Note: we summarize a 2018 study based on more recent data from the U.S. Census here. It covers a an overlapping, but different set of measurements.
For people considering opening a business, a primary reason they may consider a franchise, as opposed to opening an independent business, is safety. The trade-off for sacrificing some control of how they run the business is a known brand, the marketing, support from corporate headquarters, and other services they expect will increase their chances odds of success.
But the odds may not be in their favor after all. Contrary to the myth created by franchisors — the companies that sell licenses to individual outlet operators (franchisees), independent businesses succeed at a slightly higher rate overall than franchises. According to the most thorough study to date at Wayne State University, four years after opening, 62% of franchised businesses had survived, while 68% of independent small businesses remained open. While franchises generated much higher sales, independent businesses were more profitable as a percentage of sales and in absolute terms. In fact, the average franchise lost money during the first four years.
Increasingly, franchisees are victimized by one-sided contracts that put all risk on them while virtually guaranteeing profit for the franchisor. While the biggest fast-food franchises have much higher success rates, the buy-in often exceeds $1 million. For example, a McDonald’s Corporation requires investing $1 – $2.2 million (as of 2014) — at least 40% of which must come from personal wealth and non-borrowed resources! This makes the outlets profitable investments for the already-wealthy, but not realistic opportunities for working people aspiring to enter business.
In many communities, excellent business support services are available at little or no cost that can help you fill your knowledge gaps and address many of the needs new business owners have while remaining independent (SCORE and Small Business Development Centers are two of the most common). We welcome you to contact us for help identifying resources near you.
BlueMauMau is a website dedicated to news about franchising and resources for potential franchisees.
U.S. Map showing most numerous franchises by state