BUYING A FRANCHISE–LIES, DAMNED LIES AND STATISTICS
Jan. 11, 2013
In buying a franchise, beware of the lies, damned lies and statistics–about 90% success rates, among other things. At some point in the process of buying a franchise, someone will probably tell you that 90% of all franchises succeed. That person is lying. Years ago, the Department of Commerce produced a “study” with that statistic and unscrupulous franchisors and franchise brokers have been relying on it ever since.
The Department of Commerce stopped conducting franchise research in 1987 and in 2010 the International Franchise Association disavowed the study saying it was “old and no longer valid.” Decades of research from the Small Business Administration shows that franchises succeed and fail at a rate similar to all small businesses. Roughly 50% of all small businesses survive five years and about one third survive ten years or more. Very few things have a 90% success rate and franchises are not one of them.
So how can you make a smart choice buying a franchise? First, do not do business with franchisors or franchise brokers who tell you about 90% success rates-if they are deceiving you on this point what else are they lying about? Second, do your research and question everything. Purchasing a franchise may be the biggest financial decision you ever make. Take the time to review the facts. Some franchisors will tell you that 90% percent of their franchisees choose to renew their franchise. That does not equal a 90% success rate-only the franchisees who successfully finish their first franchise term have the chance to renew. If their franchise fails or is terminated before the end of the term that failure is not included in the franchisors’ 90% renewal claim. Third, hire an independent experienced franchise attorney to review your franchise documents and guide you through the franchise purchase process. Unlike the franchisor, or the franchise broker, an experienced franchise attorneys is only interested in helping you make the best choice for you and your business.