Franchise Facts & Trends
The impact that franchising has on the economy in both the U.S. and Canada is staggering. The following data (U.S. statistics) demonstrates the growth of franchising:
- The franchising sector of the economy grew at a faster pace than many other sectors of the economy.
- Franchising now provides more jobs than many other sectors of the U.S. economy. For example, franchising provides more jobs than the durable goods manufacturing sector or the financial activities sector of the economy.
Following is the “Executive Summary” from a report that was published in January 2015 by IHS Economics.This report presents a forecast of the franchise sector of the U.S. economy in 2015 prepared by IHS Economics for the International Franchise Association Educational Foundation:
“As projected in our forecast report at the beginning of the year, 2014 proved to be a year of solid growth for the franchise sector. Overall economic growth picked up sharply in the second and third quarters, boosting real GDP for the year to an estimated 2.4% increase, with payroll employment (including government) up 1.8%, and the acceleration of the franchise sector in 2014 was even stronger, with employment of franchise businesses up 2.8% and franchise output (in nominal dollars) up 4.9%.
Strong Franchise Growth:
The Franchise Business Index indicates that momentum was building as the year came to a close. The index showed strong growth in each of the last three months, and in November the index was up 3.1% compared to November 2013 – the biggest year-over-year gain since prior to the 2008-09 recession.
Continued acceleration in the pace of economic activity will create the conditions for another strong year of growth of the franchise sector in 2015. We expect real GDP growth to improve to 3.1% in 2015 on the strength of faster growth of consumer spending and a pick-up in the housing sector.
2015 Franchise Projections:
The implications for the franchise sector in 2015 are another strong year of employment and output growth. Based on the fundamentals of the macroeconomic outlook:
We expect the number of franchise establishments in the United States to increase by 1.6% in 2015, matching the pace of growth in 2014.
Employment growth in the franchise sector will continue to outpace the growth of employment in all businesses economy-wide, as it has in each of the last four years. We expect franchise employment to increase 2.9% in 2015, while total private nonfarm employment will increase 2.4%. Over the five-year period, 2011-2015, average annual job growth in the franchise sector, at 2.5%, will be 0.4 percentage points higher than for all businesses economy-wide.
Growth of the output of franchise businesses in nominal dollars will accelerate to 5.4% in 2015 as output per worker in the franchise sector increases slightly.
Franchise GDP Increase Expected:
The gross domestic product (GDP) of the franchise sector will increase by 5.1% to $521 billion in 2015. This will exceed the growth of U.S. GDP in nominal dollars, which is projected at 4.9%. The franchise sector will contribute approximately 3% of U.S. GDP in nominal dollars.
However, this forecast based on the economic fundamentals is presented with a note of caution. A recent ruling by the National Labor Relations Board that was based on the premise that a franchisor can be viewed as a “joint employer” and thus responsible for actions taken by its franchisees, creates a cloud of uncertainty over the franchise sector, which could impede the growth of the number of franchise businesses and, thus, franchise employment and output.”
Key findings of the “Small Business Lending Matrix” and “Franchise Business Outlook”
- Franchise demand from both new and existing franchisees is expected to exceed 73,800 unit transactions in 2014. This represents a 12.4 percent increase in demand over 2013 and an 18.8 percent increase over 2012. (FRANdata)
- To satisfy this demand, franchise businesses will require $29.4 billion in lending. Of this demand, banks will make $28.1 billion available. These funds will provide financing for 70,500 unit transactions, which will create or maintain more than 1 million jobs and support $138 billion of annualized economic output. (FRANdata)
- The gap between the demand and supply of funds was the largest in 2010 at 16.6 percent. FRANdata projects the lending gap to diminish by half in 2014, from 9.7 percent in 2013 to 4.4 percent this year.
- Franchise employment is expected to increase by 2.6 percent in 2014, faster than the 2.5 percent growth in 2013 and outpacing projected total employment growth in the U.S. by 0.8 percentage points. (IHS Global Insight)
- Franchises are expected to add 221,000 new jobs in 2014. Moreover, with 2.6 percent employment growth, franchises are adding jobs faster in 2014 than 2013 and outpacing projected total employment growth in the U.S. by 0.8 percentage points. (IHS Global Insight)
- The number of franchise businesses is expected to increase by 12,566 in 2014. This rate of increase is in line with the growth of overall business formation across the economy. (IHS Global Insight)
With 4.6 percent growth, the gross domestic product (GDP) of the franchise industry is expected to increase by $22 billion in 2014. This rate of growth is up from 4.3 percent for 2013. (IHS Global Insight.
Franchise Owner Facts
- A Gallup Poll of franchisees found that more than 94 percent considered themselves successful and that more than 75 percent would buy their franchise again. The average pre-tax gross income was $124,290.
- Making money is an important factor as well as personal fulfillment, independence and freedom.
- In a recent working session with franchise presidents and CEOs, The Franchise Update Media Group identified (via an online survey) that candidates referred by consultant groups like YFS, were the number-one source for finding superior franchisees.
The Five Most Common Mistakes When Considering A Franchise Business
1. Evaluating franchise companies before taking inventory of skills, available capital and motivations.
Start with the end in mind. You would never jump into your car for a vacation without having a road map of how you plan to get there. Therefore, take a few steps back to see the Big Picture of where you are and where you’d like to end up. What is it about your destination that is so important to you?
