IMPROVING SMALL

BUSINESS SURVIVAL RATES

VIA FRANCHISING:
The role of the banks in Europe

Professor John Stanworth

Peter Stern

INTERNATIONAL FRANCHISE RESEARCH CENTRE

SPECIAL STUDIES SERIES NO.2

NOVEMBER 1993

PUBLISHED BY UNIVERSITY OF WESTMINSTER PRESS

ISBN 1 85919 090 1
THE INTERNATIONAL FRANCHISE International Journal (MCB University
Press). Additionally, Franchise Growth And
RESEARCH CENTRE (IFRC) 1993-2007
Failure In The U.S. And The U.K.: A
University of Westminster, London, UK.
Troubled Dreamworld Revisited received the
Best International Paper Award in 1997,
"The International Franchise Research
again from the Society of Franchising. This
Centre (IFRC) is committed to
paper was later published in Franchising
improving the understanding of
Research: An International Journal.
franchising. This is achieved by the
publication of impartial research and
Close links were fostered with universities in
by the encouragement of informed
Rome and Pisa (Italy), Haute Alsace
debate."
(France) and Boston, Minneapolis and
Texas (USA), with a view to research
Franchising operates in a dynamic environ-
collaboration. Professor Pat Kaufmann of
ment, with new issues and challenges
Atlanta, Georgia, addressed our inaugural
emerging, including: globalisation, coping
annual strategy seminar, in 1994. Overseas
with competition, disclosure, industry
speakers in subsequent years included
regulation, managing relations with
Cheryl Babcock, Director of the Franchising
franchisee associations, franchisee
Institute, University of St. Thomas,
recruitment & market saturation.
Minneapolis (1995), Professor Rajiv Dant,
University of Boston (1996), Professor
Against this backdrop, the IFRC was
Francine Lafontaine, University of Michigan
established in 1993 by Professor John
(1997), Professor Claude Nègre, University
Stanworth (Director of the Future of Work
of Haute Alsace (1997), Colin McCosker,
Research Group at the University of
University of Southern Queensland (1998),
Westminster), supported by Brian Smith (ex-
Professor Frank Hoy, University of Texas at
BFA Chairman, franchisee, franchisor and
El Paso (1998), Professor Jack Nevin,
author), and Chair of its Steering Group.
University of Wisconsin-Madison (1999),
Professor Tom Wotruba, San Diego State
FOUNDER MEMBERS
University (1999), Professor Bruce Walker,
University of Missouri, (2000), and,
Founder members and sponsors included:
Professor Wilke English, University of Mary
Barclays Bank, the British Franchise
Hardin-Baylor (2000).
Association (BFA), Dyno-Rod, Franchise
Development Services Ltd., Lloyds Bank
IFRC members were active supporters of the
(now Lloyds Group), Mail Boxes Etc.,
International Society of Franchising, and
Midland Bank (now HSBC), Prontaprint,
hosted the ISoF 2005 conference in London.
Rosemary Conley Diet & Fitness Clubs,
Royal Bank of Scotland, The Swinton Group,
The IFRC ceased its research activities in
and Wragge & Co.
2007, when John Stanworth took retirement.
PUBLICATIONS
Web versions of IFRC Special Studies
Series Papers 1993-2001 (listed overleaf)
Their support enabled the IFRC to publish a
number of reports, including its Special
Many of the earlier papers have been re-set,
Studies Series Papers, journal articles,
to allow a successful conversion to Acrobat,
book chapters and conference papers.
and are now available online.
Two IFRC papers received three awards
John Stanworth, Emeritus Professor,
over a period of 12 months (1996-97). The
University of Westminster
first being Business Format Franchising:
http://www.westminster.ac.uk/schools/
Innovation & Creativity or Replication &
business
Conformity ?, which received the Best
International Paper Award in 1996, from the
David Purdy, Visiting Fellow,
Society of Franchising. This paper also
Kingston University
received the Outstanding Paper of 1996
http://business.kingston.ac.uk/sbrc
award from Franchising Research: An
December 2010

