A recent Bloomberg BusinessWeek story, “Many Franchisees Get Nothing for Their Investment,” did not paint a full picture for those looking to fulfill a dream of business ownership through franchising, a business model that has been successful for the last 50 years and continues to grow and create jobs for millions of Americans.
The blanket statements made in the article revealed a lack of understanding about how franchise agreements actually work. For example, the author alleged that in all situations involving the turnover of a franchised business, franchisees are unlikely to recover their investment. But this assertion is far too broad. Turnover refers only to the change in the license agreement or contract between the franchisee and the franchisor. For example, the franchisor can terminate the license agreement when the franchisee fails to comply with system standards, or when the franchisee decides not to open additional stores that had been agreed upon in the original contract. Many franchisees do see a return on their investment and some even pass their franchised businesses on to family members.
To make this claim, the article relied heavily on biased reporting by a blogger at BlueMauMau that inaccurately equated “turnover” with the overall performance of the franchising industry, stating that “122 franchises leave for every 100 newly opened franchises.”
The BlueMauMau report inflated the numbers by counting transfers of ownership as “departures”. This is a mischaracterization. In fact, a better measure of franchising industry performance would count more than 46,000 transfers as businesses that continued to operate during this time period under new ownership. When the transfers are added to the 135,000 new outlets that opened, the total number of franchised businesses operating from 2010-2013 is 181,000. This means the number of franchise agreements that were terminated, reacquired, not renewed, or ceased operations for other reasons was approximately 118,000, or about 40,000 per year. It is a big over-simplification to claim that so-called “turnover” equates with business failure. In some cases, franchise owners decide to pursue other business opportunities or to retire.
Regardless, any statistic about business performance during this period should be put into a broader context of what has happening in the U.S. economy at the time. Recent data suggested that in 2011 alone, 575,000 businesses – not just in franchising – ceased operation. Additionally, the Bureau of Labor Statistics estimates an average annual failure rate of 45% of all business startups in a five year period. Using this national benchmark, 40,000 franchise departures per year, or an overall rate of 10 percent per year, compares very favorably with other businesses.
Another misconception about franchising repeated in the article is that franchisees are not independent, local business owners. In fact, franchisees do own their businesses. They pay taxes, wages to their employees and permits and fees to local, state and federal agencies. These local business owners have an employee identification number from the IRS and take their profits out of their businesses the same way other business owners do.
There is no guarantee of success when going into any business, including franchises. To be sure, franchise businesses are not immune to failure for the same reasons that other businesses fail – recessions, poor financial planning, lack of management, or personal issues. Prospective franchisees should plan carefully, consult with a franchise attorney, and thoroughly investigate franchise opportunities before making a decision to invest. However, inflating statements about “high turnover rates” does not do justice to the franchise business model that has created a way for tens of thousands of Americans to pursue the dream of business ownership. Franchise businesses continued to grow during the worst recession since the Great Depression, at survival rates much higher than other businesses. Today, they continue to create jobs and livelihoods for millions of Americans.