2. Allowing pre-conceived notions to limit your outlook!
When most people think of franchising, a very narrow view of concepts tends to dominate the thought process such as: McDonalds, Tim Horton’s, Dunkin Donuts, and KFC. Popular food chains are usually the first options that come to mind. The reality is there are over 3,000 franchise concepts in North America spanning hundreds of industries. Be open-minded; don’t be locked into any of the national brands thinking this is the only way to be successful in franchising. The majority of those 3,000 franchise concepts have less than 200 franchisees operating in their system.
3. Not sharing information with the Franchisor or your franchise advisor.
Every franchisor that’s seeking to recruit the best new franchisees will seek to gather a large amount of information from you. Questionnaires, assessments, interviews, etc. The best performing franchises will be very thorough with you. The franchisors that are more interested in making a sale will not take the time to thoroughly qualify you. Therefore, be proactive in sharing information with a franchisor once you are ready to begin a mutual investigation. Sharing more information about yourself, allows YFS and a franchisor to help you determine if there’s a possible fit in their system. The performing franchisees will be upfront with you if they don’t see a fit with you based on their “profile” of their successful franchisees.
4. Focusing on one franchise company only.
Just like house-hunting, going through a few open houses in different neighborhoods helps provide perspective for comparing and contrasting. The same holds true for an effective evaluation of franchise companies. Take the time to invest in researching multiple franchises simultaneously.
5. Being influenced by the wrong people.
When someone you know begins asking you questions about the franchises you’re considering, be aware that well intentioned advice will be given. Franchising tends to be labeled with a broad brush, and everyone becomes an expert. So when Cousin Bob shares a story of his neighbor who opened up an XYZ Franchise and wasn’t successful at it, even though Bob has good intentions, he hasn’t invested the dozens of hours of time like you have. Stick with the knowledge you are gaining about any one company to help you make a well informed decision. And remember, the biggest factor to success is the “The Y-O-U FACTOR!”
- Franchised businesses continue to grow in all corners of the world. Domestic franchisors in many countries are increasingly establishing franchises across borders. More than 400 U.S. franchise systems operate internationally. International franchising has been successful because consumers around the world recognize famous brands as symbols of quality, consistency, service, and value.
- If you are considering the purchase of a franchise, you may want to not limit the scope of your search to franchisors in your home country. Increasingly, franchisors are seeking franchisees internationally, and a foreign-based franchisor may provide you with the franchised opportunity you are seeking.
- In many cases, foreign-based franchisors offer individual franchises to operate a single unit. They also often offer development rights to operate multiple units and “master franchise” rights. The latter is, essentially, an opportunity to be the “franchisor” for the foreign-based concept in your country or a portion of your country.
- Of course, international franchising presents some different challenges than domestic franchising. For example, if goods will come from overseas, you may need to be aware of various duties, tariffs, and transportation requirements. You also need to consider language and cultural differences. For instance, if you are a franchisee in a different country from the franchisor’s home office, the franchisor’s system may need to be modified for use in your country.
Minorities and Women in Franchising
- Increasing numbers of minorities and women are discovering that franchising can be a good opportunity for everybody. While franchising is not a panacea, it provides a means for mitigating the traditional obstacles that otherwise competent and capable small investors, particularly women and minorities face—lack of business experience and capital. Franchisors provide managerial training and assistance on an on-going basis and, in some cases, arrange for property leases, provide equipment financing and sale-leaseback programs, and assist franchisees in obtaining financing.
- As a result of a strong economy, women are increasingly in leadership positions in franchising whether through establishing new companies, becoming single and multi-unit franchisees, or having high-level positions at corporate headquarters.
- According to the Center for Women’s Business Research, as of 2004, there are an estimated 10.6 million privately-held, 50% or more women-owned firms in the U.S., accounting for nearly half (47.7%) of all privately-held firms in the country. These firms employ 19.1 million people, and generate $2.46 trillion in sales.
- As the population of minorities in the U.S. population continues to rise, minority franchising in cities is expected to rise.
- IFA’s Minorities in Franchising Committee and the IFA Educational Foundation’s Diversity Institute provides research, education, and outreach programs to expand the opportunities for minorities in franchising.
- IFA’s Women’s Franchise Committee (WFC) is dedicated to inspiring and encouraging women in franchising by creating a network of business professionals dedicated to strengthening the success of women in franchising. The WFC has created a number of programs and resources in order to achieve this goal, ranging from “how to” guides and conferences to local networking chapters.
Technology and Franchising
There are several trends related to the use of technology in franchising today. First, many franchisors use the Internet to communicate with franchise owners and suppliers through secure extranets in order to share critical information, facilitate discussion among the franchise network, post operations manuals and updates, disseminate news about ad campaigns, engage in supply chain management, and gather sales reports automatically and without the need for more labor-intensive data entry. Second, franchisors use the internet to advertise their network to customers. Third, some franchisors use the internet to engage in business-to-consumer (B2C) e-commerce, often with the involvement of franchisees. Fourth, many prospective franchisees glean information and make contact with franchisors using the Internet. Some franchisors now report that they get more sales leads from the Internet than from any other source. Fifth, some franchisors have started providing disclosures to prospective franchisees by electronic means. Sixth, and finally, franchisors make extensive use of technology in offering their services directly to consumers — such as networks of businesses that offer website design and web hosting. The prospects for, and reality of, involving technology in franchising make this a very exciting time to own a franchised business.