Are Franchises Really More Successful Than Independent Businesses?
May 24, 2012
We hear a lot of questions on this topic. Is there an accurate answer? Let’s look at some of the data. According to the International Franchise Association, franchise companies often have a revenue advantage over independents. Sometimes a very large advantage. In the food and retail sectors, for example, franchises make up only fifteen percent of the business units, but they receive 40% of the revenues. Do the math – these franchisees average much more revenue than the typical independent business. This seems like a huge difference. Is there any logic to it? Of course there is. If not, why would thousands of people thoroughly research franchises each year and then decide to invest? No rational person would pay the franchise fees required to open a franchise unless they saw a clear benefit to the franchise system. What kind of advantages are there? We usually focus on three: 1. Franchises provide a proven system. They have already figured out what works and what doesn’t. They know what demographics need to be, how many employees you need, what kind of advertising works best. The franchise company learned their lessons the hard way – by making expensive mistakes. They already tried advertising that doesn’t work. When you become a franchisee they will share this information with you. In a snap, you have access to all of that learned experience. 2. Franchises provide support and training. Remember, the franchise companies make more money when the franchisees make more money. They have every incentive to help the individual franchisee succeed. Good franchise companies get this. Because of this, most franchise companies have employees with the sole task of supporting the franchisees. Typical areas might be IT support, Sales Training, Advertising, Accounting, and Human Resources. Imagine the cost of an independent business trying to hire experts to give advice in all of these areas! 3. Before you invest a single dollar into a franchise, you can find out all about it. This is the advantage that gets people’s attention. With an independent business you have to make a lot of assumptions as you do your business plan. You really have no way of knowing if those are realistic. With a franchise, there are many other franchisees who have already started this exact same type of business. They are all a resource to you. As part of your research you have the right to call as many of the existing franchisees as you like and find out what their experiences have been. It is a federal regulation that the franchise company gives you a list of every franchisee, including the phone number. You have no need to make an assumption that might not be accurate. If you aren’t sure, just ask some existing franchisees. They will tell you if you are on the mark or not. These are some of the reasons franchises are more successful. But let’s look at actual data. According to a study by the accounting firm Arthur Anderson, 96.9% of franchise units were still successfully in business five years after opening. Similarly, a study by the U.S. Small Business Administration found the average franchise had five times the first year revenue of the average independent business. If you think about it, it all makes sense. We would all expect a business with more support, more training, and a more proven way of doing business to have the best chance of success. It turns out the numbers back this up: Franchises are more successful than independents.