Job Security Concerns Causing Flight to Franchising

Written on the 9 June 2009

2009 Mortgage Choice Survey of Potential Franchisees

Mortgage Choice, Australia’s largest independently-owned mortgage broker, has discovered that close to half of all Australians planning on purchasing a franchise in the next three years have been motivated by the difficult economic climate.

The nationwide company’s third annual Potential Franchisee Survey also revealed a renewed desire for income potential above all other outcomes that can be achieved by running your own business.

Of the 680 respondents looking to move into franchising by June 2012, 24% were already self-employed, 50% were white collar, 19% were blue collar and 7% were unemployed. 11% had been retrenched during the past 12 months and a surprisingly high 41% said the economic downturn had influenced their decision to buy a franchise.

The most prevalent responses as to why the downturn had influenced those respondents were:

1. 48% - It seems safer to run my own business than have my job in someone else’s hands

2. 40% - I believe I will be better paid by myself as boss rather than someone else

3. 30% - My job is looking very shaky thanks to the downturn

Senior corporate affairs manager for Mortgage Choice, Kristy Sheppard said this year’s independently conducted survey indicated optimism around entering into self-employment, due to its perceived safety.

“Of the respondents who were being influenced by the current economic situation to purchase a franchise, almost one half believed it was safer to be their own boss than to live life as an employee,” she said.

“Many Australians looking to buy a franchise in the next three years are turning to this sector in the hope it will dissolve uncertainty over their job security and enhance their ability to make a decent wage while satisfying their need for stimulation and personal growth.”

Another interesting discovery was that the potential for earnings had risen in importance, becoming the primary reason for respondents wanting to run their own business, taking it back to its 2007 survey position. In last year’s survey it ranked third.

In order of preference, the top three reasons for wanting to be a business owner were:

1. 54% - Income potential (48% last year)

2. 46% - Job satisfaction: looking for stimulation, challenge and personal achievement (54%)

3. 44% - Flexibility: ability to control your own time/movements/etc (50%)

Interestingly, females were more likely to move into franchising for the income potential (57% vs. 52% of males). Also, flexibility was a lot more important to females (51%) than males (38%).

“Working to live rather than living to work is still an important motivator for potential franchisees, but the income that can be produced via running your own business is presently the most important factor for the growth of the Australian franchising industry,” Ms Sheppard continued.

“With the Australian economy shedding jobs and many redundancies occurring, it makes sense for people to be looking for income potential and stability above anything else. However, job stimulation and satisfaction are still very important, as is the flexibility that comes with being your own boss.”

In some good news for the unemployed, the vast majority of respondents (92%) will hire staff in the first year after commencing business operations. 30% will hire one to two employees, 41% will hire three to five, 16% will hire six to 10, 4% will hire 11 to 20 and 1% will hire 21 to 50. SA respondents were the most likely to not hire anyone (15%) and WA respondents were least likely (4%).

52% of respondents will buy a new franchise while 48% will buy an existing one, with females more likely to choose the latter than males (56% vs. 49%). Meanwhile, VIC respondents were more likely to choose new (57%) while Queenslanders were least likely (47%).

Overall, the most appealing aspects of being part of a franchise system were:

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

Only 50% of survey respondents plan to enter into a franchise with a spouse or romantic partner.

“The proportion of potential franchisees buying alone has decreased to 18% from the 22% in last year’s survey however the proportion of those buying with their partner/spouse has also decreased, to 50% from 57%. This year, family members and business partners play a bigger role, with 9% and 11% respectively saying they were entering into franchising with these contacts,” Ms Sheppard said.

The state with the highest proportion of respondents who were considering buying solo was New South Wales, at 23%, while the state with the smallest proportion was Queensland, at 13%.

“When you contemplate the impact of buying a business, it was intriguing to uncover that the likelihood of potential franchisees researching their franchise purchase for more than one year was low. Only 37% will have spent 13 or more months researching by the time they buy into their new career path. 45% will have spent six to 12 months and 18% will have spent under six months researching. Interesting, especially when the survey showed 24% won’t have had any experience within their chosen franchise’s industry. However, this was much less than the 39% in last year’s survey,” Ms Sheppard continued.

Which resource do these potential franchisees turn to for advice before buying? Professional advisors (accountants, lawyers, financial planners, etc) came out on top as the most popular information source, while current franchise owners ranked second, franchisors ranked third and franchise expos fourth. Further down the list were the internet, business brokers, then family/friends, business magazines and newspapers.

The greatest hurdles respondents expected their business to face in the first year of operation were:

1. 46% - Ability to make a profit

2. 31% - Work/life balance

3. 31% - Hiring the right staff

4. 30% - Establishing myself in the local community as a trustworthy business

5. 26% - Learning everything I need to

6. 25% - Building my profile

It was interesting to note that females were much more concerned about number four above (37% vs. 22% of males) and less likely to worry about number six (22% vs. 27% of males).

“Despite all of the challenges, especially that of getting a small business to the point where it is making a decent profit, potential franchisees are keen to take control of their job security,” Ms Sheppard said.

The most popular decider for upcoming new small business owners when choosing one franchise over another was, again, money (cost to purchase, initial cash flow, income level to be achieved, etc). Second was brand reputation (brand recognition, quality and longevity of goods/services offered, consumer proposition, ethics, etc), third was lifestyle (business portability, flexibility of office/working hours, etc), fourth was ease of business management (suitability of skills, etc) and last was internal franchisor aspects (transparency of franchisor, local area marketing budgets, etc).

The most popular industries being considered were:

1. Retail – food, restaurants and cafès (47%)

2. Retail – other (22%)

3. Business and professional services (21%)

4. Health, beauty and personal services (21%)

5. Tourism, leisure and accommodation (19%)

6. Domestic services (18%)

The planned cost to purchase and set up varied widely between respondents, and fewer respondents than last year were contributing larger amounts of capital. 22% will spend less than $50K, 26% will spend $50-100K, 14% will spend $100-150K, 13% will spend $150-200K, 15% will spend $200-300K, 5% will spend $300-400K and 5% will spend $400K or more.

The most popular answer to ‘How much profit do you expect to earn in your first year?’ at 26% was ‘break even’, followed by $1-20K (23%), $20-$50K (19%), $50-100K (16%), $100-200K (9%), ‘make a loss’ (5%), $200-500K (2%) and no one expected to earn over $500K. Victorian respondents were most confident about making $100K and over (16%), while NSW and QLD had the highest percentage of respondents expecting a loss in their first year (6%) and SA had the least (4%).

“It was encouraging to see these franchisees-to-be were conservative in their expected initial earnings, and understandably even more so than those in the 2008 survey. Although the volatile economy is providing opportunities for some savvy business owners, we would certainly encourage anyone going into a new business to be realistic about the drawbacks as well as the benefits, particularly in this economic environment,” Ms Sheppard said.