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.1
LIABILITY DISCLAIMER
The information and analysis in each report
is offered in good faith. However, neither the
publishers, the project sponsors, nor the
author/s, accept any liability for losses or
damages which could arise for those who
choose to act upon the information or
analysis contained herein.
IFRC Special Studies Papers 1993-2001
10 London: A Capital City For Franchisee
Recruitment, (Mills, Stanworth &
Purdy), 1997
11 The Effectiveness of Franchise
Exhibitions in the United Kingdom,
(Chapman, Mills & Stanworth), 1997
12 Franchising: Breaking Into European
Union Markets, (Stirland, Stanworth,
Purdy & Brodie), 1998

Web versions published online December 13 Succeeding As A Franchisor,

2010, via http://www.scribd.com/:
1 The Blenheim/University of
Westminster Franchise Survey:
Spring 1993, (Stanworth & Purdy),
1993
2 Improving Small Business Survival
Rates via Franchising: The Role of the
Banks in Europe, (Stanworth & Stern),
1993
3 Targeting Potential Franchisees:
Industry Sector Backgrounds and
Declared Areas of Interest, (Purdy &
Stanworth), 1994
(Stanworth & Purdy, published jointly
with Business Link London Central),
1998
14 Direct Selling: Its Location in a
Franchise Typology, (Brodie &
Stanworth), 1999
15 Unravelling the Evidence on
Franchise System Survivability,
(Stanworth, Purdy, English &
Willems), 1999
16 Survey: Professional Services For
Franchising In The U.K., (Stanworth &
Purdy), 2001

4 The Impact of Franchising on the

Development Prospects of Small &
Medium-sized Enterprises (SMEs) in
Europe, (Stanworth & Purdy), 1994

5 The Blenheim/University of
Westminster Franchise Survey: A
Comparison of UK and US Data,
(Stanworth, Kaufmann & Purdy), 1995

6 Developing a Diagnostic
Questionnaire as an Aid to Franchisee
Selection, (Stanworth), 1995

7 Franchising as a Source of
Technology-transfer to Developing
Economies, (Stanworth, Price, Porter,
Swabe & Gold), 1995

8 Aspects of Franchisee Recruitment,

(Macmillan), 1996

9 Business Format Franchising:

Innovation & Creativity or Replication
& Conformity ?, (Stanworth, Price,
Purdy, Zafiris & Gandolfo), 1996

