The recent CNBC Documentary, Behind the Counter: The Untold Story of Franchising, provided viewers a unique perspective into the $2.3 trillion franchise industry.
Franchising touches all of our lives every day in ways you probably don’t even realize—and the industry has been growing, despite the economic downturn. In fact, one out of every six jobs is related to franchising. It’s no wonder CNBC’s sports reporter Darren Rovell took four months away from his day job to travel around the country eating donuts, burgers and ice cream as part of his look into some of the most well-known brands in the world of franchising.
The show highlighted one of the most fundamental things about franchising—if you have a proven business concept, there is no better model to grow your business than by franchising. The segments on Dunkin’ Donuts, Proctor & Gamble and Five Guys segment were examples of how companies grew by franchising.
The show also addressed the fact that not all franchisees are successful. While we disagree with some of the inferences in the show and were disappointed that the reporter did not fully use the information provided to him by IFA and our member companies, it did provide some sound information about the franchise industry.
No one would dispute that certainly, some franchisees will fail. Yet when you look at government data regarding small business survival rates on a large scale, the statistics consistently show that franchise-owned businesses have a greater likelihood of thriving over an extended period of time than independent small businesses. Let’s take a look at a few of the numbers as a basis of comparison:
• According to the U.S Small Business Administration, seven out of 10 new employer firms survive only 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. Bureau of Labor Statistics data on establishment age show that 49 percent of establishments survive 5 years or more; 34 percent survive 10 years or more; and 26 percent survive 15 years or more.
• According to previous research conducted by the IFA Educational Foundation, more than 90 percent of franchisees renew their agreements at the end of their contracts. On an annualized basis, approximately 5-6 percent of the franchisees that come up for renewal are terminated (not renewed), and approximately 2-3 percent are transferred to another owner (this may be due to a retirement, a death of the previous owner, or a multitude of other factors that have nothing to do with whether or not the business was “successful”).
Clearly, franchise termination and transfer rates would be much higher if operating a franchise was not a prosperous way to make a living. Given that most franchise contracts have a term of seven to ten years, the data seems to indicate there is a much higher business continuation, or survival rate, among franchises than other small businesses.
While opening a franchise is certainly not a guarantee of success, it is clear that the vast majority of franchise business owners believe they can continue running a successful business if you measure success in terms of the percentage of franchise owners opting to renew their franchise contract with a franchisor.
CNBC did not report on the astounding rate of growth that has been taking place within the franchise industry. According to the IFA’s Economic Impact Study prepared by PricewaterhouseCoopers, from 2001 to 2005 the growth rate of franchise businesses far outperformed other businesses in terms of economic output and job creation. From 2001 to 2005, franchise businesses grew by over 41 percent, an annual rate of more than 8 percent, 1.5 times the rate of other businesses. Employment generated by franchise businesses grew by 12.6 percent compared to 3.5 percent for all businesses, a rate of 3.5 times the rate of other businesses.
We’ll have new data to report in January about the growth of the franchising industry over the past several years, but our preliminary estimates seem to indicate that while credit has remained tight due to the economic downturn, franchising continues to see slight growth (around 2 percent annually in terms of new franchise units opening). In fact, the growth in franchising led the U.S. Census Bureau to add a question about franchising to its recently-released Economic Census information for the first time.
It is important to highlight the ‘do’s and don’ts’ when considering purchasing a franchise. The program encouraged consumers to do their homework before making an investment in a franchise system—at the IFA, we caution anyone from considering a single viewpoint when considering purchasing a franchise. As with any sound investment, prospective franchise purchasers should consider multiple sources, including those of existing and former franchisees within a system and franchise legal experts, in order to use sound judgment before making the final decision if franchising is right for you.
One segment of the program zeroed in on the upfront costs that may be associated with buying a franchise within certain industries and concepts. The show used the pet-care industry as an example to provide viewers with a “cautionary tale of franchising,” and we feel misrepresented IFA member Camp Bow Wow’s positions, including the discussion about “sold but not open”.
According to Camp Bow Bow CEO Heidi Ganahl, she believes the numbers reported in the program about her company were misleading. We spoke to Ganahl, who said, “80 percent of the Camp Bow Wow franchises awarded to date since 2003 are opening or open. Considering we just went through the worst recession in the century, I think we made it out of the woods in pretty good shape.” Some additional figures that were not reported in the piece that Ganahl shared with us are below:
• Only seven Camp Bow Wows (out of 115) have closed seven years.
• Camp Bow Wow franchises reported gains of 10-20 percent in year-over-year system sales from 2007-2010
• Of the 80 units reported by CNBC as “sold but not open,” 36 are in the Opening Process (site search, build out). The other 44 are Area Development Agreements (additional territories purchased by current franchisees not open yet and not scheduled to open until 2011 or later)
• The Camp Bow Wow SBA Loan Failure Rate for 2009 was 4.76% while the franchise industry as a whole was 13.9%. The company ranked Camp Bow Wow 93rd lowest of 512 franchise systems the SBA tracks in terms of loan failures.
• Camp Bow Wow makes earnings claims data available as part of their Item 19 information in the company’s Franchise Disclosure Document (FDD), placing it in the 20-30 percent (according to CNBC’s “scores” of analysis) of companies that make earnings claims*
*Although according to FRANdata, a company that has the largest database of information in the world about the companies that franchise and manages the Franchise Registry for the Small Business Administration, the number of companies that disclose earnings claims is much higher, 40 percent, and growing.
Another major issue the franchise industry has been dealing with that was not explored in the CNBC program is the inability of banks to provide credit to small businesses during the recession. This is a primary reason you may find pockets of franchisees within many industries stuck in the “sold but not opened” stage—regardless of the industry or soundness of the business model.
The challenge posed by the credit crisis since 2008 is the principle reason why the IFA’s top legislative priority continues to be increasing access to credit for franchise businesses. To draw the conclusion, as the CNBC program may have led viewers to believe, that solely because a company has high start-up costs, that it is a flawed business model just doesn’t add up. There are so many other factors one must consider.
The truth of the matter is that there are no guarantees in franchising, just as there are no guarantees with anything in life. The best course of action is to take in as much information as possible to make an informed decision about buying a franchise. The IFA has some great resources available on our web site, including a recently released publication An Introduction to Franchising; as well our Franchise Opportunities Guide, which is published twice a year. We commend CNBC for taking such a deep dive into the exciting world of franchising and look forward to welcoming those interested or with questions about getting into franchising themselves to contact us at the IFA—we’re here to help!
Posted by Matt Haller, IFA Director of Communications