An Educated Rant: The State of Franchise Growth

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BDC Investments and the state of franchise growth

Over the last 4 weeks, I’ve been undertaking deep research into the franchise and retail industry as part of our launch of the BDC investment group to confirm what we believe is true. To say it is would be an understatement.

There are 2,569,000 businesses registered for GST in Australia (ABS) on average there are 350,000 new businesses registered each year. Last year there were 475,000 registered. 60% of those will fail over the next 3 years with 50% of them profitable…amazing!

The franchise register shows around 987 brands. 489 of those are 10 franchises or less and only 20% in excess of 50 stores. Ibis world predicts a gain of nearly 9000 franchises over the next 5 years. That is 1.8 new franchises per brand each year.

Clearly, the franchise industry has a major scaling problem. By the time businesses turn into a franchise chain, the model should have already been proven out with the next steps being pure replication and growth across Australia. How is it then that nearly 500 franchise systems have less than 10 units in each chain and are predicted to only put on under two a year?

What is clear after all the research there are three key reasons for this inability to move forward:

  1. Lack of capital
  2. Lack of experience
  3. Fear

Being a franchisor is bloody hard and bloody scary. Anyone who has been through it understands the day-to-day of living financially and mentally on the edge. On top of having the added pressures of trying to grow their business, manage their team (albeit a small one), manage the existing franchisees manage the 1 or 2 outlets they usually own and run directly, manage their family and personal life, and have everyone looking at you for answers and direction!! 

Most franchisors end up like a deer in the headlights, completely paralysed as to what to do next, (trust me I’ve been there myself and seen it multiple times) and I’ve wondered how the hell they break through that 5 to 10 store barrier. In most modelling for any franchise system, the genuine profits really only start to kick in when you hit over 25 franchises but to get there is a herculean task with a shitload of luck.

It’s a very simple equation. Replicate a proven model, remain focused on the success of the franchisee, add capital and experience and go H.A.M (ask your kids what that means). 

If you need a bit of help or just want a chat, send me a note as we are investing in 5-6 businesses this year and are looking for the right fit, contact us here for more information.

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