|
|
The Truth about Franchising
Thinking of buying a franchise. Wait. A first word of caution is: do not believe everything you are told, and do your due diligence, before you leap into what could possibly be a regrettable venture.
Franchising is promoted as the “fail safe” solution for all aspiring entrepreneurs who are too frightened to start a business on their own, or who may feel they don’t have enough knowledge. Especially, do not be lured by reported success rates and profitability, which do sound very impressive. The question one should ask is “Should we believe them?”
To begin with, the first question you should ask is: “Who compiles these statistics?” Is it an independent body? What is the criteria used to quantify the statistics? Who defines success?
For four decades, the International Franchise Association has insisted that independent small businesses have much higher failure rates than franchised small firms. IFA surveys suggest that, in the USA, 92% of franchise businesses are still operating after 5 years. This is compared to an 80% national small business failure rate. However, findings of the studies presented to support this assertion have been totally discredited.
Research on franchising in the US by Timothy Bates, a Wayne State University Economist, paints a very different picture. After 4 years, only 62% of franchised businesses had survived, while 68% of independent small businesses were still open for business. And independent businesses are far more profitable. Profitability was actually negative, on average, for franchised firms over the four-year period.
Bates’ research underscores 3 harsh realities:
1. Many franchisees never make much money. Average profitability is poor, especially after taking into account the purchase price of the franchise.
2. “Studies” used to sell franchises are paid for by the franchisors. Don’t mistake the information provided for balanced consumer guide information. It’s a carefully engineered sales pitch. Getting hold of the information you need to make a rational buying decision is difficult, to say the least. So use your common sense and a healthy dose of cynical discretion.
3. Franchise agreements always favour the franchisor. It is very easy to be swept away in the heat of the moment and get into a binding contract that is not in your best long term interests. And it is very hard to get out of a franchise agreement without taking a big financial loss. Remember, the main purpose of franchising is to make the franchisor wealthy. So be careful.
“Despite the hype that franchising is the safest way to go when starting a new business, the research just doesn’t bear that out”, says Timothy Bates.
The reason for the discrepancy between statistics reported by the franchise industry and independent studies is differences in methodology. Surveys done by Franchise Associations are done by sending questionnaires only to existing franchisees. This means that all those franchisees that couldn’t make it work and sold their franchises are excluded from the figures. Only the franchisees that went bust and couldn’t sell their franchises are taken into account.
This serious omission means that, survival rates, profitability, involvement in disputes and other reassuring indicators dished up by franchisors and Franchise Associations, are grossly under reported. And positively misleading! The much vaunted franchising awards are similarly flawed.
From a report published by Steven H. Goldman, (http://www.goldmanrosen.com/) trial lawyer, titled “ Is Buying A Franchise Really A Safer Way Of Doing Business?”, he makes the following comments.
“As a trial lawyer with extensive franchise litigation experience, it has become apparent to me that a large proportion of franchisees are losing or have lost substantial sums of money operating their franchised business. My perception is in stark contrast to the claims by the franchise industry, generally that franchising is an almost foolproof, risk free way of achieving the dream of business ownership.”
The sad truth is that many franchisees never make much money. Average profitability is poor, especially after taking into account the purchase price of the franchise.
What most people don’t realize is that, while franchising offers a way to counter the three biggest killers of small business, namely, a lack of business know-how, insufficient start-up capital, and inadequate cash flow, it offers no guarantee of prosperity – or even survival. The concern is always, whether the franchisor is ethical, and whether the figures supporting his claims are legitimate. Too many aren’t! For some franchisors, the main source of ongoing profit is to regularly terminate and resell existing franchises.
So take the hype used to sell franchises with a big pinch of salt!
|
|
|
|
|
|
| ABOUT
THIS SITE |
|
|
This site has been established for the aspiring entrepreneur.
As laudable as entrepreneurship might be, starting a small business is risky,
so risky in fact, that most people will eventually fail at this attempt. As
comforting as it might appear, the Internet, with it’s ample availability of
information, will not in and of itself translate into success. What the
aspiring entrepreneur/business owner requires is knowledge. Knowledge and
information unfortunately are not synonymous, and to assume so, would likely
lead to a failed outcome. The key to acquiring knowledge resources is do
sufficient research, to investigate, and to identify those
interactive programs that will provide the necessary personal guidance,
to help you achieve your individual goals and aspirations. Knowledge is
acquired only when context is added to information, a task very difficult to
provide over the Internet.
|
|
