A critical, but largely unexplored indicator of franchise performance and network health is franchisee tenure – the length of time someone operates as a franchisee.
According to the Franchising Australia Survey*, franchisees stay with a system for an average of seven years. This figure was last reported in 2010, and remained unchanged from the 2004 survey.
If the average tenure of franchisees hasn’t changed over a six-year period, does this mean that growing systems are adding more new franchisees, thus keeping the average age low? Or does it mean that franchisees simply get a seven-year itch and decide to leave of their own accord?
The answer is not so straightforward, and can be linked to the nature and profitability of the business model itself, the franchisor’s recruitment efforts, and the tenure of head office support personnel.
Franchisee tenure and the franchise business model
The 2010 Franchising Australia Survey found that the average initial term offered by franchisors in Australia is five years, with one or two further five-year options for renewal.
Where franchisees are on average staying in a system for seven years, compared to an average term of five years, this means that franchisees are staying for a total of 140% of their initial franchise term.
In other words, franchisees renew their agreement for a second term, but exit part-way through.
While the Franchising Australia Survey identifies five years as the average franchise term, it does not differentiate between retail and service franchises, which often have very different timeframes.
Retail franchises have franchise terms linked to the term of the lease for the premises from which the business operates. These retail lease terms also average five years (plus options to renew), but can in some instances be as long as seven years.
Consequently, the term of the lease for a fixed-location franchise tends to drive the term for which the franchise is granted, rather than the other way around.
On the other hand, most mobile service franchises are not required to operate from a fixed location, and rarely have leases on shops or offices. As a result, there is no external factor to determine the length of a franchise term, and for mobile service franchisees, these can be as low as three years.
Not only are franchise terms generally longer for retail franchises, but retail franchises require between three and 10 times the amount of initial capital investment compared to a mobile service franchise. (Source: Franchising Australia Survey).
The additional capital investment required for retail franchises (in addition to the commitment of a shop lease) provides the main reason why the average retail franchise tenure should be longer than for service franchises.
Put simply, it will take a retail franchisee a longer time to get a return on their substantially higher level of investment.
Satisfaction and franchisee tenure
Franchisee tenure can be used as a measure of franchisee satisfaction, usually exemplified as profits. It can be assumed that the longer a franchisee stays in a network, the more satisfied the franchisee must be.
This assumption is useful up to a point, but does run into some difficulties where large amounts of capital are invested.
Rather than the franchisee staying in a system because they are satisfied, the franchisee may remain because they have a greater need to get a return on their investment, and therefore be prepared to tolerate a degree of dissatisfaction as a means to this end.
For example, a retail franchise may grant a five-year initial term, but franchisees could be staying for seven years in order to get an acceptable return on their investment.
So while extended franchisee tenure may indicate a healthy network, it potentially overlooks those franchisees that remain as “economic captives” waiting to get a return on their investment, rather than as cheerfully willing participants.
(The counterpoint to this is the early exit made by these “economic captives” who sell their businesses below replacement cost and without waiting for a return on their investment simply to get out).
By comparison, the low investment levels required for mobile service franchises mean these businesses can quickly generate a return on their investment and are less likely to stay due to “economic captivity”.
Franchisee tenure in service systems would be expected to be lower than in retail systems because the payback period is much shorter, thus giving these franchisees greater economic “freedom”. Plus the repetitive nature of the work and seasonality of demand in many service systems may also lead to burnout or a desire for change.
Tenure relative to franchise recruitment
From a recruitment point of view, extended franchisee tenure actually helps network growth. The longer franchisees stay, the greater the focus that can be placed on recruiting new franchisees for new outlets, thus growing the network.
If franchisees do not stay for long, more recruitment effort needs to be expended on simply replacing the existing franchisees, which means a lot of work to maintain the network at its existing size for little or no growth.
When franchisees remain longer in a network because they are satisfied (and not “economic captives”), the faster the network can grow if its recruitment activities are properly resourced and if there remains market potential to expand.
Tenure as a measure of head office personnel
Just like in any workplace, tenure can be an indication of the satisfaction of franchise head office support personnel. If the average tenure is low, this would indicate to a potential franchisee that quality and consistency of support services provided by the franchisor may be adversely affected.
If the average tenure of the franchisor’s senior management team is low – and less than the initial term of the franchise – this could represent a major concern for all but brand new systems which have only just commenced operations.
Franchisees are easily frustrated by dealing with a revolving door of head office personnel, and often find themselves “training” the franchisor’s staff in how the business is run, rather than the other way around. Low tenure (i.e. high turnover) of franchisor staff may decrease franchisee satisfaction, and lead to a reduction of tenure by franchisees as they exit earlier than they would have otherwise.
There is no requirement under the Franchising Code of Conduct for franchisors to disclose the average tenure of their franchisees or their head office personnel.
However, good franchisors will be aware of tenure as a measure of their own performance and should be able to answer questions on this topic when asked by existing or potential franchisees.
For potential franchisees, understanding and evaluating franchisee and franchisor personnel tenure is an important part of the due diligence process. If all else is equal between two rival franchise offers, tenure may be the deciding factor that helps a franchise candidate decide on one system in preference to another.
* Compiled every two years by Griffith University.
Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.
Content for this article has been drawn from the Centre’s Effective Franchise Recruitment workshop, to be held in Brisbane, Sydney and Melbourne in September, 2012.
He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.