Franchise Business Outlook & Compensation Survey

August 02, 2006

Franchising World, May 2006

By Ken Walker

In late 2005-early 2006, the International Franchise Association conducted an e-mail survey of its franchise-system members. Of the 872 companies that received the query, 97 responded, a response rate of 11 percent. While some comparisons can be drawn based on years in business, size of company, system-wide gross sales and other characteristics, this survey is not representative of the IFA membership in general. It would not be accurate to generalize about the IFA membership as a whole based on the survey results.

For example, due to the limited number of responses by industry category, it is not possible to draw any comparisons by type of business. Only eight franchisors in the quick service restaurant category responded to the survey (or 8 percent of all respondents). Franchisors in the quick service restaurant segment represent a much larger segment of the overall IFA membership than represented by this survey. Therefore, the survey respondents do not represent a balanced cross-section of association members.

The survey was divided into three parts: business outlook and attitudes, general characteristics and functional operations, and compensation for franchise company executives. Click here to view all charts.

Business Outlook

Based on the survey responses, franchisors have a very positive outlook on the current economic conditions and are optimistic about the future.
68 percent say that current business conditions are somewhat good (34 percent) or very good (34 percent) for their specific business.
77.2 percent say that future business conditions are somewhat good (31.9 percent) to very good (45.9 percent) for their specific business.
70 percent say that current business conditions are good overall for franchising–43.2 percent somewhat good, 26.8 percent very good.
72.1 percent say that future business conditions are good overall for franchising– 41.2 percent somewhat good, 30.9 percent very good.

Franchisors have a very positive outlook for the year ahead:

74.1 percent believe that their system-wide gross sales will increase
48.4 percent by 11 percent or more,
25.7 percent by 6-10 percent
76.1 percent believe that their franchise units will increase
46.3 percent by 11 percent or more
29.8 percent by 6-10 percent
72.1 percent plan to increase employment in next 12 months

The survey responses indicate some correlation between the size of a franchise company and the general business outlook. Smaller companies, those with less than 50 units appear to have a more positive outlook on the economy and a more growth-oriented focus on franchise sales, growth in the number of units, and adding employees.

Survey responses also suggest that there is some correlation between overall system profitability (net profit before taxes) and system size, with profitability rising as the number of units increase. Likewise, there is a correlation between the number of employees and system size. However, the number of employees is highly leveraged.

General Characteristics

Nearly half (47.4 percent) of franchisors responding to survey have been in business 16 or more years. Nearly one-quarter (22.6 percent) of franchisors responding to survey have been in business less than 5 years.
84.5 percent are publicly held. Total number of units by franchisees was equally divided in four categories, with nearly half of the survey respondents reporting 100 units or less:
26.7 percent — under 25 units
20.5 percent — 26 to 100 units
24.7 percent — 101 to 300 units
22.6 percent — 300 units or more

Franchisor net profit before taxes

60.8 percent — under $1 million
12.3 percent — $1 million to $3 million

Total number of corporate employees

53.6 percent — 1 to 20 employees
17.5 percent — 21 to 50 employees

Main Functional Areas

The vast majority of respondents (84.5 percent) have one to five employees dedicated to franchise sales/development. About half (53.6 percent) use franchise brokers. Of those that use franchise brokers, 20.6 percent allocated about 10 percent of their franchise development budget to this function, while 10 percent of those that use brokers allocate as much as 50 percent of their franchise development budget to this function.

Most respondents dedicate one to five employees to other functional areas, such as franchise support (46.3 percent–one to five employees, 21.6 percent six to 10 employees), consumer marketing & advertising (75.2 percent–one to five employees).

Most respondents allocate the largest share of their operating expenses to franchise support/training and field operations: 31.5 percent allocate 30 percent or more to franchise support, 21.5 percent allocate 20 percent to 30 percent, and 12.9 percent allocate 10 to 20 percent.

32.2 percent allocated 20 percent to franchise sales/development, 38.7 percent allocated 10 percent to franchise sales/development.

11.8 percent of respondents allocate no expenses to general consumer marketing and advertising, 50.5 percent allocate 10 percent, and 23.6 percent allocate 20 percent.

40.8 percent of respondents allocate 10 percent to general administration-executive-legal, 24.7 percent allocated 20 percent and 19.3 percent allocate 30 percent.

Base Compensation Charts

Survey respondents were asked to indicate the salary ranges for many different positions in franchise systems, such as CEOs, COOs, senior vice presidents and other positions.

The most useful way to group these responses to the survey was by system size – the larger franchise systems, with more units and more employees, generally had higher base compensation ranges. Below are charts which group the responses into three categories: small franchisors (under 100 units), medium size franchisors (100 to 300 units), and large size franchisors (300 plus units).

Note: The large number of “No” Answers is partly because some survey participants did not have particular positions in their company.

Ken Walker is president and CEO of Meineke Car Care Centers. He can be reached at [email protected] .