International Franchise Research Centre Special Studies Series Papers 1-16 Web Versions 2010 p.2
INTRODUCTION
The last 2 decades have witnessed a
metamorphosis in the scale and fortunes of
franchising in Europe (Abell, 1991;
Mendelsohn, 1992). For instance, when the
first serious research study of franchising in
Britain got underway in 1975, it was hampered
by an almost complete absence of information
and statistics on what was still frequently seen
as a business marketing technique rather than
an industry per se. In 1977, within a month of
the research study's publication (Stanworth,
1977), the firms which formed the focus of the
study - Wimpy (fast food), Dyno Rod (drain
cleaning and hygiene services) and
Servicemaster (carpet and upholstery
cleaning)- had joined with five other franchise
companies to launch the British Franchise
Association (BFA).
Since that time, membership of the British
Franchise Association has grown and now
embraces over 120 companies (including its
register of developing franchises) plus over 50
affiliates, including professionals, banks and
consultants. The industry has developed its
own industry-specific exhibitions and
publications, and the term franchising has
been transformed in the public image from
being synonymous with ethically suspect
business practices such as 'pyramid selling' to
a bona fide business format with an important
and legitimate role to play in a modern
economy.
Possibly the franchise industry's single most
impressive breakthrough has been its
acceptance by banks in Europe. For instance,
in 1981 in Britain, the National Westminster
(NatWest) Bank and then Barclays appointed
franchise managers to co-ordinate their
activities in the franchise field. Lloyds
appointed a franchise manager in 1982 and
the Midland had a manager with special
responsibility for franchising in post by the end
of 1983. However, it has been the NatWest
Bank which has undertaken the essential
pioneering role in financing British franchising
and has lent over £250 million to franchisees/
licensees through its centralised Franchise
Section.
It is the intention of this article to outline the
historical development of franchising up to the
International Franchise Research Centre - Special Studies Series Paper No.2
present day and then to examine the specific
role and importance of the clearing banks
involved in franchise lending throughout
Europe. Finally, issues relating to the future of
franchising will be examined.
HISTORY AND DEVELOPMENT OF FRANCHISING
A franchise relationship can take various
forms and is often seen as having much in
common with licensing. Typically, however,
the relationship involves satellite enterprises
(run by franchisees) operating under the trade
name and business format of a larger
organisation (the franchisor) in exchange for a
continuing service fee. The franchisee sets up
his/her own business, operating along lines
specified by the franchisor and trading in the
product or service previously market tested by
the franchisor. The main advantage of
franchising to the franchisor is that it enables
him/her to achieve national coverage for his/
her product or service more quickly. Most of
the necessary capital is put up by franchisees
and the latter, being self-employed, are
usually motivated to work hard in building up
their businesses which, at the same time,
ensures success for the franchisor.
The franchisee, on the other hand, gets the
chance to run his/her own business, use of an
established tradename, prime rights to a
particular geographical territory where
appropriate, head office advice and
administrative backup, plus the benefits of
continuous market research and product or
service development.
Franchising is frequently seen as a relatively
recent phenomenon imported from the United
States but the real pioneers of modern
franchising were almost certainly the British
brewers of the 18th century who created a
system of 'tied' house agreements with their
publicans which remains widespread to this
day. It is true, on the other hand, that
franchising is today economically more
important in America. Franchise activities in
the United States now account for around
one-third of all retail sales and 10 per cent of
gross national product. It is estimated that, in
America, there were around 492,000
franchise outlets in 1989 (including nearly
95,000 franchisor operated) with a combined
1
turnover of $678 billion (Acheson, 1991).
As yet, there exists no centralised statistical
intelligence gathering machinery in Europe to
match that operated via the US Department of
Commerce up until the late 1980s. However,
non-government estimates indicate that,
taking into account the fact that European
countries are individually substantially smaller
in population than the United States, the
imbalance in the extent of franchising in
Europe is not as great as is sometimes
supposed. For instance, the number of
franchised outlets in the United Kingdom
alone was estimated as long ago as 1984
(Stanworth, 1984) at around 80,000. This
included retail petrol outlets, tenanted public
houses and voluntary group wholesale-retail
franchises operating in areas such as food
retailing and photography. This estimate of
80,000 includes most areas of activity likely to
be encompassed in US official estimates of
franchise industry size.
A more recent estimate including full business
format franchising together with associated
sectors in franchised motor dealers, the
tenanted licensed trade, and petrol forecourts,
indicates a total value for the franchising
related sector in excess of £40 billion, or 29
per cent of total retail sales, achieved through
74,000 outlets (The NatWest/British
Franchise Association Franchise Survey
1992, 1993).
Annual sample surveys aimed at estimating
the size of the franchise industry in Britain and
restricted largely to the growth area of
'business format franchises' (thus excluding
most of the businesses mentioned in the
above paragraph), indicate that there are
currently around 370 franchises with 18,000
outlets, employing 170,000 people and turning
over something in the region of £4.5 billion per
annum (The NatWest/British Franchise
Association Franchise Survey 1992, 1993).
Since franchises often differ so greatly from
one another, it is useful to form them into
sub-groupings after the fashion originally
suggested by leading American expert,
Charles Vaughn (1979):
International Franchise Research Centre - Special Studies Series Paper No.2
The Manufacturer-Retailer Franchise
Here the manufacturer is the franchisor and
the franchisee sells direct to the public. The
franchisee may operate the franchise as his/
her sole business concern or, alternatively, as
an activity within an existing business. Car/
truck dealerships and petrol service stations
are examples and these cover a large
proportion of franchise activities overall (they
account for around 28 per cent of all outlets
and 66 per cent of franchise sales in the
United States).
The Manufacturer-Wholesaler Franchise
The outstanding example of this type of
franchising is the soft drinks industry
dominated by Coca-Cola, Pepsi-Cola and
Seven-Up who franchise to independent
bottlers which, in turn, serve retail outlets.
The Wholesaler-Retailer Franchise
The best-known examples here are the
'voluntary' groups in grocery retailing where
the wholesaler (the franchisor) supplies
products to the retailer (the franchisee) who is
signed up on a voluntary franchise basis.
Examples are Spar, Mace, VG, Londis, etc.
The Trademark, Trade-name, Licensor-Retailer
Franchise
This is the franchise sub-group that has grown
so remarkably quickly over the last three to
four decades (especially in the United States)
and is still developing on an international
basis. The franchisor, who may not be a
manufacturer, has a product or service to be
marketed under a common trade-name by,
usually, standardised outlets. This sub-group
approximates to what are often now known as
'business format' franchises which have a
high service element and are based on the
'cloning' principle, for example, fast food, fast
print services, cleaning and related hygiene
services, car-hire, car tuning, etc.
The underlying strength of franchising,
combined with the cross-national drive for
self-employment opportunities, goes a long
way towards explaining the ready
internationalisation of many franchises. The
American fast food giants come most
2
 TABLE 1: INTERNATIONAL FRANCHISE STATISTICS

