Is franchising a business really a guarantee of success?

Many small business owners exist in the misapprehension that franchising is easy.

These are the ones who are persuaded by “franchise your business” advertising, or who observe successful franchise systems from a distance and decide to give it a go. They may also receive occasional flattering comments about their business from excitable customers who eagerly suggest that “one of these would go gangbusters in Cairns/Perth/Melbourne/Bendigo” or wherever it is that the customer comes from.

These business owners may be dynamic entrepreneurs in their own right, but as many business studies have found, entrepreneurs aren’t very good with details and tend to be blue sky visionaries who go after opportunities but don’t have a road map to get there.

Other business owners aren’t really that dynamic any more and look to franchising as an exit strategy to get them out of the daily grind of working at the coalface of the business.

These and other types of business owners who look to franchising generally expect that it will lead to a better life, a bigger income and fewer business hassles. While this is possible in the long-term, it is not the reality of the short- to medium-term experience of most start-up franchisors.

When asked why they had ceased franchising, one former franchisor who emailed the Franchise Advisory Centre recently revealed the following:

All the consultants were unanimous … this (franchising) was a GREAT idea!! (But)…the reasons for going into franchising were ill thought out.

The former franchisor admitted that they thought franchising would be relatively easy, and gave the impression that their consultants made it look straightforward, though in hindsight he realised that the consultants had a vested interest in this approach. He also noted that franchising was considered to be a good way to make money and listed the following three reasons for going into franchising:

Reason number 1: It could/should make money for ME!
Reason number 2: It could/should make money for ME!
Reason number 3: It could/should make money for ME!

The franchisor’s subsequent experience indicated that this was a one-sided proposition which was bound to run into trouble:

It never once entered our tiny little minds that there should possibly be something in it for prospective franchisees. I think you will agree, this is THE number one reason not to do anything.

The former franchisor discovered after much effort and expense that their entire approach to franchising was fundamentally flawed right from the outset. Unfortunately, they realised this too late.

We… ignored all the ‘signs’ and we kept throwing copious quantities of money into our obsessive/compulsive lust for the pot, which of course accompanies every rainbow. We continued to advertise (for franchisees), even when all hope was gone.

Looking back, the franchisor concedes they would and should have approached franchising entirely differently, but only came to this conclusion after already sinking a huge amount of organisational resources into the unsuccessful venture.

Unfortunately, the experiences of this franchisor are not isolated. The failure to successfully launch franchise operations is surprisingly common according to overseas research into franchisor survival.

In the United States, often considered the home of modern franchising due to the profile of its fast food chains, there are an estimated 2,300 franchise systems with more than three quarters of a million outlets. However, the rate at which franchisors exit franchising are high, reaching 75% over 10 years and 85% over 17 years.

Research conducted by the International Franchise Association in 1997 identified 1,156 franchisors operating in those US states requiring registration, which rose by just 22 franchisors the following year. On comparing the registration lists from one year to the next, only 834 of the franchisors registered in 1996 were still registered the following year. The remaining 322 (28%) were absent.

A tracking study of franchisor start-ups in the United States from 1980 to 1992 showed a survival rate for the period of just 28.6%. Similarly, another study tracked 138 US franchisors which commenced franchising in 1983, and found only a 24.6% survival rate after 10 years.

In the United Kingdom, researchers analysed the database of franchisors listed as advertisers in the UK’s two annual franchise directories in 1996 and found that in the 18 to 24 months since the directories were compiled that almost one third of the 704 franchisors identified had ceased franchising. Furthermore, of the 237 franchisors that had ceased franchising, 150 of these had ceased to trade altogether, or could not be traced despite the researcher’s best efforts, and therefore presumed to have failed.

Thankfully in Australia, initial research by the Franchise Advisory Centre into franchisor survival indicates that the situation here is not as bleak.

A content analysis of a 10-year-old issue of Franchising Magazine revealed a lower overall rate of franchisor exit compared to the UK and the US. Of the 113 franchisors listed in the magazine’s index as advertising in the December 2006/January 2007 issue, 78 (ie. 69%) could be identified as still franchising today by comparing against the Franchise Advisory Centre’s database, internet and telephone directory searches.

The remaining 30% had ceased to franchise, and in most cases, could not be found at all, suggesting that not only had those franchisors exited from franchising, but that they may have ceased operating altogether. (The remaining 1% could not be determined as to whether the business was still franchising or not).

For the many business owners who enthusiastically embraced franchising as a means of growth and profit, but found disappointment and pain, franchising was not the goldmine they thought it to be. Similarly the franchisees of failed franchisors are likely to have found disappointment and pain in their franchise journey as well.

The moral of the story is this. Many business owners hold a perception that franchising is easy, and that it will lead to fast and enormous profits. Nothing could be further from the truth.

Franchising a business is hard work. It takes guts and determination. It needs a successful business to start with. It is costly and time consuming, and what’s more, it needs the business owners to fully understand every single step of the process.

Unfortunately, the experience for many aspiring franchisors is that franchising wasn’t right for them, and the lesson cost them dearly.

Returning to the former franchisor who inspired this article, his advice may be a prophetic warning to any struggling start-up franchisor who has lost their way:

…when you find yourself on a dead horse …dismount!

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.