In a turbulent 2016, franchises show stability – but only once they’ve broken even

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One of the interesting trends emerging from the Franchise Association of South Africa (FASA)’s recently published annual survey, is that in the current slow economic environment, franchises are taking longer to break even.

According to the survey, one in four franchisors estimate that it takes up to 6 months before a new franchisee breaks even and a further 47% mentioned that it could take up to a year. Although, three in four franchisees are expected to break even within the first year of operations, there is a significant decline in the number who would break even in the first six months.

four-year-declining-periodFour-year declining trend

  • Less than six months: The trend over the past four years indicates a declining number of franchises are breaking even within the first six months. In 2013, 49% expected to do so, rising to 52% in 2014, but then falling to 42% in 2015 and precipitously declining to just 26% in 2016.
  • Seven to 12 months: This decline is then matched by those expecting break-even point taking longer. In 2013, 32% of franchisees expected it to take up to 12 months to break even, again falling in 2014 to 27% but then rising to 35% in 2015 and 47% in 2016.
  • More than one year: The percentage of franchisees expecting their business to take longer than a year to break even is smaller but has consistently risen: from 19% in 2013 to 21% (2014), 24% (2015) and finally 26% (2016).

How to cope with a longer break-even point

breakevenBreak-even refers to the point at which the business generates enough operating revenue to cover monthly operating expenses and start paying back the initial investment. Until that point, you are pouring money into the business – after that point, it starts trickling back out and eventually repays your initial investment.

For an individual looking to buy into a franchise, the break even statistic becomes a more important one that at this time you need to interrogate more thoroughly. It may mean the difference between ultimate success and failure that in the current economic climate you may have to fund your new business’ running costs for, say, 12 months instead of six, on top of your initial investment.

Something that is therefore good advice would be to double up on the number of franchisees you call before selecting which franchise system to choose. You need to get a closer idea of that franchise’s break-even point and try establish some averages.

But greater confidence revealed

Lifecycle

Another interesting trend emerging from the FASA survey was respondents’ answer to the question of what lifecycle stage they would place their business in.

An increasing number of franchisors feel that their businesses were at an Ambitious (expanding and taking a risk) or Mature (control and profit) stage. The Success stage (achieving and nourishing) has remained consistent with that of a year ago. The number of businesses classifying themselves as being in the Turbulent phase (adjusting and changing) has doubled though off a low base, perhaps at the expense of the Stable (establishing and maintaining) and Establishment (return on investment and status) stages.

More than three-quarters of businesses (compared to 61% in 2014 and 73% in 2015) placed themselves in the categories of Ambitious, Success, Stable and Mature, suggesting that notwithstanding the slightly longer time to break even, franchises are doing well in this turbulent climate.

In conclusion

businesses-opened-and-closed-in-2016In 2016 71% of the franchisors interviewed claimed that they had opened a total of 2,646 businesses, 26% of which were fast food and restaurants and 21% of which were in retailing. An estimated 612 businesses were closed down, resulting in a net gain in the number of stores of 2,035.