Franchising

During the recent International Franchise Expo in Washington, DC, one of my students asked me if it was true that the U.S. Department of Commerce determined that franchises succeed 97% of the time.

"Where'd you'd see that information?" I asked.

The student said, "I found it on the Internet."

Don't Believe Everything You Read Online

That's what I figured she'd say because I've read it on the Internet, too.

And before we go any further, let me tell you that it's a lie. And it's not a lie that the U.S. Government perpetrated.

So how did this story get started? It's in more than one place on the Internet, and more than the occasional franchise seminar leader uses it, too.

The fact is the U.S. Government did conduct studies on the longevity of franchises in the 1970s and 1980s. A long, long time ago! The fact is the government didn't study the "success" rate of franchises. The government studied the "survival" rate of franchises.

Year after year, through the late 1980s, the government's leading franchise expert, the late Andrew Kostecka, reported that 97% of franchise licenses "survived" from year to year. In other words, a franchise license that existed one year would still exist the next year when the study was conducted. Through the years, Mr. Kostecka concluded that 97% of franchises "survive."

Survival Doesn't Necessarily Mean Success

Mr. Kostecka always pointed out, however, that "survival" did not necessarily equate to "success." On many occasions he noted that a franchisee could be in bankruptcy, but the franchise license was still intact and therefore part of the 97% that survived.

Through the years, overly ambitious franchise sales people substituted the word "success" for the word "survive" in Mr. Kostecka's findings and voila!, they had quite an attractive testimonial for buying a franchise. Some people--including some who just don't know any better--continue to use the erroneous data today.

But don't you believe it! It may still be true today that 97% of franchise licenses survive from year to year, but... so what?

It's not important.

And that may be the reason why no one has repeated that study since the late 1980s. That and the fact that the government hasn't demonstrated all that much interest in studying any aspect of franchising. That's not a jab or a complaint--it's probably just as well that the government spends its money elsewhere.

Does The Data Matter?

In every franchise seminar that I teach, the "survival vs. success" issue always comes up and I'll tell you what I tell my students. Even if I could tell you that 97% of franchises succeed, it wouldn't be good enough for the person who bought one of the franchises that fell into the 3%!

Don't worry about generalized, across the board statistics in franchising. First, they don't exist where success is concerned, and second, they would not be relevant.

Here's what does matters: The rate of success for the franchise that you want to buy?

Now that's worth knowing!

So before you buy a franchise, do this:

1. Ask the franchiser about the success vs. failure rate of the franchise. How many franchises failed last year? The year before?
2. Ask existing franchisees the same questions!
3. Carefully review the Franchise Disclosure Document, which the franchiser is required to give you. It's free and it includes detailed information about the franchise company, including its performance from year to year.

One caveat: Franchisors may try to mask their failure rate by turning failures into transfers, or re-sales. Rather than close the doors, a failing franchisee may be fortunate enough to sell to a new franchisee. That sale is not characterized as a failure, but a "transfer." Sometimes franchisers will buy out failing franchisees just so they can "transfer" the franchise to a new party.

Before you buy a franchise it's important that you take your time and investigate before you invest. And while you can be sure that the U.S. Government does not claim that 97% of franchises succeed, you may find a franchise where 97% or better of the franchises in that network have succeeded.