Are baby boomers the key to franchise growth?

Forget what you thought about Generation Y being the next big group of potential franchisees, it appears that baby boomers are driving growth in franchisee numbers, according to an analysis of more than a decade of franchising research.

A comparison by the Franchise Advisory Centre of Franchising Australia Survey results from 1998 to 2010 indicate that not only are baby boomers (generally those aged 50 and above) driving franchise growth, they are the only generation to show consistent growth in the population of Australian franchisees in the last 13 years.

In 1998, the over 50’s accounted for about one in every seven franchisees. Last year, that number had increased to nearly one in every four franchisees, with the trend continuing upwards.

The Franchising Australia Surveys are conducted every two years by Griffith University, and provide a snapshot of the Australian franchising landscape across a range of issues. (The 1998 survey was conducted by the University of Southern Queensland. No survey was conducted in 2000, and the question about franchisee age was not included in the 2002 Griffith survey).

Australian Franchisee age groups 1998-2010

Source: Analysis of Franchising Australia Survey 1998 (University of Southern Queensland) and 2004-2010 (Griffith University).

A trend analysis of franchisee age groups shows that while franchisees aged between 30 and 50 who are typically Generation X’s remain by far the largest group, their numbers have dwindled by more than 10% over the 12 years of the survey period from 78.9% in 1999 to 67.1% in 2010.

Likewise, franchisees under the age of 30, which today are exclusively Generation Y (ie. born in 1980 and later), have barely grown 1.3% from representing 7.7% of the total franchisee population in 1999 to 9% of the population last year.

However the under 30 group of franchisees did experience peak growth in 2006 when it represented 14.3% of the population, before dropping back to 9% in 2010.

There are a number of possible explanations for the growth in baby boomer franchisees at the expense of growth in Generation X and Y franchisees.

The first is that people who were previously in the 30-50 age group are remaining as franchisees into their 50’s. Unfortunately, the survey results do not include an examination of franchisee tenure (ie. the length of time they stay with the franchise), which might indicate if franchisees are staying longer and transitioning into the next age bracket.

The second explanation is the availability of investment capital.

Baby Boomers are likely to have accumulated more assets over their lives than the younger age groups, and therefore are more able to self-fund or borrow against their existing assets to invest in a franchise.

Some may also view investing in their own business via a franchise as a way of taking control of and growing their wealth prior to retirement, compared to the predictable but limited income prospects that they may otherwise have if they remain in employment on a wage or salary.

Indeed many self-employed over 50’s expect the gains to be made on the sale of their businesses to contribute substantially toward their superannuation and fund part or all of their retirement.

The decline of the middle age group, 30-50 year olds, may be related to the growth of both the employment and property markets over the collective survey period.

In other words, as jobs have become more plentiful (and better paid) over the last 12 years, someone on a career-path with a well-paying job and no shortage of potential employers available to them may simply be less interested in becoming self-employed.

At the same time, the property market in Australia has boomed, with prices being driven to record levels, and correspondingly, the amount of household income required to service mortgages has also increased significantly. Despite their well-paying jobs, the 30-50 year olds have also experienced greater cost of living increases, and now that property prices are declining across the board, may now find that the reducing equity in their homes leaves them little or no scope to further borrow to invest in a business.

Then there are the under 30’s, whose youthful enthusiasm and strong sense of self-determination make them desirable, but sometimes challenging franchisees. It is interesting to note that their population appeared to peak in 2006 at 14.3% at the height of the global economic boom when access to finance was much easier than today, but has since slipped back to 9% in 2010.

Finance for the under 30’s is an even greater problem for the 30-50 age group, as under 30’s are less likely to have accumulated enough assets in their shorter working lives to fund themselves into a franchise.

This younger generation of franchisees will eventually progress to the next age-bracket, and are expected to represent the bulk of franchisees in years to come, however their funding challenges may also remain and it will be increasingly common that franchisors will need to look at partial or full vendor financing, or find ways of accommodating family financing arrangements where parents fund their grown-up children into business.

Franchisors are already accepting franchise candidates under these two different funding models, yet the downside is that unless a candidate has their own money invested (also known as “skin in the game”), they may not be as fully-committed to making their business a success because under vendor or family financing arrangements, franchisees are somewhat insulated from the consequences if the business fails.

In other words, if a franchise candidate has put their home on the line to borrow from a bank, they will be more determined to make the business succeed than a candidate who has staked nothing to get into the franchise.

Where family financing is involved, it may require not just the candidate, but also their parents to be bound to the franchise agreement. If the candidate subsequently buckles under the pressure of running their own business, their parents may need to step in and take over operational control to protect their investment.

In such a scenario, the parents become the franchisees, and further contribute to the growth of the over 50’s franchisee population.

The next Franchising Australia Survey will be conducted in 2012 and it will be interesting to compare its findings against these current trends.

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.

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.