We’ve all heard the stats that indicate 90% of start up businesses fail within the first 3 years of business.
You can make stats work for you whichever way you like, but it’s hard to argue against the fact that more start up business fail in the early years, than the number that succeed.
Then there is Franchising. The “safest” form of business to start.
In a nutshell, the greatest advantage of a franchise system is that it reduces risk of business failure.
This is due to the fact that an ethical franchisor will have a tried, tested and proven business concept in the market place. Therefore, most of the wrinkles will have been ironed out and the risks to the franchisee minimised.
It is a well known fact that less than 7% of franchise owners fail within the first 3 years, as compared to over 90% of new business start ups. - Source
Am I the only one questioning the 93% success rate here?
Franchising is a fantastic business model for the majority of people looking to get involved with business. The benefits vastly outweigh the negatives.
But only a 7% failure rate? Excuse my Australianisms here but... c’mon mate, you’re having a lend of me!
I’m not buying the theory, irrespective of what stats get thrown around, that stand alone businesses are nearly 13 times more likely to fail in the first three years than a franchise business. That’s a huge differential.
I’m going to hypothesize that the reason we have statistics stating only 7% of franchises fail in the first three years is due to three reasons:
Why the stats are baloney
1. Most Franchise Agreements (the binding agreement between franchisee and Franchisor) are 3+3+3 or 5+5+5 year agreements, meaning the partnership is locked for an absolute minimum of three years, in nearly all circumstances.
In short, shutting down a franchise before three years of operation is not straightforward.
2. Franchisees invest in the business startup itself, but also pay a franchise Establishment Fee to the franchisor. Whereas independent business owners might walk away from their business in under three years and lose money invested in the startup, premises fitout and so on, franchisees that exit within three years stand to lose that money plus their Establishment Fee.
To borrow a poker term, franchisees are arguably more “pot committed” than your average stand-alone business owner.
3. We’ve probably got a loose definition of “success” at play here. Is a 7% failure rate defined as a business closing down? For reasons mentioned above, it’s unlikely that a franchise business will shut down in under three years. That doesn’t mean the Franchisee has made much profit, if any, along the way.
Franchise businesses are still fantastic
That all being said, getting involved with a franchise business, all things being equal, does have a significant number of benefits over going it alone. Although likely that the projected franchisee failure rate of 7% is a touch low, there’s little doubt that franchise businesses overall do out-perform sole business owners in terms of longevity and success rates.
Go in with eyes wide open
Starting a franchise business is a great way to become your own boss and is much simpler than starting your own business entirely from scratch, but it’s not for everyone. Ask yourself these questions before you commit to a franchise business:
1. Are you actually ready to start your own business?
Yes, franchises are generally easier than starting a business from scratch because of their existing brand, systems and so on, but they’re still a lot of work, especially in the first couple of years. If you’re not willing to make sacrifices you’re only going to waste money buying into a franchise. Any business for that matter.
2. Will you enjoy the franchise?
If you’re not going to enjoy running the business for the next 10 years, it’s not worth getting into. Make a list of the franchise companies you find most interesting and research them extensively to be sure you choose the right one.
3. Are you willing to follow the franchise system 100%?
One of the main benefits of joining a franchise group is to leverage existing systems and processes. If you’re not willing to follow the proven systems that are designed to simplify the running of your business, perhaps you shouldn’t buy a franchise business.
4. Does the franchise you’re considering have a track record of success?
A franchise business you’re considering has obviously been successful enough to catch your attention, but just how successful have they been? How long have the directors been doing business? Have they run other successful businesses? How long have they been in charge of this franchise? How long has the franchise been around? How many locations have they successfully kept open?
All of these questions must be answered to properly assess whether or not a franchise is successful enough to be worth getting involved with.
5. Are the franchisees happy and successful?
The disclosure document you receive when you’re interested in joining a franchise will include a list of current franchise owners. Reach out to a few of them and ask them some questions about their experience with the franchise. Speak to a number of different franchise owners to get a really good feel for the company.
6. Do you like the franchisor’s staff?
Buying a franchise also means buying into the community. Some franchise communities are incredibly supportive and feel almost like families, and having a community like this can really help you build a successful business. If your values align with the franchisor staff, this is a good sign of a potential happy ongoing relationship.
Summing Up
This is by no means an exhaustive list of things to consider before buying a franchise, however they each should play a role in your decision-making process.
The franchising industry is huge and has a long history of success, in general terms. Go in with eyes wide open and you’ll put yourself in a good position to be one of the 93%..... or whatever the actual stats are....
Greg Nunan is has over 13 years experience in the franchising industry. Nowadays, he is an online entrepreneur, website investor, blogger and freelance writer. Follow Greg on Twitter.