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A recent article distributed by the Associated Press quotes Scott Shane, professor of entrepreneurial studies at Case Western Reserve University, stating that three-quarters of all new franchising companies go under within the first 10 years.
True or False?
I don’t know. I’m not familiar with Prof. Shane and the article doesn’t say how he arrived at his conclusions, which include these: “There are golden nuggets in franchising. There are great (franchises) out there where if you buy into them you could make a lot of money. But that’s the minority.”
I can’t discount his conclusion about the failure rate, and I don’t think it’s far-fetched. After all, for many years the U.S. Small Business Administration has told us that as many as 50% of all new business start-ups fail within their first 12 months of operation, and just as many more never make it to their 5th anniversary in business! I don’t think start-up franchise companies would be excluded.
All the more reason why due diligence is critically important when you investigate buying a franchise opportunity. Make sure that you’re buying in to one of those “golden nuggets” that Prof. Shane says exist, and surely they do.
However, even golden nuggets can tarnish. Economic forces, political forces, changes of ownership and management–you can never be sure of the future in any franchise company. You’ve always got to ask: What will I do if my franchisor fails?
If your franchisor fails, it doesn’t have to be the end of your business. On the other hand, it might be unless you’ve prepared for the worse. One way to protect yourself is to network with like-minded colleagues who are asking and answering the same question. That’s why I support Franchise Masterminds and believe that every franchisor and franchisee should belong to one.
Photo by TheDiva Rockin
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Twitter: @sessler
I agree with your comments John. The only dilema I think the publication of this article really poses is that due to the fact that the average person is not familiar with franchise terminology, they may actually think that 3/4 of the “franchisees” fail and of course that would be really bad news for the industry. Clearly if that was the case then none of us would be involved in this great business platform.
WOW! Great post John. There is always risk in starting a new business and franchising is no exception. Both you and Mr. Shane make good points, the failure rate of starting a new business is high in the beginning; there in lies the advantage in franchising. Investing in a proven, successful system with processes already in place will eliminate many mistakes normally made by a new business owner during the start-up learning curve.
Due diligence is the answer! Yes a golden nugget is important, but even more important is your passion; what do you really want to do that you are passionate about? So passionate that you will invest your hard earned family savings on and work every waking hour on for the first few years? That is the real question.
I have been in franchising for 12 years and like Dr. Hayes have seen the successes come and go. In most every case where there was failure there was NOT enough due diligence. The American Dream of owning your own business is a huge motivator for some of us and in many cases must be toned back down to reality.
Is this new franchise business really a good fit for you? Are you sure you have asked and heard all of the information. Did you do enough research? These are important and life changing questions that must be asked and answered to the potential franchisee’s satisfaction. Then review your passion again to be sure you are still a good fit!
Due diligence is where franchising shines; potential franchise owners have the opportunity and duty to talk in person with existing franchisees in the system they are considering to get explicit facts and information that is not available in the open business world for all to ask. As a potential franchisee you have a list (provided by the franchisor) of all the owners in the system to call and interview. Due diligence at its finest!
So is there a risk that your franchise may fail, yes there is, but with proper investigation and research on your part you can improve the odds of your success buy simply talking to those who are successful AND those who are not.
Arnie Williams