Latest data suggests the decision comes down to personal priorities, not economics
By Jeff Milchen
Franchising has long been promoted as a way for would-be business owners to start with help from a tested formula and support system that increases their chances of success. The choice of whether to go independent or buy into a franchise is as much a question of personal values as economics. But the most basic question — is franchising a way to increase your chance of success — had gone without serious analysis since 1994.
That earlier research by Dr Timothy Bates found franchises actually failed at slightly higher rates than independents and yielded significantly less profit after fees and commissions to the franchisor were paid. (The franchisor is the company leasing rights to use the business brand and operating system to the franchisee.)
But have the changes in business, technology and culture changed the equation since that landmark research 25 years ago? Those are the questions researchers sought to answer with in-depth research using U.S. census data.
Francine Lafontaine, and Xu Zhang of University of Michigan, and private economist Marek Zapletal recently published their final peer-reviewed paper, “Brighter prospects? Assessing the Franchise Advantage Using Census Data,”
The results, while somewhat more favorable to franchises than Bates’ research, certainly won’t be appearing in the marketing materials of franchisors. “There is a franchise advantage [in survival rates], but it is quite small relative to what is claimed” in many publications. The researchers did not attempt to measure profitability, as Bates’ study did.
The report found that advantage was “small and short-term,” disappearing after two years. The researchers suggest the screening process employed by franchisors explains part of that advantage by winnowing out people who lack the right assets, skills or temperament to run the business. They also observed people with higher education levels are more likely to start a franchised business while those with a high school degree or less were more likely to start an independent.
In other words, while the data shows slightly higher survival rates for franchises, that small advantage likely is due to factors (educational level and franchisors screening out poor prospects) irrelevant to the decision of any aspiring business owner.
“Franchisors, however, charge ongoing fees to their
franchisees, fees that might capture most, if not all, of the value
created by the business‐enhancing benefits associated with franchising.”
Other findings by the researchers include:
- Businesses organized as corporations have substantially greater survival rates than those organized as proprietorships or partnerships.
- Larger new businesses and those financed by banks or government‐backed loans tend to survive longer. Those financed using credit card debt fail more often.
- There were 560,086 establishments of franchised chains in 2012, with 10.8 million employees.
- Retail trade, accommodation and food services accounted for 43.4 percent, 27.6 percent and 6.3 percent of franchisee businesses, respectively.
Readers should note these generalized franchise failure rates may not be representative of probabilities in specific business sectors. Many companies with the highest survival rates, such as McDonald’s, require seven-figure investments to get started.
As advocates for independent locally-owned business, we’ll also point out that some of the advantages attainable by buying into a franchise can be gained at little or no cost. SCORE, Small Business Development Centers and other local support networks are available in most of the United States. They provide information and volunteer assistance to help entrepreneurs fill knowledge gaps, assess financing options and address many of the needs new business owners have without sacrificing decision-making control over the business.
The Myth of the Franchise Advantage (our story based on the 1994 study noted above)
Subway Got Too Big. Franchisees Paid a Price A fine 2019 report showing some of the dangers of buying a franchise and of mandatory arbitration agreements
U.S. Map showing most numerous franchises by state