Using Bad Numbers and Logic to Sell a Franchise

There are good reasons to buy a franchise. But peddling myth and faux numbers do not help the industry. It turns off a lot of thoughtful business people from looking further. Take a look at what Rachel Elnaugh in The Franchise Magazine of Britain writes:

"A little known fact is that most new start-ups take a good two years to come into profit... Franchise owners on the other hand frequently find themselves making money after only a month or two of opening."

That statement is full of errors. In the author's defense, it is possible of the thousands that start a franchise in the United Kingdom that if there were just three that find themselves "making money" after a month or two, that would technically qualify as "frequent", wouldn't it?

"Making money" connotes earning a profit. It might also mean to break-even, the point in which sales cover fixed costs. But most new franchises do not break-even within a month or two. That's false thinking. Here are some possibilities of what is meant when a salesman talks about you "making money" in the first couple of months of your franchise business.

• Some pioneer customer will discover your business and start giving money in exchange for goods and services within the first couple of months. You "make money".
• It is not a description of what will happen but rather a command. If you are the first to make money in two months, she can use that as a selling point with all other prospects. She is trying subliminal hypnosis - "Repeat after me, you will make money in the first two months."
• Franchise owners have a printing press that cranks out money in the back. It may take a month or two of trial and error to set it up as per the instructions in the franchise operations manual so that the money looks really authentic.

The article provides another set of dubious figures in the cloak of an authoritative source.

"According to recent research by NatWest bank, 17 million people in the UK are now thinking of starting their own business, with 30 per cent planning to act on their idea in the next three months. That's over five million new businesses coming to a high street near you!"

In a country with 60 million people, some five million new businesses are coming soon to your neighborhood?? As we say in America, "yeah, right..."

Here's one more set of statistics peddled to sell franchising.

"The sad fact is, statistically two thirds of them will falter within their first two years. Of those that do survive, only around 250,000 will achieve anything like material success."

Starting your own business is tough but it isn't that tough. Two-thirds fail within the first two years? It's actually closer to one-third in the U.S. and I suspect something closer to that rate in the United Kingdom.

Anyone see anything wrong with Ms. Elnaugh's numbers below? Hint: It has been circulated around the U.S., discredited and discouraged from use.

"banks are much more receptive to lending money to fund a tried and tested franchise. The reason for this is that banks hate risk - given that the failure rate of franchises is less than five per cent compared to the fall-out rate of something like 65 per cent for normal business start ups"

It seems that old franchise myths and bad numbers don't die. They have found a new home in Britain.

Related reading:

• A collection of failure rates statistics for small business and franchises
• Startup Failure Rates,The REAL Numbers by Prof. Scott Shane