Buyer Beware of Recession Proof Franchises

This is an interesting article of note, both in its statistics and its well-crafted argument. It describes an industry crafted around accessing middle-class savings and access to capital.

“These graying baby boomers, however, are highly coveted by thousands of franchise businesses, especially if the boomers have a sizable severance check, a six-figure 401(k) account or other assets. Since the downturn began, hundreds of franchises have been marketing themselves as ‘recession proof.’”

Several studies show that franchised businesses fail at higher or similar rates as compared to independent businesses.

“But a landmark study in the mid-'90s by Wayne State University economist Timothy Bates found that after four years, only 62 percent of franchised businesses had survived, compared with 68 percent of independent small businesses. And independent businesses proved to be far more profitable. Profitability was negative, on average, for franchised firms over the four-year period. Bates also found that the average capital investment for franchisees was $500,000, compared with $100,000 for independent entrepreneurs.

A separate, independent study in Great Britain found that franchisee survival rates were also similar to independent start-ups over a five-year period, and that 50 percent of franchisees failed over a 10-year period.”

The author, Keith Girard, a 30-year reporter and one who covers small business, speaks about how the slowing economy has exposed onerous and exploitive franchise agreements. He cites Noble Roman’s Pizza, Quiznos and record high defaults to pay-back SBA backed loans.

“Although franchisors and their trade groups routinely sponsor studies on the effectiveness of their industry, in reality many are nothing more than carefully crafted sales pitches. Franchise agreements almost always favor the franchisor, and may not be suitable or flexible enough for a franchisee to operate, especially in difficult economies. Contracts are binding and difficult to get out of.

The bottom line is not all franchises are created equal. Despite some general protections offered by federal and state franchise laws, it's still a buyer beware business.”

Read the entire article at All Business