Imagine you're thinking of leaving your job to open a business and decide to do a little research into franchising. A Google search may lead to an evenly balanced sermon on the pros and cons of franchise ownership. Or you may land on this gem from About.com: "Some studies show that franchises have a success rate of approximately 90 percent as compared to only about 15 percent for businesses that are started from the ground up. The increased probability of success usually far outweighs any initial franchise fee and nominal royalties that are paid monthly."
Most experienced franchisees would laugh themselves hoarse after reading that statement. But what about a novice entrepreneur who is considering going it alone? That's the type of thing that might get their heart set on franchising.
Dig a little deeper and you'll find that About.com is not alone in espousing such numbers. That claim and myriad variations are all over the internet, from business articles written by people who should know better to puffery put out by franchise brokers and consultants. It's known as "The Stat"--the notion that franchises have a success rate of 90 to 95 percent--and it has helped fuel franchise fever for decades. It's also completely unproven.
As an industry model, franchising has been poked and prodded and analyzed by economists since its inception. There are figures on how much franchising contributes to the economy, ownership rates among various demographics, loan performance and a monthly index that shows the strength of the sector as a whole. But that one stat, the success rate of franchised businesses vs. independent shops, has had the biggest impact, even though its origins are dubious. In the absence of solid data, The Stat, which is based on a discredited study, has stepped in to fill the void.
Bad information is the bread and butter of the internet, but this particular nugget is especially troubling. Franchising is one of the most heavily regulated industries in the U.S. for a reason--it has suffered from high-profile cases of misrepresentation and fraud. Critics point to The Stat as a willful misrepresentation and an attempt to sucker people into buying franchises. In many ways it really does lure people into franchising, even if a franchisor has never made the claim. The ubiquity of The Stat means that many candidates come into their businesses thinking franchise ownership is practically guaranteed success.
Robert Purvin, who believes his 1994 book The Franchise Fraud was the first to cast doubt on The Stat, contends it has had an even bigger impact. "Even if the success rates were true, focusing on franchising as a path to riches instead of small-business ownership has caused the industry to evolve in ways detrimental to franchisees," he says. "They've become less and less protective of franchisees over the years."
The Stat was not just created from whole cloth. In the 1980s, the U.S Department of Commerce published the results of a voluntary survey of nearly 2,000 franchisors who submitted data disclosures. Some analysts interpreted the data to say that over a five-year stretch, 5 percent of units closed. Flip that around, and you have the stat that franchises have a 95 percent success rate over a given five years. Here's the catch: The data was not audited, and since franchisors chose whether or not to answer the questions, it is likely that the pool of respondents included more successful franchises than unsuccessful ones.
The Stat, with the imprimatur of the Commerce Department, took on a life of its own. Even after the survey was discontinued and the International Franchise Association sent out a letter asking franchisors and brokers to scrub the stat from the web--a request it has repeated several times since--it has been difficult to close Pandora's box. The SBA has also put out numerous calls over the years to disregard the data, making its latest plea last fall.
But many in the industry haven't gotten the message. "It's amazing the number of franchise brokerages still putting it on their website," says franchise consultant Joel Libava, who has written several articles critical of The Stat. "It gives prospective buyers a false impression. There's enough spin out there telling people to buy a business in a box or turnkey business. The Stat welcomes them to take a risk and make bad assumptions about their chance for success."
The main reason The Stat has survived a quarter century of rebuttal and criticism is that no credible number has emerged to replace it. The SBA has released papers showing that in the early 2000s, defaults on its loans were higher for franchised vs. independent businesses. But the most comprehensive study was conducted in 1994 by Timothy Bates, professor emeritus at Wayne State University. His analysis of more than 20,500 small businesses found that 65.3 percent of franchises survived after four years, compared to 72 percent of independent businesses. Retail franchises fared worse, with a 61.3 percent survival rate, vs. 73.1 percent of independent retail businesses.
Brian Headd at the SBA's Office of Advocacy points out that all these studies are long in the tooth and don't represent the current economy. More broadly, he questions the overall usefulness of calculating franchise success rates at all. "Survival isn't everything," he says. "Business owners have to make up startup costs and try to break even. Just existing for five or six or seven years doesn't necessarily mean success."
So why has no ambitious economist or franchise maven taken on the research? Jania Bailey, president of franchise brokerage FranNet, says looking at franchising as a whole would be extremely difficult, and the results would likely not be useful. "You'd have to look at the FDDs [ Franchise Disclosure Documents ] of 3,100 companies in 80 industries," she says. "There are new franchises and mature franchises. The success rates between the two are going to be night and day."
