Generalized franchising statistics are very misleading and seldom give an accurate picture of each franchisee’s actual experience which frequently is worse than what the statistics portray.

A 1995 study by Dr. Timothy Bates, a professor at Wayne State University in Detroit, found that the franchise failure rate actually exceeded 30 percent and that franchises made lower profits than independent entrepreneurs. Dr. Bates’ study also found that the average capital investment of franchisees was $500,000, compared to $100,000 for independent entrepreneurs.

“Twenty years from their start, less than 20% of the franchisers will still be around,” Prof. Shane says. “In fact, of the more than 200 new franchise systems established in the United States each year, 25% don’t even make it to their first anniversary.”

Small business association loan default rates vary from about 90% to 10% depending on the company and only indirectly give you misleading ball park figures of the success rate for a business that may not have used a small business association loan.

It is not obvious to most that the location of the business, the type of business, management skills of the franchise, need for the business in the community, brand popularity, and competing similar businesses surrounding the franchise are leading reasons for success or failure and no one has really effectively studied a franchise failure rate or success rate based on those 5 important parameters.

Pick a remote location or one with low potential customer density, have bad employee managing skills, pick a business the community doesn’t need or only needs about two times a year, pick a business brand no one recognizes by name, and pick a business with many similar competitors and your failure is 100% guaranteed.

If you haven’t researched and verified these 5 parameters for your business then it is basically a crap shoot with minimal opportunity for success in the long duration and you will probably lose what money you personally have invested plus you will default on a loan if you got one.

Even if your start up business seems to be a roaring success future competitors setting up shop near you may devastate your business in the long duration.

Saturation in most businesses or too much similar competition is a major reason why new businesses frequently fail since the profit pie is so small to begin with.

I am not trying to scare you but if you have no prior business experience and only money to lose then chances are that you will lose all of it with franchise investing. The odds are against you in a major way.

 

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