% of business and commercial service franchises. One statistic which is clear though is the way in which franchises have spread. In 1984 franchises were concentrated within London and the Home Counties with 44% of all franchises in that region. Now the figure is closer to 33% with 31% of UK franchisors also awarding licences outside of the UK.

Overall the NatWest bfa franchise survey returns a positive impression of the state of franchising within the UK. The survey notes that in common with the previous recession in the early 1990s “There has been little evidence of widespread business failure and few signs of the business model breaking down.”