However, her company did want to investigate the success rate of its own clients, so last fall FranNet looked at 1,500 individuals it had helped get into franchised businesses between 2006 and 2010. According to the internal research, 91.2 percent of the businesses were still open after two years, and 85 percent were operating after five years. But Bailey is quick to point out that those stats don't extend to franchising in general--she attributes the high success rate to the FranNet system. "Arguably, the time period we studied had the worst economic conditions since the Great Depression," she says. "That success rate speaks volumes about our ability to match a person and their skill set to the right franchise concept."
Libava, a former FranNet franchise broker, is skeptical of any studies that attempt to quantify franchising as a whole. Each case is unique, he argues, and success is mediated by the performance of individual franchisees, not by the strength of the franchising model. "Here's how I look at it: The perfect franchise candidate is in the perfect time of their life, has funds and chooses the right franchise for his geographic area," he says. "A lot of things have to line up, and if they do, I feel in my heart a franchisee has a better chance of success than an independent startup. But there's no guarantee of that."
Headd at the SBA takes a more practical view of success. His research has shown that bigger fish tend to survive longer, whether they are independent or part of a chain. "The bottom line is, the larger you are at startup, the more likely you are to stay open," he says. "It helps to start larger and faster, but it has a cost. And it's up to the individual to decide if franchising is the right formula for them, or being independent."
Purvin agrees that research that lumps together thousands of unrelated business concepts, from gyros to muffler repair, into one statistic is ultimately meaningless. "Franchising is just a way of doing business; it's not a script for success," he says. "The world is constantly evolving, and all of those 'proven' systems have to evolve, too. Proven success does not guarantee success tomorrow. Look at McDonald's: Thirty years ago it was focused on burgers and shakes; now it's a coffee shop. It has constantly innovated. Any company standing still and focused on its 'proven method' is a company that will be a dinosaur. Buying a company that holds back from change is not a path to success."
So are franchises more successful than independent businesses? Bailey at FranNet believes franchising can have benefits over going it alone, but she's not willing to put a number on it. "I think the crux of what we do and the reason we're so committed is that franchising works," she says. "You have the support of the franchisor and the experience of other franchisees. You have a back room you don't have when you go out on your own."
FAQs
Bates looked at more than 20,500 small businesses and found that 65.3% of franchises survived after four years compared to 72% of independent businesses. Retail franchises had a lower survival rate of 61.3% compared to 73.1% of independent retail locations.
What percentage of franchises are successful? ›
There's no real consensus on exact franchise success statistics out there, but for years franchises, brokers, and other websites have claimed a 90% to 95% success rate for franchisors.
How risky is owning a franchise? ›
Like starting any business, buying a franchise involves risk. Although most franchisees are satisfied and successful, some do suffer financial losses. That's why you must be particularly wary of any company that “guarantees” profit or certain success.
How many franchises fail in 10 years? ›
Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
What are the statistics on franchise owners? ›
10.5% of all businesses are franchises, according to the U.S. Census Bureau. About 14% of all franchisees are veterans. As of 2021, veterans own 66,000 franchises and generate $41 billion in GDP. The U.S. franchise sector is comprised of more than 780,000 businesses.
What is the failure rate for a franchise? ›
A widely publicized statistic from a 1987 International Franchise Association (IFA) study showed that franchises have a failure rate of 5% (which would equate to an unbelievable success rate of 95%).
What is the failure rate of a franchise business? ›
Starting a franchise can be a great way to get into business. However, it can also be risky, with a failure rate higher than the average for all businesses — a staggering 50 percent, according to some estimates.
Why do most franchises fail? ›
Just like independent businesses, cashflow problems are one of the major causes of franchise failures. You can be profitable, but problems with cashflow will still sink you. Simply put, cash flow is the amount of money going out versus the amount of money coming in.
Why is a franchise likely to fail? ›
A leading cause of a franchisee failure is the franchisee being undercapitalized. A lack of sufficient working capital can be the result of a slow start-up or the franchise operation requiring more working capital than the amount disclosed in the franchise disclosure document.
Why do so many franchises fail? ›
The franchisor sells to unqualified, inexperienced, undercapitalized, or naive franchisees. In addition, franchisees are unrealistic about the workload of operating a franchise. The franchisor fails to control all aspects of the brand that they have created, leading to inconsistency and confusion.
The industries with the highest failure rates are the construction, transportation, and warehousing industries where 30%-40% of businesses fail within their fifth year.
Is it hard to sell a franchise? ›
The sale of a franchised business can take considerable time to complete and you should start looking for a buyer at least a couple of years before you want to exit and be prepared to leave earlier than you plan if a suitable buyer can be found.
How long should a franchise last? ›
The typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee's initial investment, though market conditions and the type of franchise can also be factors.
Are franchise owners happy? ›
Most franchisees are happy in their business A quarterly survey by Vistaprint concluded that 'the vast majority of micro business owners are optimistic about running their own businesses, with 78 percent reporting that they are either happy or very happy. '
What is the most owned franchise in the world? ›
McDonald's. McDonald's has been the world's largest franchise for decades. That trend continues in 2023.