Number of Number of Sales

Franchisors Franchisees US $bn

Australia (1987/88) 184 10,303 4.1

Austria (1988) 30 1,363 N/A
Belgium (1987) 77 4,045 3.2
Canada (1987) 1,000 45,000 51.7
Denmark (1989) 60 600 N/A
Germany (FR) (1987) 180 9,000 5.4
France (1988) 675 29,698 16.0
Italy (1988) 197 11,500 3.4
Japan (1988) 619 102,397 44.3
Netherlands (1988) 248 8,332 5.8
Norway (1988) 120 850 0.5
Republic of Korea 33 337 0.3
Sweden (1988) 60 1,000 2.4
UK (1990) 379 18,260 7.6
USA (1988) 2,177 368,458 190.1

These figures were compiled from a range of sources and exclude sales of Cars,
Trucks, Gasoline and the Soft Drink Bottlers.

obviously to mind here but there are markets can be penetrated:

outstanding European examples too. For
instance, Britain's own Body Shop, set up by
Anita Roddick in 1976, now trades in 41
different countries and 19 languages and
opened its 1,000th store in 1993. It has been
described as Britain's most successful retailer
abroad outpacing giants such as Marks and
Spencer and Mothercare.
INTERNATIONAL MARKETS
The internationalisation of franchising
generally continues unabated, led principally
by American franchise companies. In 1989,
almost 400 American business format
franchisors operated 37,600 foreign outlets
covering most countries of the world. In an
increasing number of countries, the shift from
manufacturing to services, the process of
urbanisation, rising disposable incomes and
expanding consumer markets provide similar
conditions to those which fuelled the earlier
franchising surge in the United States.
There are a number of ways in which foreign
'...franchising directly to individuals,
company-owned operations, joint
ventures or master franchisors. Many
franchisors use more than one method
in conducting foreign operations but the
most popular, cheapest and fastest
method is the master license
technique' (US Department of
Commerce, 1988).
Under the master licence technique, a master
licensee receives the right to develop the
franchisor's system in a specific country or
region. The US Department of Commerce
claims that, 'Compared to other service
sectors, the problems of franchise companies
in accomplishing international transactions
are relatively less formidable' (US Department
of Commerce, 1986). The heaviest foreign
concentrations of American franchise outlets
are in Canada (11,182); Japan (9,249);
Continental Europe (5,405 - especially
France, West Germany, the Netherlands and
Belgium); the United Kingdom (2,961);
followed by Australia, Asia, Mexico, the

International Franchise Research Centre - Special Studies Series Paper No.2 3

 TABLE 2: STATISTICAL COMPARISONS FROM DIFFERENT SOURCES

Number of Number of Franchise Sales

Franchisors Franchisee In Billion ECU
Outlets (Unless Otherwise
Stated)

Austria 30 1,363 N/A

- - -

Belgium 77 4,045 2.85

(135) (4,500) ($3.0bn)

Denmark 8 25 N/A
- - -

France 675 29,698 13.15

(680) (38,000) ($15.5bn)

Italy 197 11,500 4,500 (bn.Lire)

(99) (9,000) ($3.8bn)

Netherlands 248 8,332 5.4

(390) (8,500) ($7.0bn)

Norway 120 850 0.5

- - -

Portugal - - -
(100) (1,100) ($0.39bn)

Sweden 44 752 0.4

(110) (3,000) ($1.0bn)

UK 270 20,000 £3.80

(520) (30,000) ($5.0bn)

Germany 180 9,000 4.8

(400) (26,000) ($2.8bn)

Denmark, Greece, - - -
Spain & Norway (675) (10,000) ($1.3bn)

TOTALS: 1,849 85,565 -

(3,109) (130,100) ($39.8bn)

