For many entrepreneurs, the idea of buying a franchise, rather than starting a home-based business may seem tempting. In the modern digital age of DIY ecommerce websites and retail dropshipping, how do franchises stack up? Why would entrepreneurs still invest in franchise business models?
Believe it or not, franchises are still very much a fabric of the overall business world. In 2018, an estimated 759,236 franchises were operating in the United States alone. Not surprisingly, the largest percentage of those franchises are in the fast food sector. The most lucrative franchise was McDonald’s, bringing in $91 billion in sales, followed by 7-Eleven, at $85 billion.
So of course, entrepreneurs may consider franchises an easy way to quickly start a profitable business, as long as you have the capital. A franchise comes with brand recognition, a blueprint for success, and support from the corporate office, right? But it’s not as simple as that.
As part of a project with CNBC, Franchise Business Reviews combed through figures of the top “Star Franchises” and found that, as a whole, these franchises averaged three times the net income of the average U.S. franchisee. This means that primarily, it’s only a handful of the top franchises (that can cost millions to invest in) that are really “successful.”
But even in these massive franchises, where you see two or three McDonald’s along the same sidewalk, failure is still a big possibility for the franchisee. It’s just that McDonald’s is such a huge franchise, a few or even a few dozen stores closing makes very little difference to their income.
Investors also continue to view the franchise model with positivity in terms of potential returns. For example, private equity firms are known to be open to both franchisor and franchisee investment opportunities. You can read more here about what a “good” franchise looks like from the investment side.
But as to why entrepreneurs still believe in franchise business models, there are numerous reasons.
Belief in “The Stat”
Misinformation on the internet is rampant, and sadly, there are tons of articles out there that give the franchise industry around a 90% success rate. This statistics is based on a flawed 1980s survey from the U.S. Department of Commerce, which was interpreted by some analysts to predict that 95% of franchise businesses are successful over a 5-year stretch.
This stat is misrepresented on so many small-business websites, that the IFA (International Franchise Association) and SBA (Small Business Association) regularly send out letters asking franchisors to stop quoting it.
Of course, this doesn’t mean that franchises aren’t successful. It’s just important to be realistic about survival rates in any industry.
For many entrepreneurs, the corporate assistance from franchisors is a very compelling reason to buy in. This corporate assistance can come in the form of:
The company will offer training programs to give you a guideline for successfully running the business.
The company already has marketing material, and the corporate marketing team can help you develop marketing strategy and budget.
The corporate office has people that can provide you with coaching and assistance when your business is going through a rough patch, and can also help you develop ideas for growing the business.
Construction and real estate assistance
The corporate office will evaluate any potential site for the business location, choosing the best one based on a number of factors that revolve around maximizing traffic. Furthermore, the corporation will also help you design the building layout and choose the best contractors for the job.