How much does the average franchise owner make a year? ›
What Is the Average Franchise Owner Salary by State
| State | Annual Salary | Monthly Pay |
|---|
| California | $99,624 | $8,302 |
| Vermont | $99,068 | $8,255 |
| Kansas | $98,834 | $8,236 |
| Delaware | $98,759 | $8,229 |
46 more rowsDisadvantages of Franchising
- Limited creative opportunities. ...
- Financial information is shared with the franchisor. ...
- Varied levels of support. ...
- Initial investments and start-up costs can be expensive. ...
- Contracts aren't permanent. ...
- You're your own boss, but you have less individual control.
Contents
- Failure Rate.
- Average Failure Rate of Less than 2% for Top 100 Franchises.
- Kona Ice.
- Home2 Suites.
- Nothing Bundt Cakes.
- Christian Brothers Automotive Corp.
- Steak n Shake'
- CycleBar.
Reduced risk
Generally, franchises have a higher rate of success and may be seen as less risky than other new businesses. This is because they come with the support of an established business that has already addressed things like location choice, design, and construction.
Is franchise less likely to fail? ›
It depends on the franchise you choose
It's a much better idea to look at failure rates for individual franchises than for the idea of franchises on the whole. If you do this, you will find that there are some with failure rates as low as 10% or 20%. These could be quite stable, especially compared to a start-up.
One of the weaknesses of franchises is that franchisors often require you to pay a certain minimum amount to open a new location. Franchisors may also take a cut of the profits, require you to pay ongoing management fees, or purchase products from them.
What is the negative side of franchising? ›
The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market. You may find that after some time, ongoing franchisor monitoring becomes intrusive. The franchisor might go out of business.
Do franchises ever end? ›
Movie franchises are a lot like TV series; if they're successful, they usually end up going on for too long, so it's up to the creators to decide when it's time to end the story.
What happens if you buy a franchise and it fails? ›
Often the best answer to a franchise that is not succeeding is for the franchisee to sell the business to a third party who becomes the new franchisee for that territory. This allows the failing franchisee to terminate its obligations under the franchise agreement and under any lease.
Can you lose money in a franchise? ›
A failed franchise hurts the franchisor
Of course, if things don't go well, you and the franchisor both lose money. The franchisor's losses include money that was not recovered from initially training and supporting you, plus the loss of royalty dollars that your unit failed to produce.
Do most franchises make money? ›
Each franchise offers different financial prospects for franchisees. Franchisors usually share the brand's financial performance, so you can get an idea of what to expect. On average, typical franchisees make about 80,000 dollars a year, not considering tax and expenses.
Why do 90% of businesses fail? ›
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. Ways to avoid failing include setting goals, accurate research, loving the work, and not quitting.
Do 90% of businesses fail? ›
According to the latest data, up to 90% of startups fail. Across almost all industries, the average failure rate for year one is 10% However, in years two through five, a staggering 70% of new businesses will fail.
What business is least likely to fail? ›
6 Businesses With Amazingly Low Failure Rates
- Business buyers taking action. 6 Businesses With Amazingly Low Failure Rates. ...
- Laundromats. That's right, folks. ...
- Rental property businesses. Listen up, real estate lovers! ...
- Self-storage facilities. ...
- Transportation businesses. ...
- Vending machine businesses. ...
- Senior care centers.
The bottom line is that while a franchise can make you independently wealthy, it isn't a guarantee. Choosing the right business in the right industry, and going in with preexisting entrepreneurial experience and/or existing wealth can help, but your income-generating potential may still be somewhat limited.
Instead, both a franchise owner and a franchisor make money through the business' success. A franchisor makes money from royalties and fees paid by the franchise owners. A franchise owner makes money through profits received from sales and service transactions.
How long does it take for a franchise to become profitable? ›
On average, businesses take two to three years to become profitable. However, many factors determine profitability — while some small businesses fail within the first year, others with low start-up costs can even be profitable in the first year.
What is the average return on a franchise? ›
The average annual income return from the business will be equal to at least 30-50% per year of the total initial investment for the franchise unit. This total investment we're referring to includes all debt and working capital reserves needed to start the business.
Can you walk away from a franchise? ›
A franchise agreement is a fixed term contract and there is no early right to exit unless the parties agree.
What is the average franchise fee? ›
On average, franchise fees range from about $25,000 to $50,000. However, these costs can get much lower or greater depending on the company you pick. You will also need to budget for ongoing payments like technology costs, marketing/advertising fees, and royalties.
How much do franchise owners pay themselves? ›
Most franchise owners don't receive a salary. Instead, your earnings as an owner come from the excess revenue after overhead costs to support the operation of the business are paid.