International Franchise Research Centre - Special Studies Series Paper No.2 4

Caribbean, Africa, and South America
(Acheson, 1991).
National and international statistics on
franchising tend to vary considerably
depending upon their source (see, for
example, Stanworth, 1991, Acheson, 1991
and Mendelsohn, 1992). Mendelsohn, has
recently compiled the figures presented in
Table 1 which give at least some indication of
the scale of international franchising.
Another recent compilation of statistics (Table
2), however, shows how variable statistics
can be and is presented here as an indication
of the still often crude and imprecise nature of
statistical estimates in this field. Here again,
sales of Automobiles, Trucks & Soft Drink
Bottlers (and Hotels) are excluded.
The figures presented in brackets (shaded
rows) in Table 2 (Stanworth, 1991) relate to
1988 and are drawn from the Euromonitor
publication, Franchising in the European
Economy: Trends and Forecasts 1980-1990.
As can be seen, there are certain obvious
obstacles to direct comparisons with
European Franchise Association (EFA)
figures (not bracketed) for the same period
i.e., 1988. The latter do not include Portugal,
Greece or Spain, whereas the former do.
Euromonitor amalgamate figures for
Denmark, Greece, Spain and Norway, unlike
the EFA. Also, sales turnover figures are
presented in different currencies. Finally,
whereas the EFA presents data on number of
franchise outlets, Euromonitor figures in the
same column refer to numbers of
franchisees. Given that some franchisees
may be expected to be multi-outlet holders,
we would expect numbers of franchisees to
be lower than numbers of franchised outlets,
which they are plainly not.
THE ROLE OF THE CLEARING BANKS IN BRITAIN
Almost without doubt, the biggest single boost
to the prospects for franchising in Britain
came from the recognition and support
extended by the clearing banks. Interestingly
too, banks have recognised franchising as
very much an avenue into small business
rather than viewing it as an essentially big
business activity. In fact, the NatWest bank
International Franchise Research Centre - Special Studies Series Paper No.2
was quite explicit in its early promotional
literature, going into print very early on with its
statements such as:
'The bank has recognised the part that
franchising can play in the creation of
new small businesses and has
appointed...Franchise Managers with
specific responsibility to assist the
development of new business through
franchising'
and, more recently:
'Recognising the contribution that
franchising can make to the
establishment of new small successful
businesses, NatWest now has a team
of ten with responsibility to assist the
development of business through
franchising'
The approach of the other major clearers was
essentially similar and, while the need to
provide information to Branch Managers out in
the field may have been the initial impetus to
appoint franchise managers, an additional
function has been to develop a generally more
formalised approach to the supply of funds to
both franchisors and franchisees. At an
international franchise convention in 1987,
NatWest's Senior Franchise Manager stated 3
principal objectives for his Franchise Section
(Stern, 1987):
■ To produce detailed information packages
for Branch Managers, customers and the
general public as a basic guide to
franchising and to inform and develop
wider acceptance of the franchise concept.
■ To achieve market penetration and
maintain a knowledge and information
base via contacts in the field, including the
BFA itself, solicitors, accountants,
consultants and, not least, NatWest's own
subsidiaries such as its vehicle equipment
leasing and commercial/personal
insurance subsidiaries.
■ To develop the bank's small business
portfolio by safe lending to viable small
businesses, established through reputable
franchise networks.
5
LESS RISK
While franchising should improve the chances
of someone establishing a successful
business, the banks make it clear that any
business carries risk particularly when starting
up. When vetting the franchisor the banks are
establishing whether they are happy to carry
a line of finance to a number of franchisees of
that franchise. They do not vet on behalf of
the franchisee, who is strongly advised to
make an independent assessment of the
business with the assistance of his/her
accountant and solicitor.
To date, it does appear that, when a franchise
system is based on a good and tested product
or service, an individual wishing to become
self-employed can achieve his/her goal more
rapidly and with less risk than would be the
case if he/she staged entry into self-
employment by more conventional means.
Further, for the person without skills and prior
experience, franchising can have a particular
appeal. The franchisor can put at his/her
disposal a product or service, training in a
proven method of doing business, advertising
and other back-up services.
The record of the clearing banks - or certainly
the NatWest Bank - indicates that franchise
lending, subject to the checks and forms of
scrutiny outlined below, represents a relatively
safe form of bank support compared to
conventional small business start-ups. The
precise level of failure amongst franchise
outlets is not easy to estimate and has been
the subject of much previous discussion.
However, a picture is gradually emerging. The
overall failure rate appears at least lower than
for small businesses generally (particularly
considering the sectors in which they
operate).
It has been estimated that, in 1992, in the
space of a year, around 10 per cent of
franchise outlets in Britain either changed
hands or ceased operation (The NatWest/
BFA Franchise Survey 1992, 1993). Turnover
can often disguise failure. However, it appears
that most failures are likely to occur in what
has been termed the 'less predictable new
arrivals in the industry'. Thus, there appears
to be a continuum of risk probabilities within
the industry ranging from low amongst the
International Franchise Research Centre - Special Studies Series Paper No.2
franchising 'establishment' to a somewhat
higher level around the periphery of the
industry.
Before agreeing either franchisor or
