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:
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