20 September 2013
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Franchise Success Rates

Do Franchises have a higher success rate (95%?) – Really?

A not so recent study (which many franchise industry “experts” still quote as gospel today) Indicated that 92% of all franchise owners were happy with their decision.

That is quite Bullish news for franchising indeed. Unfortunately those numbers are grossly inaccurate. But like any worthy internet meme these statistics have permeated the industry with overzealous “Franchisors and brokers alike tweaking the numbers in their favor. A common variant we often hear the ever popular “Franchising has a 95% success rate”

The SBA did provide statistics way back in the early 90’s indicating that 80% of franchisees succeeded whereas small businesses had a much higher failure rate. Some people still quote that study today, but as anyone not living under a rock is likely aware – our economy is slightly different today than 20+ years ago.

Now at the far other end of the spectrum we have the franchise haters. They will tell you franchising is evil, franchising will suck you dry with unjustified fees and ongoing royalties, and anyone who buys a franchise is doomed to an agonizing life of servitude.

The reality of course lies somewhere in the middle. Yes, there are thousands of happy franchise owners all around the world. Many of them have become millionaires by owning a franchise. But yes, there are also those who were devastated mentally and financially following the decision to buy a franchise. And surprisingly you will occasionally encounter both of those extreme experiences within the same franchise organization!

So what is the success rate of franchises? Well that depends on who you speak with as the numbers will range from the same as a start up business to over 95%. But the question you should be asking yourself is what is the success rate of the franchise I am looking at – and am I a suitable candidate? Obviously established brands with fantastic operational models like McDonald’s, Subway and Chick-fil-A do have a 95% success rate or higher. But many brands with a gimmick and a huge marketing budget have capitalized on the industry hype and brought those numbers down.

So – those 2 questions again – what is the failure rate of the franchise I am looking at – and by law Franchisors require to provide that information in the FDD, and am I a suitable candidate for the franchise operational model?

A Franchise, is inherently neither bad nor good. It is a vehicle that can offer an element of safety, security and guidance and a quick way for someone to enter into an established business operational model. If it is a viable one!

Unfortunately many people take the industry touted franchise benefits as justification to avoid performing due diligence. Enter our “unhappy franchisee” of the future.

At the time of this writing there are over 3000 franchise brands in virtually every sector. Some have great reputations and histories, some not so good. But how do you define “good”?

Historically “good” franchises will always have very low or nonexistent failure rates. They have exceptional support and established processes, a well known brand, competent management and will vet their prospective franchisees quite diligently. You will have to qualify for a good franchise. For example Chick-fil-A receives 10,000-20,000 applications a year and awards only 70 locations!

Conversely a “not so good” franchise will often have multiple franchisee failures, ineffective processes, or minimal support available to the franchisee. They may also have weakly established brands or marketing plans in place which place impossible demands on the new franchisee. Often times these poorly performing Franchisors will not have a handle on the psychological profile or ideal background of their franchisees (or not care) which subsequently results in a larger number of failures. This scenario doesn’t necessarily mean the franchise is bad – just that they are recruiting unsuited personality or skill set types.

Franchising has become an essential component of our modern infrastructure. You can’t walk down a city block without seeing several. But as with anything there is good and bad and due diligence is your best friend when looking into buying a franchise.

If you are in the market to buy a franchise you can work with a qualified broker consultant at no charge.  Contact us for a free consultation.

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