franchisee funding, each franchise is subject
to a thorough investigation by the Franchise
Section. This evaluation includes an
examination of the pilot operation, financial
stability, management structure, marketing
ability, product/service quality and brand
awareness of the franchisor. It is also
examined from the viewpoint of the kind of
information provided to, and the selection of,
prospective franchisees as well as the nature
and quality of services provided for
franchisees.
Of special interest to the banks is the quality
of the franchisor's field support services since
the franchisee's ability to meet his obligations
to the bank can be dependent on his ability to
deal with problems before they become
serious. The franchise agreement is scruti-
nised with attention particularly to the rights
and obligations of both parties, any onerous
clauses which could affect the bank, bases for
contract termination or non-renewal, transfer-
ability and the conditions attached to sale.
The bank is particularly concerned that the
franchisor should have the ability to maintain
the franchise chain as a whole. The franchisor
is expected to consult with the bank should he
suspect that a franchisee is encountering
difficulties, for example, failing to make
service fee payments, and certainly before
termination.
One of the advantages of this form of funding
over more traditional forms is its integrated
nature. This may include a higher level of loan
funding than the bank would normally
consider and, in some cases, at a lower rate
of interest. While a conventional small
businessman could usually expect to receive
bank support on no more than a 1:1 own
funds/loan finance basis, a franchisee using a
bank package can expect this ratio to improve
up to 2:1. Up to two-thirds of the total start-up
capital, including working capital, may be
provided.
As far as security for two-thirds finance is
concerned, the bank usually expect the bulk
6
of the facility to be secured, invariably by
personal assets with any balance unsecured.
In a situation where there is only, say, 20 per
cent security available, the bank can utilise
the government backed Small Firms Loan
Guarantee Scheme which is designed to
assist small businesses in business
categories seen as worth supporting but
deficient in security even after the applicant
has pledged his/her personal assets.
The bank takes no security from the
franchisor when assisting a franchisee since
the two are seen as separate business
entities. The reason for the higher than
conventional gearing ratios and possibly lower
interest charges is that, while the prospective
franchisee may have no previous business
experience or record himself, the franchisor
does. Loans may be on fixed or variable
interest rates, and can include a capital
repayment holiday.
Whilst the recession has led to some
reduction in staff trained in franchising in UK
retail banks, the use of the clearing banks by
the franchise industry appears set to develop
as the industry matures and becomes
increasingly professional. As franchising
expands, so will the number of prospective
franchisees sought by growing franchisors.
Research already shows quite clearly that
prospective franchisees are now considerably
more knowledgeable than they were and this
is showing up in a trend towards them
considering several franchises rather than just
one as was typically the case years ago.
Thus, as franchisors compete for good
franchisee prospects, an ability to
demonstrate good relationships with clearing
banks has become increasingly important.
The growing importance of bank finance to
franchisees is reflected in research conducted
by the University of Westminster (Stanworth,
1977 and Stanworth, 1984). For instance, an
in-depth study of 165 franchisees carried out
in 1975-77 showed that 45 per cent had
obtained funding assistance from clearing
banks when starting-up. A subsequent piece
of research conducted in the 1980s showed
that 53 per cent had used bank finance. In fact
42 per cent claimed to have raised 26 per cent
or more of their total set-up requirement
funding from clearing banks and, of this 42 per
International Franchise Research Centre - Special Studies Series Paper No.2
cent, one quarter claimed to have raised in
excess of 51 per cent. A more recent survey
indicated that 59 per cent of all borrowers (44
per cent of all franchisees) raise finance from
clearing banks (The NatWest/British
Franchise Association Franchise Survey
1990).
The above research sought, amongst other
things, to gain an impression not only of the
extent of bank borrowing by franchisees but
also of the impressions that franchisees had
of the clearing banks and, again, the results
were favourable. Less than one-third of the
sample felt that banks still did not really
understand franchising and less than one-
quarter felt that the attitude of banks towards
franchising was unfavourable.
BANK SUPPORT FOR FRANCHISING IN EUROPE
In order to ascertain how banks elsewhere in
Western Europe have reacted towards
franchising, a survey was carried out by the
authors through the relevant Franchise Trade
Associations. Trade Associations in the
countries studied represent between 20 and
67 per cent of franchisors but, irrespective of
numbers, can be expected to have an opinion
as to levels of bank support for franchising in
their own country.
The results for European franchising generally
must be considered poor with only the UK and
Dutch banks giving full support (Table 3).
Several countries' responses were negative in
every respect. Only UK, Dutch and French
banks show as having a good level of
franchise knowledge. Six countries show as
having unsupportive banks with poor
knowledge plus there are 4 countries where
information was not available but is believed
to be negative.
The conclusion must be that UK and Dutch
banks lead in positive and knowledgeable
response to franchising with Eire credible in its
smaller marketplace. France is also
responsive although the banks have no
involvement in the Trade Association and no
specialist units or literature.
Whilst some interest is starting to be shown in
emerging Eastern European countries, there
is clearly a vast knowledge gap and lack of
7
 TABLE 3: SURVEY OF BANKING INVOLVEMENT IN EUROPEAN FRANCHISING

