Is Franchising for You?

You know the economy is getting better when you begin hearing “buy a franchise” ads every day on the radio!

I’ve been taking notes. So far—just this week—I’ve heard spiels for these franchise types: Smoothies, men’s fitness, yogurt shops, men’s hair salons, and hamburger joints.

So I thought I’d do a little research to find out the current state of the franchise industry.

First of all, let’s define franchising as essentially adopting someone else’s successful (or at least hyped as successful) business model. Franchising has grown tremendously—especially in good economies—as it is promoted as easier and less costly than building your own business.

You may be surprised to know—according to Wikipedia—that Isaac Singer, the fellow who improved sewing machines, began one of the first franchises in the U.S. in the 1850s. But it is said that franchising goes much further back—maybe as far as 200 B.C. in China.

As of 2011, Statista.com says there were some 735,571 franchises operating in the U.S. That’s pretty amazing, isn’t it? It sounds like a great idea—walking right into an already-successful business strategy. And you only have to look at the multi-millionaire franchisees who were smart enough to sign on with McDonalds (whose franchises currently cost from $1.07M - $1.89M ) when they began franchising, back in 1953—or the many who joined in with the following Top 5 American franchises—to see that, indeed, franchising can be the ticket to riches.

FRANCHISE	START-UP COSTS
Hampton Hotels	$3.75M - $13.11M
Subway	$84.8K - $258.8K
7-Eleven, Inc.	$30.8K - $611.1K
Servpro	$132.05K - $180.45K
Days Inn	$202.17K - $6.76M

Source: http://www.entrepreneur.com/franchise500/index.html

And since the economy—as I’ve been saying for months—is definitely on the upswing, it’s no surprise to see new momentum in both business start-ups as well as the franchise world.

So far in 2012, here are the most popular new franchises:

FRANCHISE	Business Type	START-UP COSTS
No Mas Vello	Laser Hair Removal	$84.1K - $122K
Complete Nutrition	Weight loss & nutrition products	$150K - $220K
Yogurtland Franchising Inc.	Self-serve frozen yogurt	$329.8K - $615.6K
ShelfGenie Franchise Systems LLC	Custom shelving & accessories for cabinets/pantries	$70.1K - $125.25K
The Senior's Choice Inc.	Assisted living & healthcare staffing services	$54K - 71K

Source: http://www.entrepreneur.com/franchises/rankings/topnew-115520/2012,-1.html

When I ran banks for a living, I would often see customers who wanted my advice (or the bank’s money) on buying a franchise. And it was just as true then as it is now, that franchising riches are not guaranteed, and it’s sad but true, that “buyer beware” should be the first thought in a potential investor’s mind when considering a franchise.

That’s because franchise failure rates can be as high as 94%, according to the U.S. Small Business Administration (SBA). Here’s the SBA’s list of the Top 10 franchise failure rates, mid-2011:

Franchise                                                                   Failure Rate (%)
WINGS-N-THINGS                                                               94.12
TILDEN FOR BRAKES CAR CARE CENTER                   92.86
BEAR ROCK CAFE                                                              80.00
NOBLE ROMAN PIZZA                                                       77.27
SUPER SUPPERS                                                                  76.92
PRO GOLF                                                                             76.47
LA PALETERA                                                                      75.00
STEAK ESCAPE                                                                   75.00
EXECUTIVE TANS                                                              74.47
GOLF ETC. OF AMERICA                                                   71.00

Statistics show that by type of franchise, bagel stores—with a 23% failure rate—are the worst franchises, as a group, to own. They are followed by smoothie stores (23% failure rate), pet supplies and pizza restaurants (15%), and tanning salons (14%).

As to why the failure rate is so high, Five Reasons Why Franchises Fail – Franchise Failure Rates | GlobalBX Entrepreneur Business Blog, the top five reasons are:

1. Ineffective Parent Company
2. Poor Location
3. Too Much Competition
4. Lack of Adequate Marketing
5. Unrealistic Goals

Consequently, should you be tempted to follow your dream of owning your own business by investing in a franchise, please make sure you do your homework and put your money to work in a business that has a strong potential for success. Franchising can be a tremendous path to that success, but only with the right idea and joining a company with a great track record.