Buy A Franchise, Increase Your Risk of Failure
Scholars have thoroughly disproved the idea that franchisees boast higher success rates than independent business owners. But the myth persists.
"Franchising has a much higher success rate for new businesses so you do have some peace of mind that your investment is relatively secure." Sound familiar? It should. Such misstatements of fact have long been the daily fare of those peddling business opportunities to would-be entrepreneurs. That particular snippet came from a 2009 press release issued on behalf of the UK arm of franchising behemoth ServiceMaster.
Yet it's been known for many years that such claims contradict reality. Several studies comparing success rates of independent businesses to franchisees have shown that, overall, franchisees are no more successful. In fact, one of the first and most influential, a 1995 report published in Small Business Economics, found that independents were more likely to survive and also generated higher profits than franchisees.
How so? Franchisees are supposed to get a major leg up from the brands, systems, advice and hand holding offered by parent franchise systems. And they can. But they also have to pay hefty franchise fees to get started and must follow systems that may hamper flexibility and ability to respond to changing conditions. Franchises also tend to cluster in highly competitive industries such as restaurants, where failure rates in general tend to be higher.
Most importantly, franchisees pay parent franchisers an ongoing percentage of their revenues averaging 5 to 10 percent. That is more than the net profit margin of many businesses and is clearly a heavy burden to overcome.
These disadvantages tend to depress survival rates of franchisees below those of independent businesses, researchers suggest. This is in spite of the fact that franchisees tend to be better capitalized, which is otherwise considered a fairly reliable indicator of survival and success.
All franchises are not created equal. Veteran franchisers with well-established networks and thoroughly refined systems tend to produce higher survival rates than newer franchisers. But even new franchisers with competitors and compelling offerings in fast-growing sectors may genuinely present superior opportunity.
For would-be entrepreneurs considering purchasing a franchise, the message is clear: If you really have to get into business quickly, can't see doing it without a lot of hand-holding, and have the money to invest, it might be worth it. Otherwise, you're probably better off growing, learning and investing on your own.
Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications. Follow him on Twitter @MarkHenricks.
Image courtesy of flicker user loop_oh, CC2.0