Denmark Eire Finland France Greece Holland Italy Norway Sweden U.K.
Number of Major Banks 3 4 5 4 5 4 14 4 5 5

Does the Franchise ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Association have
Professional Affiliates ?
Number of Banking 0 3 0 0 0 4 1 0 0 5
Members

Any Specialist Franchise 1 ✗ ✗ ✗ ✗ 2 ✗ ✗ ✗ 4

Units ?

Perceived General Level of Poor Fair Poor Good Poor Good Poor Poor Poor Good
Franchise Knowledge in
Major Banks
Banks Generally Supportive ✗ ✓ ✗ ✓ ✗ ✓ ✗ ✗ ✗ ✓
of Franchising ?

Banks Keen to Lend to ✓ ✓ ✗ ✓ ✓ ✓ ✗ ✗ ✗ ✓

Franchisees of Established
Franchise Systems ?
Do Major Banks Produce ✗ ✓ ✗ ✗ ✗ ✓ ✗ ✗ ✗ ✓
Franchise Literature for
Their Customers ?

N.B. It is believed that there are no Bank Affiliates nor Specialist Units in banks in Germany, Austria, Switzerland or Portugal. Spain has no Franchise Trade Association.

02_TABL3.PUB
interest in the majority of European countries
which needs to be addressed if franchising is
to reach its full potential in Europe.
THE FUTURE OF FRANCHISING IN EUROPE
The growth of franchising in Europe during the
1990s appears set to continue, despite
setbacks in the recent recession. A number of
factors appear to be at play here. First is the
general world-wide decline of traditional
manufacturing industry and its replacement by
service-sector activities. Franchising is
especially well suited to service and people-
intensive economic activities, particularly
where these require a large number of
geographically dispersed outlets serving local
markets.
A second factor is the growth in the overall
popularity of self-employment. Most
governments in the Western world are looking
towards self-employment and small business
as an important source of future jobs and, in
Britain, over the last 15 years, the proportion
of the labour force in the self-employed sector
has increased from around 7 per cent to
around 12 per cent (Daly and McCann, 1992).
As franchising becomes increasingly well
known and understood, it is likely to appeal to
a growing number of people. Alongside this
trend, we may expect to see an increase in
the number of franchise opportunities. This
process will be assisted, not least, by large
companies following the current trend towards
divestment from centralised control of an
increasing proportion of their business
activities. A notable example in Britain has
been the franchising of domestic milk-delivery
in the United Kingdom (Fulop, 1989; Boyle,
1994).
Despite the rapid increase in the number of
business schools and college management
centres running undergraduate and graduate
courses on small business and
entrepreneurship, the potential of franchising
as a viable business option has generally
been overlooked. It is likely that the future will
witness the development of a growing liaison
between the worlds of franchising and
management education with a view to
integrating the topic of franchising fully into
teaching programmes in the universities and
International Franchise Research Centre - Special Studies Series Paper No.2
colleges of Britain and their counterparts
abroad. Given the flexibility of the franchise
concept for movement across national
boundaries, it is important that this initiative be
based on an international perspective.
Finally, we come to the legislative aspect of
franchising and here current trends are
hopeful. On a number of occasions recently,
in locations as far apart as America, Australia
and the European community (EC), the issue
of the legal framework surrounding franchise
operations has come into question. What has
tended to happen here is that the early fears
of franchisors - that over-zealous legislators,
with only an imperfect understanding of
franchising, would force through inappropriate
legislation - have not been realised.
In the United States, legislation has tended to
be patchy and sometimes highly erratic,
varying on a State by State basis. In Australia,
representations made to government by
franchisors appear to be bearing fruit and
likewise in Europe. For instance, the EC has
published a block exemption regulation. This
is designed to allow franchising exemption
from competition laws framed for different
kinds of business. These have, on occasions,
threatened to encompass franchises as a
result of separate legal entities within a given
franchise operation co-operating (thus
appearing to act in restraint of trade). The
most recent EC initiative will allow franchisors
to grant franchisees territorial immunity which
appears quite logical given the original
intentions of the relevant legislation.
REFERENCES
ABELL, M. (Ed.) (1991)
European Franchising, Waterlow Publishers,
ACHESON, D. (1991)
Franchising in the Economy, IFA Educational
Foundation Inc./Stoy Hayward
BOYLE, E. (1994, forthcoming)
The Rise of the Reluctant Entrepreneurs,
International Small Business Journal, Spring
DALY, M. & McCANN, A. (1992)
How Many Small Firms ?, Employment Gazette,
February
9
EUROMONITOR PUBLICATIONS (1987)
Europe in Focus: Franchising in the European
Economy - Trends and Forecasts 1980-90

