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Franchising: Steering a safe course in choppy waters

Franchising: Steering a safe course in choppy waters

Categorised in: Ask Nigel    Posted: September 10, 2019

According to a report published by the Institute of Chartered Accountants in England and Wales (ICAEW) in June 2019, while ongoing Brexit uncertainty is weighing heavily on the minds of both consumers and businesses, it may not damage the UK economy as much as expected.

Thanks to a combination of relaxed fiscal authority, slow but steady forecasted growth and low unemployment, the UK economy continues to remain remarkably buoyant.

However, there is a more foreboding tone set by the results of the Office for National Statistics Business Demography, UK: 2017 statistical bulletin which points to the uncertainty relating to the UK’s future relationship with Europe as a possible cause for the decline in the rate of business births in 2017.

The bulletin, which records the number of active businesses in a referenced year, with new business registrations referred to as “births” and businesses that have ceased to trade referred to as “deaths”, shows that UK business births fell from 414,000 to 382,000 between 2016 and 2017, while UK business deaths rose from 288,000 to 357,000 in the same period.

While it is clearly a worrying time for SMEs, the UK’s entrepreneurial spirit continues to thrive with even further growth in the self-employed sector. Data from the ONS Labour Market Commentary; Sept 2019 shows that in the three months to June 2019, almost a quarter of a million (213,000) workers changed their employment status from employed to self-employed and a further 37,000 went from unemployed to self-employed.

The overall number of self-employed workers increased by 15,000 to 4.9 million in the quarter with by far the biggest increase seen among women who now account for nearly 35% of self-employed workers. The Homebased Franchise Industry Report 2019 by Franchise Direct cites the rise of the “parentpreneur” as the biggest influence on the demographics of the self-employed and franchisee market, as growing numbers of parents, particularly women, seek to realign their working patterns with childcare needs and the quest for a work/life balance.

While those in self-employment face much higher risks in terms of stability of work and flow of income, the rapid development in technology has given rise to the gig economy and it has become much easier to be self-employed. More and more people are now willing to take the leap in favour of the rewards it brings.

With a massive shift in occupational status towards self-employment between 1980 and 1995, this sector has continued to grow again since 2000, and it is the franchise sector that accounts for a significant chunk of this growth.

The 2018 Franchise Landscape report jointly compiled by bfa and Natwest shows that 710,000 people now work in the franchise sector and that its total contribution to the UK economy is estimated to be in excess of £17 billion. There are an estimated 48,000 franchised units in the UK, the highest it’s ever been and nearly double what the figure was 25 years ago.

Add these numbers to the fact that three quarters of all franchisees employ staff and almost a third (30%) employ six or more members of staff and it’s clear to see why franchisees are truly the unsung heroes of our national economy – not the ministers making the austerity cut-backs to cut national debt, or the politicians making manifesto promises of job creation and business investment, but the roll-up-their-sleeves entrepreneurs prepared to invest their own scarce financial resources to start businesses and create jobs.

The Legatum Prosperity Index 2018, which looks at how prosperity is forming and changing across the world, ranks the UK at number 7 out of a total of 147 ranked countries, a fall from 6th in 2017 and 5th in 2016. When it comes to the business environment however, the Index ranks the UK 4th for its entrepreneurial environment, business infrastructure and labour market flexibility.

The environment for business in Britain may be world leading, but when it comes to independent, start-up businesses the failure rates are troubling. The Small Business Association estimates that 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10.

Franchising however has an inner resilience that keeps it out of the increasing numbers of business deaths being tracked by the ONS Business Demography report mentioned earlier. Failure rates within franchising remain incredibly low with fewer than 1% per year closing due to commercial failure.

Profitability in this sector is also cause for celebration, with over two thirds of franchise units that have been running for five or more years reporting being either quite or highly profitable, as reported by the bfa and Natwest in their 2018 Franchise Landscape report. Plus, 60% of franchise units have an annual turnover of more than £250,000.

Little wonder therefore that while the Natwest survey found that franchisees confidence in the economy in general was falling, confidence in their own businesses is on an upward trajectory, a baton of optimism that is seemingly contagious, as over half of all franchised businesses are resales.

The number of benefits cited for being part of a franchise system rather than a non-franchised SME or independent start-up are numerous but it’s the top three that give a nod to the stability, in otherwise choppy seas, that franchising can offer. Of those polled by bfa and Natwest the support provided by the franchisor ranked highest, closely followed by a pre-existing perception of quality and the ability to adapt a pre-established product or service.

A strong ongoing relationship between the franchisor and franchisee is yet another reason for the success of the franchising sector with the Natwest report stating: “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.”

An opportunity to mitigate the high failure risk features of an independent new business start-up is available through the practice of supported-self-employment within franchising. This simple approach merges the personal vision and commitment of the self-employed business owner with the proven business model of an established brand to create a new, but far less risky business start-up.

In the current political climate, with a government that is constantly re-shuffling its top ministerial positions and leadership that many would argue has become endemically rudderless, franchising proves itself once more to be significantly more robust, and with potential for longevity, helping to steer HMS UK Economy and provide a backbone of business optimism.

At the launch of a new Business Finance Council on 5th September 2019, Business Secretary Andrea Leadsom met with banking chiefs to encourage support for SMEs and remind lenders of the existing guarantee schemes available  through the government-owned British Business Bank and urged them to make the most of this support, enabling their SME customers to invest in capital and manage cashflow. She said: “Lenders must empower their SME customers to seize the huge variety of opportunities that lie ahead as we leave the EU on 31 October. Our new Business Finance Council will bring together key players, ensuring that finance continues to flow to our brilliant British businesses so they can do just that.”

It’s too early to predict how the newly formed Business Finance Council will fare but those of us in the franchising industry certainly welcome the opportunity to help SME growth and see the UK franchising sector claim its justified moniker of the powerhouse behind business growth in the UK.

About the author Nigel Toplis

Nigel Toplis is the Managing Director of The Bardon Group. Nigel sees his key role as providing the vision and direction for each of the businesses, developing new income streams - across the board, recruiting customer focused and passionate Franchise Owners and providing business and management support to my Franchise Owners.

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