When Franchising a Business, Apply These Statistics to the Franchising Process
When a company decides to franchise its business, it's important ownership understands the risks.
The franchise model continues to provide a formula for success. However, just like other business ventures, franchising a business carries a certain amount of risk for franchisors. As someone who has advised franchise startups and consulted startup franchisors that have encountered unforeseen challenges, I have seen firsthand the obstacles the new franchisor may face.
In order to gain some perspective regarding this subject, it’s important to know the facts. Based upon an analysis of startup franchise systems, done by franchisegrade.com some key results have emerged.
Startup Franchise Performance:
From the franchisegrade.com database there were 405 franchise systems, which had no franchise outlets disclosed in Item 20 of their initial 2010, FDD.
Of the franchise systems with no franchise outlets in 2010:
- 102 or 25% are no longer in the franchisegrade.com database, which can lead one to conclude that those systems are no longer franchising.
- 154 or 38% of those franchise systems opened 5 or more outlets within the 5 year period
- A total of 11,367 franchise outlets were opened by these franchises from 2010 – 2015
- The net growth was 9,850 franchise outlets
- $5.67 billion was invested into the 405 franchise systems
- 14 systems projected openings of 100+ franchise outlets for more than 2 years, but opened less than 10 within that same period.
- 21% of the emerging franchisors in the franchisegrade.com database projected openings of more than twice their existing locations at the end of the year. The reasons for the disclosed projected openings are unknown. However, I would conclude that there is a relationship between optimistic startup franchise system growth by certain franchisors combined with a lack of franchisor resources and skills necessary to achieve that growth will lead to failure for the franchisor and franchisee.
Applying what we’ve learned:
Based upon the results of the franchise startup analysis there are some lessons to be learned and ways to avoid falling short of expectations:
- Have ample investment capital necessary to build, staff, launch and develop the new franchise program.
- Be prepared to invest capital for evaluating the franchise opportunity, especially a feasibility study conducted by an objective firm. The cost should be from $5,000 to $7,500.
- Be sure to have a competitive analysis done in order to be aware of the challenges you’ll face.
- Use expert franchise consulting advice and do not rely on one firm but rather seek the opinion of others especially a qualified franchise attorney. Consider getting feedback from a law firm that represents franchisees and franchisors.
- Be objective regarding the potential of franchising your business. A common refrain from the leadership of new franchise programs is: “This franchise is unique and there is nothing comparable.”
- Expect a slow and deliberate launch at the beginning and avoid overly optimistic projections of franchise growth in the first two years. The franchise system graveyard is full of fast growth franchise systems, that outgrew their capabilities or lacked the knowledge to operate a franchise system.
Companies that are considering franchising their business model need to know the facts regarding the performance of startup franchise programs, apply what they have learned and be willing to invest the capital to properly evaluate the proposed franchise program.