FULOP, C. (1989)
The Effect of Changing Channels of Distribution in
the Market for Liquid Milk in the UK, Fifth
International Conference on Distribution - Vertical
Relationships and Distributive Trades, Bocconi
University, Milan, Italy

MENDELSOHN, M. (Ed.), (1992)

Franchising in Europe, Cassell

NatWest/British Franchise Association Franchise

Survey 1990 (The), (1990)

NatWest/British Franchise Association Franchise

Survey 1992 (The), (1993)

STANWORTH, J. (1977)
A Study of Franchising in Britain: A Research
Report, University of Westminster

STANWORTH, J. (1984)
A Study of Power Relationships and their
Consequences in Franchise Organisations,
University of Westminster

STANWORTH, J. (1991)
Franchising and the Franchise Relationship in the
European Community, in Abell, M., op. cit.

STERN, P. (1987)
Presentation Given to the 27th Annual International
Franchise Association Convention, Acapulco

U.S. DEPARTMENT OF COMMERCE (1986)

Franchising in the Economy 1984-86

U.S. DEPARTMENT OF COMMERCE (1988)

Franchising in the Economy 1986-88

VAUGHN, C.L. (1979)

Franchising, Lexington Books, 2nd Edition

International Franchise Research Centre - Special Studies Series Paper No.2 10

AUTHORS
John Stanworth is the director of the
International Franchise Research Centre
and has been engaged in research into
franchising since the mid-1970s. He also
leads the Future of Work Research Group,
based at the University of Westminster, which
has a record of specialist research in
Teleworking, Small Business Development
and Human Resource Management. Studies
have been undertaken for many clients,
including The Department of Trade &
Industry, The Department for Education and
The Economic & Social Research Council.
Peter Stern is the Senior Franchise Manager
for the National Westminster Bank plc,
London, and has been actively involved in
franchising since the mid-1980s.
International Franchise Research Centre - Special Studies Series Paper No.2
INTERNATIONAL FRANCHISE RESEARCH CENTRE
The International Franchise Research Centre
(I.F.R.C.) is committed to improving the
understanding of franchising. This is achieved
by the publication of impartial research and by
the encouragement of informed debate.
Membership is suitable for anyone with an
interest in franchising and further details are
available from the address on the rear cover.
SPECIAL STUDIES SERIES
Papers in the Special Studies Series are
supplied free of charge to I.F.R.C. members
and are published a minimum of four times a
year. They report upon a range of issues
which are felt to be of interest to the
franchising community. Subject matter
includes the findings of surveys of franchisors,
franchisees, and potential franchisees, and
also special interest matters, such as finance
for franchising.
11