Buying a Franchise

If you are considering buying a franchise because you have heard or been told that your chances of success are higher than if you go at it alone YOU HAVE BEEN LIED TO. There are no studies to support this claim. I am listing here real research that tells the opposite story. If you're considering buying a franchise, get all your facts first, you may realise it is better to go at it alone.....the following quotes are from the International Small Business Journal.

A franchise is a higher risk than your own independant business, franchisors tell you the opposite to get your business. When they make this claim, ask them to produce documented independant studies on these figures. Chances are they will not (they don't exist)- I on the other hand will list the evidence based studies that have been done (there are not many, but enough) right here. Here are the real facts and I am not selling anything, other than trying to save you your hard earned money.

"However the evidence points towards franchising being even more risky than conventional small business activity in the first 4 or 5 years for franchisor and franchisee…"

"The target of much of the franchise industries hype is the potential franchisee. If, as seems the case on the evidence cited here, become a franchisee in a young system is far from being the safe investment that the industry has claimed all along………………(snip)"

"The industry must come to terms with the new reality on failure rates. This in itself could create other problems, for instance it could act to reduce the popularity of franchising per se. But an even more difficult nettle to grasp might be that of attempting to come to terms with the ethical issues involved in having previously banged the industry drum so loud and for so long"

Reference: Stanworth, J., D. Purdy, S. Price, and N. Zafiris (1998). "Franchise Versus Conventional Small Business Failure Rates in the US and UK: More Similarities Than Differences, International Small Business Journal 16(3), 56–69.

In another leading study buy Bates, he compares survival rates of franchises and independant small businesses, between 1984-1987. This one of the leading studies in defining which one is more succesful.

Here is a summary of the results

"For example, my research shows that among small businesses started nationwide in 1986 and 1987, franchises generated average pretax profits of minus $4,501 in 1987. Independent start-ups, by contrast, had average profits of plus $15,511. By late 1991, 38% of the franchises and 32% of the independents had gone out of business. In other words, young businesses started without the benefit of a parent franchisor generated higher profits and had lower failure rates"

These are the cold hard facts you need to consider before buying a franchise. The author concludes.......

"Franchise industry claims of higher survival rates among young franchise small businesses, relative to independent business startups, are untenable. When subjected to rigorous analysis using appropriate data, claims of very low franchise discontinuance rates simply do not hold up among noncorporate and S-corporation firms. Future research needs to examine underlying causes of the lower survival rates that typify the young franchise small businesses. One possible cause of poor franchise performance is the costs specific to this organizational form - upfront fees to the franchisor, royalty fees, marketing fees, and the like"

Reference: Bates, T., 1995. A comparison of franchise and independent small business survival rates. Small Business Economics 7, pp. 377–388.

Timothy Bates is a professor of economics at Wayne State University, in Detroit. The research comparing franchises and independent companies was conducted at the Center for Economic Studies at the U.S. Bureau of the Census.
Read his comments on this research Look Before You Leap Are you still thinking of buying a franchise, keep reading....

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