Franchising vs. starting your own business in an unfriendly economic environment
Terry Dunn wrote a good post on his franchise blog about how franchising seems to be a safer bet than starting your own business during these tough economic times.
Depending upon your source of information, we are headed into a recession or a depression or even a catastrophic cessation of all business activities. By any definition, things do not look promising and we are looking at a new economic landscape. The question arises as to how that will affect franchising. People will tell you that franchising is counter-cyclical, that it continues to thrive during a downturn in the general economy.
Terry then shows us a bunch of statistics showing that buying a franchise is indeed safer than starting a business on your own. I do have to slightly disagree with these numbers. Actually, it’s not that I disagree with them but these stats are from the 70’s and the 90’s and I don’t think they are relevant at all anymore.
These statistics consistently support the notion that franchised businesses are more growth oriented and survive at a higher rate than non-franchised businesses. For instance, a US Department of Commerce study is quoted on more than one site as showing that from 1971 to 1997, less than 5% of franchised businesses close each year, while those same websites cite a US SBA Study looking at the period 1978 to 1998, which found that 62% of non-franchised businesses close within the first 6 years of their opening.
Numbers speak for themselves, but is it relevant? I doubt it.
As Terry says it, “the question remains whether the current economic environment is so toxic that any business venture, be it franchised or self-invented, will find it impossible to thrive.”
What do you think?
Filed under: About Franchising, Buying a franchise, Franchise Talk
I have read many blogs concerning the success rate of franchises. I have tried to find reliable data concerning this topic for years. I used to think the success rate was better for franchises, and maybe if a brand is established a franchise is the way to go. But everyone should be very cautious about the numbers and how success rates are calculated or defined. Most franchisers do not record a terminated or re-franchised location as a failure, even though by all other definitions it would be a failure. An example of this creative accounting can be found at Pirtek. One post by Pirtek claims the owner of Pirtek Nashville abandoned his business and is now a company store. This is a failure, the sales went to basically zero, the franchisee was terminated voluntarily and walked away. His money, his time, his risk, but if the owners name changes it not considered a failure? This tactic, this lack of transparency, and lack of honest documentation skews the data, and always in favor of the franchisor.
I submit that its riskier to buy a franchise, sure you may buy yourself a job, sure, a franchisee that pays the bills is not a failure per se, but risking money, and time and getting little or no return is not really a success. There are very few Blue Chip franchises out there. Most franchises under perform and eventually change hands, its not logged as a failure but the ex-franchisee feels duped and in fact lost money. I think if a standard of success was applied fairly to BOTH franchised and non-franchised businesses the data would be very close, showing that it is just as risky to buy a franchise. That is my two cents. Either way be very careful before you buy a franchise, its riskier than any one really knows. Good luck, if you have questions please let me know, Scott [email protected].
It’s true! Franchising is a positive business option at this time where there is economic slowdown. By venturing into a franchise industry, you have a better chance of success. Just be extremely cautious in choosing the best one for you and be strongly motivated and determined to attain success in this business. My franchise guide has the details on the essential steps that you, as a prospective franchisee, must take to precisely evaluate the franchise opportunity that best fits you.
Recently PirtekUSA posted 2007 thru 2009 consolidated financial statements. These financial statements were evaluated and the bottom line is that Pirtek USA is in trouble. Pirtek USA showed a profit of 1.4 million in 2007, but that profit declined to a loss over the next three years. 2010 financials are forecast to show even greater losses. All Company owned stores lost money. With cherry picked locations and more resources than any franchisee could bring to the table, all company owned stores lost money. This proves that Pirtek USA is a franchise selling business and not a business that is good for the franchisee. The average sales per Franchise location is far below what is required to pay the bills. The only way Pirtek USA can survive much longer is to close down all the stores that lose money and continue to rape the franchisees. PirtekUSA’s inventory is down, debts are mounting and most franchisees are struggling. This financial storm was preceded by 2006 litigation, involving more than half of the franchisees, claiming prices for product were excessive. Remember, the numbers do not lie, people do. Sadly, for most franchisees it is called Poortek for a reason.
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