Potential franchisees choose stimulation over dollars

Written on the 23 May 2008

Mortgage Choice, Best in the Mortgage & Finance Industry*, discovered that stimulation, challenge and personal achievement has overtaken potential to earn for Australians planning on purchasing a franchise in the next three years.

The nation’s largest publicly listed franchisor commissioned its second annual Potential Franchisee Survey, an independent online survey, to uncover behaviour drivers for 505 Australians between 25 and 55 years of age, earning $60K or more per annum, who are looking to move into franchising.

Mortgage Choice National Manager Corporate Affairs, Warren O’Rourke said new franchisees are more likely to enter the industry for personal growth potential rather than the money they can earn.

“The concept of working to live rather than living to work continues to build in importance for Australians. People are still working hard but place less importance on working long hours and striving for the best pay possible because they know that can mean sacrificing feelings of personal accomplishment, as well as lifestyle,” he said.

The top three reasons potential franchisees want to run their own business are: 

1. 53.5% - Looking for stimulation, challenge and personal achievement
2. 50.3% - Flexibility i.e. ability to control own time/movements/etc
3. 47.9% - Income potential

Flexibility was a lot more important to females (54.6%) than males (46.7%). In fact, females rated flexibility over stimulation, though only just.

It was interesting to see ‘income potential’ drop to third place from first place in last year’s survey and lifestyle moving from a very close second to fourth place (at 47.7%). Perhaps people are realising that running a franchise, as with any small business, initially takes a lot of hard work, signifcant hours and heavy concentration.

The most appealing factors of being part of a franchise system are, in order: 

1. Established franchisor brand recognition
2. Established business model for franchisees to follow
3. Level of support provided by the franchisor
4. Higher likelihood of success in compairson to operating a small business
5. Supplier relationships already established
6. Level of advertising that can be achieved
7. Level of media coverage that can be achieved
8. Working within a collaborative franchise network

So which franchise?

So what is the decider for these potential new small business owners when choosing one franchise over another? Money (cost to purchase, initial cash flow, income level to be achieved) was ranked number one priority for 47.1% of respondents. Second was brand recognition (brand repuation, quality and longevity of goods/services offered, consumer proposition, ethics, etc), third was lifestyle (business portability, flexibility of office/working hours, etc), fourth ease of business management (suitability of skills, etc) and last was internal franchisor aspects (transparency of franchisor, local area marketing budgets, etc).

Money again factors first when it comes to the barriers preventing entry into a franchise system for 62.4% of respondents. Being bound by the directions and business protocol of the franchisor ran second (43.2%), power of the franchisor vs. power of the franchisee third (42.4%), giving some of the profit to the franchisor fifth (35%) and having to meet minimum performance standards was sixth (26.5%).

The most popular industries being considered were retail – food, restaurants and cafès (47.5%), business and professional services (26.5%), tourism, leisure and accommodation (21%), information technology (20.6%) and domestic services (19.6%).

This was fairly in line with the previous year’s survey, where ‘retail – food, restaurants and cafès’ came first and ‘business and professional services’ came second. Tourism has risen through the ranks to third from well down the priority list last year whereas ‘health, beauty and personal services’ has dropped a fair way in popularity.

Decline in regional and rural franchise numbers

The vast majority of respondents were looking to buy in their current state of residence. The widest variation was less than 6% - 100% of South Australians were buying within their state compared to 94% of Western Australians.

Almost two thirds (62.2%) of respondents were looking to purchase in a metropolitan area, 18.2% in a regional area, 3% in a rural area and the 16.6% were not sure.

“The reluctance to purchase a franchise in a rural or regional area suggests there may be a number of opportunities being missed,” Mr O’Rourke said.

“However, this result reinforces the reluctance of potential franchisees to sacrifice lifestyle in order to run a successful business. They are looking for opportunities within the region they are comfortable in – for the majority, in a familiar area within their own state”.

A brave 22.2% are going it alone with their franchise purchase, 57.4% will venture into enterprise with their spouse/partner, 7.9% with a business partner, 3.8% with a family member and 8.7% are not sure yet. NSW/ACT respondents were most likely to go solo (25.3%) and SA the least likely (16.7%).

Over one third will have no experience in the industry they enter (38.6%), 17.2% will have less than one year experience, 14.5% one to two years experience, 15.1% two to five years, 8.5% five to ten years and 6.1% will have 10+ years experience. Males were more confident than females to make their entry with no experience (41.7% vs. 34.9%). WA was the state with respondents most likely to have no experience (51.9%).

Financial expectations

The planned cost to purchase and set up varied widely between respondents. 17.2% will spend less than $50K, 24% will spend $50-100K, 17.4% will spend $100-150K, 15.4% will spend $150-200K, 12.1% will spend $200-300K, 6.7% will spend $300-400K and a surprising 7.1% will spend $400K or more.

It was a fairly even split between purchasing an existing franchise (50.9%) and a new one (49.1%), with females more likely than males to choose the latter (53.3% vs. 48.9%).

Almost one third (31.1%) will bring less than $50K working capital to the table, 29.3% will bring $50-100K, 17.2% will bring $100-150K and so on. 5.8% will contribute $300K or more.

It was encouraging to see these franchisees-to-be were conservative in their expected earnings in the first year. The most popular answer at 29.9% was ‘break even’, next was $50-$100K (21%), followed by $20-50K (17.4%), $1-20K (12.8%), $100-200K (8.7%), make a loss’ (6.9%), $200-500K (2.2%) and a confident 1% expected to earn over $500K in their first year. NSW/ACT had the highest percentage of respondents expecting a loss (10.1%) and SA the least (2.1%). WA respondents were most confident about making $100K and over (18.5%).

* 2008 Mortgage & Finance Association of Australia Awards

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