5. Franchise Player

The following topics will be addressed in this post:

What is typically provided by a franchisor to its franchisees? Why would these be valuable to a nascent entrepreneur? Why is the failure rate lower for franchisees than it is for independent businesses?

Some people might not consider franchising truly entrepreneurial because it involves less risk and already established business practices. One colleague calls “pure entrepreneurship” when you do something that no one else is doing. More broadly, entrepreneurs are often defined by traits including risk taking and innovation. I would insist that the entrepreneurial spirit exists in franchising through proper execution of customer service, inventory management, personnel management, and other business skills. Moreover, even franchises carry risk: Sbarro’s declared bankruptcy, Taco Bell had some bad press recently, and auto dealerships suffer from recalls and recessions.

Franchisors have a great deal of self-interest in their franchisees because good franchisees will add revenue and help expand the brand while bad franchisees can do just the opposite. A franchisor will, therefore, have an interview and selection process for potential franchisees. After selection, the franchisor may help with site selection and financing but not always. The franchisor will provide training, manuals, and other support to assure franchisor standards are met. Franchisors will provide product and service development, marketing campaigns, management guidance, and other corporate level functions. Sometimes franchisees are asked to participate in these processes through financial contributions, local innovation, or some other means. Finally, franchisors usually provide ongoing support and inspections to assure the franchisee is functioning at proper levels (AllBusiness.com).

These franchisor-provided resources improve the chances that the franchisee will succeed. For the beginning entrepreneur, these support materials provide structure and proven results. The franchisee does not feel lost in all of the decisions required to form a business and does not have to re-invent the business from scratch. Without all of the guesswork, the entrepreneur can focus on providing a proper environment for employees and building a customer base.

The ultimate question then becomes do these supports justify the lack of control? Should one opt to become a franchisee? Often this question is answered as a matter of personal comfort and choice. Nonetheless, some statistics bear consideration. In a recent list of the 10 Most Popular Franchises compiled by CNN indicates failure rates of below 10% in five and only two exceeded 20% failure rates. A more comprehensive list posted on FranchiseFix shows one franchise with a staggering 85% failure rate but the majority of the list is well below a 30% failure rate. On the other hand, according to the SBA, half of owner-only firms fail within four years, but, in another study, Bruce Kirchoff used other metrics to indicate only 18% of businesses fail in the first eight years (Katz and Green).

So, is franchising a better option than starting an independent business? No exact answer exists. One might prefer franchising if you believe in the parent organization and want to sell their goods and services. But, if one has innovative products and services to bring to market, then the flexibility and nimbleness of an independent firm is better suited and potentially can reap high rewards than a franchise.

Some resources for those thinking about franchises:

http://www.ftc.gov/

http://www.entrepreneurialconnection.com/default.asp

http://www.nase.org/Home.aspx

Sources:

CNN. http://money.cnn.com/galleries/2010/smallbusiness/1004/gallery.Franchise_failure_rates/index.html

FranchiseFix. http://franchisefix.com/resources/franchise-brand-failure-rate/

Katz, J.A. and Green, R.P. (2009) Entrepreneurial small business, Second edition. McGraw-Hill: New York.

AllBusiness. What Help Does a Franchisor Provide to Franchisees? http://www.allbusiness.com/buying-selling-businesses/franchising-franchisor/2199-1.html

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3 Responses to 5. Franchise Player

  1. Hi. Thanks for those interested statistics. Choosing that right franchisee must be a very tasking duty for franchisors. Simply, because if the franchisee is not careful and mindful about doing their best, he or she could destroy the image of the entire franchise. This is probably a major reason why franchisors provide on going support even after the initial deal is made between a franchisor and a franchisor. Franchisors provide the support, and inspections needed in order to help protect their business image and model.

  2. DTBA says:

    My thoughts were inline with your colleague’s thought. For me an entrepreneur was someone who starts a new business with his or her own ideas or products. I never thought of a franchisee as a true entrepreneur until my recent readings on franchise business. A franchise business carries risk and requires various business skills to run it successfully. In that sense it is no different than independent business. I agree with you.

  3. R.C. says:

    One of the biggest risks with starting a franchise is opening it in the wrong location. This risk holds true for “pure entrepreneurs” as well as franchisees. However, some franchisors will assist in the selection of the location as you mentioned, because of course, they don’t want to see one of their own fail.

    I am struggling with this decision right now. I am trying to find a way to break into the wine industry and I’ve learned a lot about the different options. There are many different levels of involvement you can have, and one of them is to start a franchise where they make their own wine. There are many of these around and trying to find the best if challenging. Plus I keep thinking – boy that start up “franchise fee” is $40k… I could do a lot towards starting my own business with that much money. Why pay it the franchisor for their “expertise”? And ugh the “royalties”! Why would I want to fork over 5-10% of my revenues every month? I’m just not sure its worth it.

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