Why is franchising better than owning? ›
Success rate - Franchises have a better rate of success than a start-up business. Operational assistance - As easy as this "They do the numbers" Easier to secure finance for a franchise - It may cost less to buy a franchise than to start from scratch.
Why would someone buy a franchise? ›
Their owners invested in a known brand in hopes of finding business success. Franchising allows bigger businesses to branch out and grow while giving entrepreneurs and small business owners a chance to run their own operations with the help and support of a larger organization with a proven formula for success.
What is the richest franchise of all time? ›
The 10 Highest Grossing Movie Franchise of All Time
- Marvel Cinematic Universe. Total: $11,355,359,299.
- Star Wars. Total: $5,083,065,844. ...
- Disney Live Action Reimaginings. Learn More. ...
- Spider-Man. Total: $3,311,113,189. ...
- J.K. Rowling's Wizarding World. Total: $2,884,087,807. ...
- Batman. Total: $2,780,809,581. ...
- Avengers. ...
- DC Extended Universe. ...
What is a Franchise Owner's Salary?
| Percentile | Annual Salary | Hourly Rate |
|---|
| 90th Percentile | $62,000 | $30 |
| 75th Percentile | $56,000 | $27 |
| Average | $49,588 | $24 |
| 25th Percentile | $43,000 | $21 |
1 more rowIn 2021, the U.S. franchise with the highest global sales was McDonalds, which reported over 112 billion U.S. dollars in sales worldwide.
How many hours a week do franchise owners work? ›
Owning a franchise unit can be demanding, requiring work of 60 to 70 hours a week, but owners have the satisfaction of knowing that their business's success is a result of their own hard work. Some people look for franchise opportunities that are less demanding and may only require a part-time commitment.
How much does a Chick Fil A franchise make? ›
On average, a Chick-Fil-A franchise makes $8,072,000 in sales per year.
| Mall units | Non mall units |
|---|
| Revenue | $2,694,009 | $8,580,978 |
| Restaurants | 182 | 1,985 |
May 22, 2023
Buying a franchise doesn't have to mean making a full-time commitment. Believe it or not, there are many franchises that can be run on a part-time basis, especially when you first start out.
What percentage of franchises fail after 5 years? ›
About 50% of all new businesses will fail within 5 years
The SBA reports that 49.7% of businesses will fail in half of a decade. Historically, these statistics have stayed consistent since the 1990s, even despite the recent COVID-19 pandemic. So in short, businesses have a 50/50 chance of survival in 5 years.
What is the growth rate of franchises? ›
The overall number of franchise establishments will increase by almost 15,000 units in 2023, or 1.9%, to 805,000 units in the U.S. Franchising will add approximately 254,000 jobs in 2023. Growing at 3.0%, total franchise employment is forecasted to reach 8.7 million.
What is the percentage of franchises that fail in the first year? ›
For starters, the failure rate gives you an idea of how and when businesses tend to fail. Only 20 percent fail within the first year but 50 percent fail within the first five years.
How long does the average franchise last? ›
What Is The Typical Length Of A Franchise Agreement? The typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee's initial investment, though market conditions and the type of franchise can also be factors.
How many businesses survive 25 years? ›
Fewer Than You Think. Data from the Small Business Administration shows that an average of 80% of employer businesses survive the first year, 70% survive at least two years, 50% survive at least five years, 30% survive at least ten years, and 25% survive at least fifteen years.
What is the most successful franchise ever? ›
List
| Franchise | Year of inception | Total revenue ( est. US$) |
|---|
| Pokémon | 1996 | $76.4 billion |
| Mickey Mouse & Friends | 1928 | $52.2 billion |
| Star Wars | 1977 | $51.8 billion |
| $20–50 billion |
48 more rowsThe bottom line is that while a franchise can make you independently wealthy, it isn't a guarantee. Choosing the right business in the right industry, and going in with preexisting entrepreneurial experience and/or existing wealth can help, but your income-generating potential may still be somewhat limited.
What does the average franchise owner make? ›
On average, typical franchisees make about 80,000 dollars a year, not considering tax and expenses. Only a small part of franchise owners make over $200,000 annually, more than fifty percent of franchisees make about $50,000. The industry you're operating in impacts the amount of profit as well.
What is the most common reason businesses fail? ›
The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.
What franchise makes the most money a year? ›
Most Profitable Franchises
- Anytime Fitness. Anytime Fitness is a popular gym brand with a low-cost investment and high revenue potential. ...
- McDonald's. McDonald's franchise program is one of the most established in the fast food industry. ...
- UPS Store. ...
- Jersey Mike's Subs. ...
- Dunkin' ...
- Sport Clips. ...
- 7-Eleven. ...
- Papa John's.
Operators aren't starting from scratch. Rather than setting up a business with no guarantee of a future, franchisees likely have an established brand behind them. Along with resources, guidance, reduced start-up costs, and many other forms of support.
