Studying the performance of the franchise industry as a whole, we might reasonably conclude that a franchised company should perform like a similar company in any other industry. Our research shows that there are many healthy, successful franchise systems enjoying sustainable growth, while other, unhealthy franchise systems, exhibit significantly high Franchisee Turnover Rates (FTR).
Based on a sample of 1900 franchise systems with 5 years of Item 20 data from 2010 to 2014, the franchise industry increased from 384,805 franchised outlets to 414,565 franchised outlets. This is an increase of 7.7% over the 5 years, or an average of 1.54% per year.
One sign of a healthy franchise system is positive net franchised outlet growth. By no means is it the only factor, but continued negative growth usually indicates an unhealthy franchise.
Looking within the overall industry reveals a stark contrast of results. The chart below breaks down our sample into four quartiles, based on net franchised outlet growth.
*Based on Item 20 data from 2012 to 2014.
Of the 168,565 franchised outlets opened within a 5 year period, the bottom 25% of franchise systems with negative growth accounted for 25% of all new outlets opened. But they also represent 61% of the 138,825 outlets closed.
It’s clear that the industry offers a healthy base of low-risk franchise investments, but prospective franchisees need to perform due diligence to ensure they invest into a quality system. And in a slow-growth economy, healthy franchise systems need to compete for their portion of the money invested in the franchise industry.
We have completed a study on the changes in Ongoing Fees in the franchise industry using our data from 2013 – 2016 to publish the report.
A Franchise Disclosure Document (“FDD”) presents key components of the franchise program including the obligations of the franchisor and franchisees.
As franchise system development becomes more competitive franchise systems are employing a new strategy to grow their brand and increase franchise sales.
The composition of the franchise investment differs in key areas such as: franchise fees, royalty rates, territory protections and Item 19 disclosures.
Data has become essential to having a successful franchise development team. Those that maximize the power of data will sell more franchises.
When reviewing an FDD, we always keep our eyes out for any errors. The error that is the most troublesome for us is when we see Item 20 errors.