John Hayes: How often do franchises fail?

John Hayes: How often do franchises fail?

“How often do franchises fail?” It’s a question frequently asked by students studying franchising at the Titus Center for Franchising at Palm Beach Atlantic University in West Palm Beach, Florida, and by students in the A to Zs of Buying a Franchise, a seminar that I’ve been teaching for the last 40 years

In the United States, and probably all other countries, most independent, non-franchised businesses fail within the first year of start-up. So the question about franchise failure is asked with hopeful anticipation: Do franchises fail less often, or not at all?

The answer is that no one really knows. There’s no clearinghouse that reports the success or failure of franchises. Even if such data existed, would it be useful? Let’s say the data reported that most franchises succeed, and that’s a fair generalization. That information might be comforting, but how would it offer any real protection when there’s still a chance of buying a franchise that fails?

There’s a better question to ask: “How often do (brand name) franchises fail?” Franchise candidates need to realize they’re not buying franchising. They may be persuaded to buy a franchise because franchising as a practice has a reputation for success, but ultimately they are buying a specific brand. What they need to know is how often that brand, or the franchisees of that brand, fail. Or succeed.

Conducting due diligence about a brand is a good way to answer that question. In fact, it may be the only way to confidently answer the question. Of course, franchisors know how often their franchises fail, but they’re not always forthcoming with that information, and they’re not always transparent. If a franchisor rescues a failing franchise with a buyout, then turns it into a company-owned store, or sells it again, was that or was that not a failure? 

Due diligence, which involves asking questions of not only the franchisor, but franchisees as well as brand suppliers, sets you up for success in franchising. For many years, the International Franchise Association in Washington, D.C. has advised buyers to “investigate before you invest.” It’s the best way to protect yourself. Once you know the failure rate for the brand you want to buy, the failure rate of franchises across the board really doesn’t matter.

ABOUT THE AUTHOR

Dr. John P. Hayes is the Titus Chair for Franchise Leadership at Palm Beach Atlantic University in West Palm Beach, Fl.

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