“Progress always involves risk; you can’t steal second base and keep your foot on first.” Frederick Wilcox
The English soccer player’s baseball analogy proves helpful when weighing the risks that come with starting a business. Every business endeavor involves a certain level of risk, and franchising is no different. However, you have to embrace and navigate those risks if you want to reap the benefits of a successful franchise business.
Overall, franchises have a higher success rate than traditional business ventures. However, if you’re interested in a particular industry, you should evaluate the performance of franchises in that field. Furthermore, while franchises offer great potential, it is helpful to understand the factors that lead to a franchise business failing. Making a well-informed decision when buying a franchise will contribute to your long-term success.
What is “The Stat”?
For years, various sources on the internet have claimed that franchises have a 90-95% success rate. However, the information came from an inaccurate study. Widely known as “The Stat”, this particular statistic should be disregarded.
1987 International Franchise Association (IFA) Study
The IFA, the world’s largest membership organization for franchisors, franchisees, and franchise suppliers, published an 1987 study stating that franchises only had a 5% failure rate, which would be incredible if true. Over time, other studies contradicted this claim, and in 2005, the IFA retracted its initial statement. Consequently, they asked franchisors not to use the statistic as a selling point for buying a franchise. While reputable organizations have worked to remove this false information from the internet, the statistic is still commonly cited.
What is the Failure Rate of a Franchise?
There aren’t any recent studies that comprehensively answer this question, perhaps because of the sheer volume of franchises to analyze. Jania Bailey, CEO of FranNet, stated that “You’d have to look at the FDDs [ Franchise Disclosure Documents ] of 3,100 companies in 80 industries…There are new franchises and mature franchises. The success rates between the two are going to be night and day.”
However, The IFA published ‘The Value of Franchising Report’ from Oxford Economics in 2021 providing insightful statistics that illustrate the distinct role franchises play in the U.S. economy. The following is a small glimpse of the information provided in the report:
- On average, franchises report sales 1.8 times larger and create 2.3 times as many jobs as non-franchised businesses
- 32% of franchise respondents state that they would not have the opportunity to own a business without the franchising model
- 26% of franchises are owned by people of color, compared with 17% of independent businesses
Without a doubt, franchising provides unique entrepreneurial opportunities and has an important impact on the economy.
3 Main Reason Franchises Fail
There are typically various factors that contribute to a failing business, but the following three will often play a role:
- Mismatched goals – It’s essential for all parties to be on the same page regarding the business. For example, if a franchisee only has business growth in mind but fails to uphold the franchisor’s standards for the location, then conflict is unavoidable. If the franchisor and franchisee have different expectations, this will inevitably cause problems that could spiral into a failed business.
- Lack of funding – It goes without saying that a business will fail and default on its loans if it isn’t bringing in sufficient funds. However, the cost of running a business often goes well beyond the initial investment. A franchisee will need to continue putting money into business until it is profitable, which could take months or years. This is why franchises require a minimum amount of liquid capital starting out.
- Failure to adapt – A business that doesn’t evolve as the industry changes is bound to fail eventually. It’s critical to keep your customers coming back for more, which means you need to accommodate their changing demands. For example, McDonalds started out selling burgers and shakes but began to focus on coffee in order to compete with increasingly popular drive-thru coffee shops.
If you are pursuing franchise ownership, make sure you guard against these three mistakes to set yourself up for success.
Increase Your Probability of Success With FranNet
Anyone who lives and works in this world knows that success is never guaranteed. However, your probability of success goes up significantly when you make well-informed decisions. FranNet is here to help. We have a network of hundreds of franchise brands for you to explore. Our franchise consultants will take your unique goals, skills, and interests to help you find the right franchise to join. Our objective is to set you up to succeed on your journey to business ownership. Even better, our services are free to you! Don’t wait to get started. Schedule a free consultation today!