"... in any given five-year period, 75% of franchisors disappear."
Timothy Bates, a professor at Wayne State University, studied Census Bureau data on 20,000 new enterprises and found that 38% of franchise units failed over a four-year period, vs. 32% of independent startups. ...
... In retailing, for instance, 45% of franchised units lasted less than four years, while just 23% of independent retail stores flopped.
There are four common reasons for franchise failure:
- The franchise company fails to live up to the franchisor's promises
- The franchisor wants to buy your business back
- Your franchisor goes bust
- You have a serious row with the franchisor
This is an extract from an article published in CNN Money:
"The big names have spent many years and many millions of dollars on advertising and marketing, and stellar brands carry big pricetags. McDonald's stores, for instance, are such money machines that, depending on location and other factors, opening one will set you back a minimum of $540,000. So typical franchisee wannabes -- with, say, $50,000 to $100,000 to invest -- frequently find themselves signing on with far smaller, lesser-known organizations that may or may not have a clue about how to help operators make money. They also may not be around long. According to the American Association of Franchisees and Dealers, companies that sell franchises go under at a rate of about 15% a year. That means, notes AAFD chairman Robert Purvin, that "in any given five-year period, 75% of franchisors disappear."
Even big-name franchisors that have been around for years can run into trouble when they try to grow too fast. Witness Krispy Kreme, the scandal-plagued doughnut store chain. As if the growing legal and regulatory hubbub over certain of the company's accounting practices were not trouble enough, Krispy Kreme, based in Winston-Salem, N.C., is facing a barrage of complaints from irate franchisees. These folks--and some Wall Street analysts who follow the stock--say that Krispy Kreme has revved up its revenues by squeezing all the profit out of its franchises, partly by charging exorbitant prices for doughnut mix and equipment that franchisees must buy from the company. Krispy Kreme, which declined to comment on pending litigation, says it plans to defend itself vigorously.
Anyone looking for reliable data on failure rates of individual franchise units faces a tough challenge, because the franchise industry uses a weird definition of "failure." Consider: If your business sank so deeply into the red that you were forced to give up on it and eat your losses, wouldn't you call that a failure? Most would.
But the International Franchise Association, a trade group in Washington, D.C., that represents franchisors, sees things differently. When a franchisee doesn't prosper--indeed, loses his shirt--what usually happens is that the franchisor simply takes back the unit (without reimbursing the hapless franchisee one dime) and sells it to somebody else. That franchised doughnut shop on the corner of your street probably looks the same on the outside as it always did, but it may have run through ten operators in as many years. Never mind. As long as the shop doesn't close its doors, it isn't a "failure" as the International Franchise Association defines the word. That is why, when asked for the failure rate of franchised businesses, the IFA says it is 5% a year. Wow! Just 5%! Sounds as if making money on a franchise is practically a sure thing!
Time for a reality check: The scant research that exists suggests that, as risky as starting an independent business is, buying a franchise is an even bigger roll of the dice.
Professor Bates - Franchise Research
In the early '90s Timothy Bates, a professor at Wayne State University, studied Census Bureau data on 20,000 new enterprises and found that 38% of franchise units failed over a four-year period, vs. 32% of independent startups. In some industries the gap was much greater. In retailing, for instance, 45% of franchised units lasted less than four years, while just 23% of independent retail stores flopped. And here's the jaw-dropping part: Bates notes that his figures on franchises are quite conservative, because he defined "failure" the same way the IFA does. If a more commonsensical definition were used instead, Bates acknowledges, the percentage of failed franchises would be far higher than his study shows. Okay, but his research is a decade old. Does he have plans to update it? "My God, no," he says. "After that paper came out, I was inundated with so many sad stories from bankrupt franchisees--they were so relieved to know they were not alone--that it interfered with my ability to live my life."
Bates’ research underscores 3 harsh realities:
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Many franchisees never make much money. Average profitability is poor, especially after taking into account the purchase price of the franchise. So take the hype used to sell franchises with a big pinch of salt!
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"Studies" used to sell franchises are paid for by the franchisors. Don’t mistake the information provided for balanced consumer guide information. It’s a carefully engineered sales pitch. Getting hold of the information you need to make a rational buying decision is difficult, to say the least. So use your common sense and a healthy dose of cynical discretion.
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Franchise agreements always favour the franchisor. It is very easy to be swept away in the heat of the moment and get into a binding contract that is not in your best long term interests. And it is very hard to get out of a franchise agreement without taking a big financial loss. Remember, the main purpose of franchising is to make the franchisor wealthy. So be careful.
You can read the full article here
UK Franchises
The UK experience reflects similar trends. The British Franchise Association survey report predicts each year that franchising will double in size during the following five years. But the reality is that the UK franchise industry has experienced negative growth since 1990 and is currently less than half the size that was predicted for it in 1990 by the BFA. Franchisee survival rates are similar to independent start-up survival rates over a 5 year period. And 50% of franchisee systems fail over a period of 10 years.
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