Franchises Among Top Seven Overrated Investments

This is a post by guest blogger Don Sniegowski, the founding editor of the daily franchise news site BlueMauMau.

Fall is when many franchising firms crank up the volume to get the attention of prospective franchise buyers. This time around, as the economy bottoms out, there are a lot of people out of work who are hungry for opportunities to start a business. Raining on the franchising parade are veteran small business editors Kelly Spors and Kevin Salwen, who are sounding the unusual warning that buying a franchise is one of the seven most overrated business investments. Here are a few crucial paragraphs to consider from their article:

The idea of being handed a proven business plan without the uncertainties and headaches that come with building a business from scratch is understandably alluring. But too many people don’t understand the risks associated with franchising and sign restrictive franchise agreements without thoroughly researching their franchisor and their contractual obligations, says SCORE’s [Ken] Yancey.

Some franchisors, for instance, allow franchisees to open stores too close together, over saturating the market. Or they simply require their franchisees pay so much in royalties and fees or other operational costs that it’s very difficult to be profitable. Beyond that, when a franchisee fails, a franchisor may make it extremely difficult and costly to get out of its contract.

It’s a myth that franchises are far more successful than independent businesses. A 1995 study by a researcher [Professor Tim Bates, urban economist] at Wayne State University found that 62% of franchises were open for business after four years, compared with 68% of independent businesses. And franchises were also found to be less profitable in those early years.”

The last paragraph is particularly of interest. Besides professor Timothy Bates’
study, the Small Business Administration, which oversees its government-backed loan program for small businesses, has also been warning the nation’s bankers and franchise buyers that its experiences show that generic franchises fail more often than independent small businesses. “Despite the popular view that franchisees are much more successful than non-franchisees, SBA’s experience with defaulted loans does not support this,” the Administration’s Office of Inspector General reported.

There are some good choices out there, but just because a business is a franchise doesn’t mean that you’re ahead of the game.

Don Sniegowski is the founder and editor of Blue MauMau, a daily business news site for franchise buyers and owner-operators. Previously, he led global field operations and franchise development for a quick-print franchising firm. Sniegowski also helped lead global publishing efforts for trade publisher Global Sources Media and led Asia-Pacific retail and operations for Franklin Covey.