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Perhaps the most common and pervasive franchise myth is that franchising per se is a safe investment. Fed by a steady diet of industry hyperbole, the conventional wisdom that feeds this myth contends that when you buy a franchise you are investing in a proven brand and an established business system that will virtually guarantee business success. In truth, investing in a well-regarded brand that has a well-developed business and operating plan, can be a wise investment. The myth is that all franchises are created equal.
The franchise success myth is often expressed as a once widely heralded (and quite misleading) claim that 95% of all franchise businesses are successful after five years in business. Although research has uniformly debunked such success rate claims, this success rate statistic is again and again trotted out by individual franchisors and industry trade groups.
In fact, over the past twenty-five years, study after study has found that franchises and independently-owned businesses typically have similar failure rates.
The ‘all franchises are successful’ myth is especially dangerous, because it may instill unrealistic expectations for both existing and prospective franchise buyers, providing a false sense of security as they invest their life’s savings and their future in a franchised business without appreciating the attendant risks of all business ownership. Existing franchise owners have an even greater need for vigilance and hard work to achieve the success of their brand. A collaborative franchise system, where the franchisees and franchisor work consistently to keep competitive and to improve profitability, is the best model to deliver the promise of franchising.
Why is this particular myth so pervasive? It’s because the franchise industry’s definition of success is merely that your store remains open! This is most likely not your definition of success!
Your definition (and your bank’s definition) is that your business is generating sufficient revenues to pay your business bills, provide you with fair compensation, and a profit on your investment! At the end of the month after all the vendors have been paid, all the inventory and supply costs deducted and a check sent off to cover the franchising fee, is there any money left over for the franchise owner to pay their home mortgage, save for retirement and take their kids to a movie?
If the answer is no, then that isn’t my definition of a successful franchise. Franchisors, on the other hand, have a much more lenient definition of franchise success. As long as a franchise is open, it’s a success. It doesn’t matter if a particular location is making money, losing money or has switched hands multiple times because previous owners haven’t been able to make a living from the business – if that open sign is on the window, the franchisor won’t categorize the business as a failure.
The best way to break through this myth is to accept the fact that no matter what franchise you choose to buy, you are taking a risk with your money and your career. With this fact firmly in mind, you can give each individual franchise opportunity the proper vetting it deserves.
When you and your franchise attorney are reviewing the Franchise Disclosure Document, don’t limit your investigation to the closure rates. Look at the profitability of each location, especially those that serve in markets similar to yours. Do your due diligence and speak with current and past franchisees. Ask them direct questions about their profitability. It is especially critical to talk to past franchise owners and to ask them why they left the franchise. If you get any sense that the franchisees had trouble making a profit, then think very carefully before moving ahead.
Most importantly, insist that your prospective franchisor provide you with sufficient data to evaluate the profitability of the business. Limit your search to franchisors that make financial performance representations (formerly called ‘earnings claims). There are many franchise opportunities available that are able to authentically boast high rates of success and profitability. These tend to be the top tier franchisors that require the highest investments and strictly limit their franchisee pool. As you go down the rungs of the franchising ladder to less well-known brands, new franchisors, and those with very low rates of entry, the risks typically grow.
Existing franchise owners should continually seek a collaborative and transparent effort to monitor the health of your brand and to constantly work to improve system performance, revenue growth, cost containment, purchasing synergies and strong profits for all. A great franchise brand will take maximum advantage of the collective wisdom and talent of the network to identify strengths and threats to the system, and to share a common goal of mutual success—success being the financial rewards that were envisioned when the investment was first made, which I daresay was never to simply ‘keep the doors open!’
In my opinion, the strongest brands take maximum advantage of the wisdom and talents of the franchise owners in the trenches. Prospective franchisees should take pains to determine if a franchise system is committed to collaboration, and an effective franchisee association is a strong indication this goal is being met. Contact the association and several members—you can easily learn if the franchise system embraces a collaborative culture.
My goal with this blog post was not to scare franchise owners and prospective buyers, but to demonstrate reality and provide a strategy to identify opportunities that deliver the promise of franchising. If you believe that all franchise opportunities are safe, you are much more likely to make a poor decision that could cost you everything. When you understand the risks involved, you can make a more educated decision that will hopefully lead to true franchising success.