U.S. Franchise Industry Grows 3.8% In Four Years

After extensive analysis of the U.S. franchise industry from 2010 to 2014, we concluded that, based on the performance of 1,695 companies that operate franchise systems in the United States, the franchise industry grew by 3.8 percent.

This was based on data collected from Franchise Disclosure Documents and compiled into our Franchise Industry Report.

We are excited to see how well the franchise industry has performed coming out of the recession. Our analysis uncovered the following key findings that were contributing factors to this growth:

135,289 New Franchised Outlets Opened

We discovered that two different points of analysis for outlet growth create different outcomes:

1. Beginning 2013 franchised outlets open minus beginning 2010 franchised outlets open showed a net growth of 15,506 outlets.

2. Outlets opened minus terminations, non-renewals, reacquired and ceased operations showed a net growth of 16,644 outlets.

In a number of instances, we found that Item 20 data differed from year to year. For example: In some franchise systems, the number of outlets at the end of one year did not match the number of outlets at the beginning of the following year, or the number of outlets opened minus terminations, non-renewals, reacquired and ceased operations did not equal the net growth in that year.

9.9 Percent Yearly Franchisee Turnover Rate (FTR)

This is one of the most interesting findings we uncovered in our analysis. Over 135,000 new franchised outlets were opened, while a combined 118,000 outlets were closed or reacquired and an additional 46,000 outlets were transferred.

Between 2010 and 2014 the average Franchise Turnover Rate was 9.9 percent per year. The scope of the FTR could be affected by a number of factors such as the financial impact of the recession, expiration of initial franchise agreement or renewal terms, or unhealthy franchise systems. No matter the reason, this Franchisee Turnover Rate was higher than expected and was one of the most significant findings in our analysis.

We concluded that the while the industry has experienced steady growth, there should be some concern about the yearly FTR. Further analysis will help us understand the contributing factors.

$59 Billion Franchisee Investments

Within the Sample, there were a total of 135,289 new franchised outlets opened during the four year period for a combined total of $59.4B in new franchisee investments.

Between 2010 and 2014, based on Item 20 data, there were:

• Outlets Opened: 135,289
• Terminations: 40,113
• Non-renewals: 11,997
• Reacquired by the Franchisor: 8,431
• Ceased Operations: 58,104
• Transfers: 46,187

The above results could be attributed in part to the effects of the great recession whereby many businesses failed to survive. The franchise industry may still be feeling the impact of that pressure. A total of $3.07B in initial franchise fees were collected between 2010 and 2014. Commercial & Residential Services franchise systems led all sectors, collecting a total of $621M in franchise fees.

This does not include calculations of franchise fees on transfers within the 2010 to 2014 period.

Based on our analysis of Item 7 disclosures within the FDD Sample, we determined that franchisees invested $59.4B into the franchise industry between 2010 and 2014 based on disclosed average initial investments. This was calculated by taking the number of new outlets opened by each system multiplied by their average investment as disclosed within Item 7. This does not include any fees or investments from, or required by, transfers.

Moving Forward

Our analysis indicates that we can expect consistent growth over the next year. Specifically:

• We expect to see the Personal Services sector lead growth as both Children’s Services and Home Care continue to outperform the industry.
• We are looking for continued trends in the data related to Franchisee Turnover Rates to determine causation of FTR scope.
• As additional Franchise Disclosure Documents are collected, we expect to see a drop in industry averages based on a number of factors including Item 19 FPR rates, litigation and other averages.
• As additional smaller franchise systems are incorporated into our sample in the future, these systems have less activity leading to less variability within their FDDs and analysis.

The information we have shared here is but a snapshot of the information we have included in our latest Franchise Industry Report.

To learn more and to order the full report, visit us at www.FranchiseGrade.com.

As the CEO of FranchiseGrade.com, Jeff Lefler understands that there is no Silver Bullet or sure-fire, simple way to pick a guaranteed franchise system winner. However, by using a little science and a lot of hard work, Jeff and the team at FranchiseGrade.com have developed a sophisticated research, analysis and comparison model to help potential investors and existing Franchisees assess a realistic value for any franchise system relative to others. It’s called a Franchise Grade.

With over fifteen years of small business experience and ten working in franchising as a multi-unit Franchisee, consultant and Franchisee Association President, Jeff has a good understanding of the level of hard work, dedication and commitment that drives a successful franchise system. As part of his ongoing involvement with the industry, Jeff also served as a Member of the Strategic Committee of the International Association of Franchisees and Dealers.

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