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Article 3: Survival Rates
There was a time when it was common to boast that the success rate of franchises was astronomical, especially in comparison to other small businesses. But claims are more tempered these days if they are made at all, and especially muted when speaking of franchising in general. Also, the distinction between franchises and other small businesses probably is much less dramatic than it was once portrayed, if a distinction exists at all.
So, what is the success or survival rate of franchises?
“That’s a hornet’s nest,” according to author and syndicated small-business columnist Jan Norman, whose new book, “What No One Ever Tells You About Franchising,” will be released in early 2006 by Dearborn Publishing. (Disclosure: Jan is this writer’s wife, but nevertheless an expert commentator of the small-business scene since 1988.)
“Some claim the failure rates are higher than independent businesses. It’s pretty clear that the International Franchise Association and most responsible parties have backed away from earlier claims that franchises have a much lower failure rate than independent businesses.”
Robert L. Purvin, Jr., chairman of the American Association of Franchisees and Dealers, agrees. “The franchising industry, and publications produced or encouraged by the industry, have claimed for years that 95 percent of all franchisees are still in business after five years,” Purvin writes in his book, “The Franchise Fraud.”
But Purvin notes that franchisors “can be very creative” in reporting “failures.” For example, if a franchisee fails, but the store remains open for another franchise owner to take over, it may not be recorded as a failure at all.
In a 1992 congressional hearing, franchise attorney Rupert Barkoff, at the time chairman of the American Bar Association’s Forum on Franchising, testified that franchise failures may be as high as 50 percent.
Similarly, the loose talk used to be that nine of 10 small businesses failed in the first year. But during the 1990s the overall number of new small businesses increased at record rates. Those who have tried to verify the 90 percent failure rate run into inconvenient facts such as when adding bankruptcies, reported failures and terminations, then dividing them by existing and new businesses, produces about a 4 percent failure rate, not 90 percent. Other studies show a wide disparity between startups beginning with at least $50,000 capitalization versus those with less. Another complication is that the small-business failure rate includes nearly all franchises.
What does all this mean? Probably not much. Rather than using hyped estimates or numbers that bear little correlation to what can be verified, it’s prudent to fall back on fundamentals. Is there a market? Is the business model proven or plausible? Do you have what it takes to make it work? Ultimately, those are better questions to ask than relying on ambiguous, if not dubious failure and success ratios.
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