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HOW LONG DO FRANCHISEES
KEEP THEIR BUSINESSES?

by Simon Lord,
last updated 18/05/2012

May 2012 - We were recently asked what the average length of time is that franchisees stay with a franchise system in New Zealand. It's longer than many people might think, so we decided to explore some of the reasons why people stay or why they go.

The 2010 survey of franchising in New Zealand asked 63 franchisors who had been operating for more than 5 years what the average length of time was that franchisees remained in their system. The results showed that franchisees remain in a franchise for a median period of 6 years before exiting, with a slightly longer period (7 years) for retail franchisees. The actual percentages were:

  • Up to 5 years – 39.7%
  • 6-10 years – 55.6%
  • More than 10 years – 4.7%

The researchers also noted that, as the initial term of the average franchise agreement is 5 years, many franchisees renew their agreements at least once. However, there was a huge range of average tenures reported, from 2 years to 25 years, suggesting that some never renewed at all while others renewed several times.

Reasons for differences

The research doesn’t break the responses down by industry, but experience suggests that franchisees are likely to stay longer in some industries than others. Lawnmowing or mobile coffee vending may be a stop-gap or a starter business for some (although there are examples of long-term franchisees in both). The level of investment can also be a significant factor –  a business that requires a million dollar investment, say, may take longer to establish and produce worthwhile returns than one with an investment of $100,000. In fact, as McDonald’s told me once, their franchise term of 20 years allows for 5 years of hard graft and little reward, 5 years of getting on top of it and 10 years of pay-back, making the franchise very much a long-term investment if a franchisee wants to make the most of the opportunity.

It has been suggested that New Zealand’s lack of a capital gains tax actually encourages new franchisees to sell their businesses earlier than would otherwise have been the case, as they are able to cash in on the hard work they have done in the establishment phase earlier than would otherwise have been the case. In Australia, where capital gains tax does apply in some circumstances, the same survey process found franchisees stayed one year longer with a median of 7 years rather than 6.

Apart than financial considerations, the other major influence of franchisee longevity is franchisee satisfaction levels. If a franchisee is happy with the ongoing challenge of running the business, enjoys their relationships with other franchisees, has confidence in the franchisor and feels valued by customers and the community, then they are likely to stay within the system longer. But perhaps the biggest factor of all is family – if the business allows the franchisee to provide for the family, to spend time with them and even to work with them, franchisees are likely to stay longer.

Steady turnover is healthy

The franchisor who asked the question about franchisee longevity was obviously doing a good job, as she reported that 80% of their franchisees had stayed 10 years in a non-retail business at the lower end of the investment spectrum. This suggests that her franchisees have high satisfaction levels.

However, all businesses need new blood sometimes and if every franchisee stays forever then there is a danger of franchisees becoming stale and even complacent. This can result in a franchise failing to grow in an area, or even inviting newer, hungrier competitors to develop.

As a result, most franchises therefore feel that a steady turnover of new franchisees is healthy – a common figure mentioned is that some 10% of franchises in an established franchise might be for sale at any one time. This enables businesses to benefit from a flow of energetic and enthusiastic new franchisees and allows the franchisee base to be constantly renewed from the inside without dramatic change.

In conclusion, although the optimum rate of turnover will vary from industry to industry, a steady rate of franchisee change is therefore a positive sign for both franchisors and new franchisees.

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