Franchising Can Be Much Riskier Than Some Believe

About a year ago, we wrote about the questionable nature of the 90% success rate for franchisees (a figure promulgated by the industry).
Now, two recent Wall Street Journal articles raise even more questions about the viability of a franchised business from the vantage point of the franchisee.
In the first article (“Is Buying a Franchise Riskier Than Ever?”), Sarah E. Needleman notes that:
“Franchising has never been a more popular option — or, perhaps, a bigger risk. Over the past few years, people have been flocking to franchising, seeing it as a simpler path to entrepreneurship in troubled economic times. But over that same period, numerous pitfalls have appeared that make franchising much tougher to navigate, say many franchise attorneys and advocacy groups. For one, they say, it’s gotten much more complicated for buyers to get an accurate picture of a franchise before taking the plunge. And, they add, if people do buy into a chain, they may have less leverage over things like how they can pursue complaints against the franchise
“Of course, vetting a franchise has always been a challenge. Franchisers are not legally required to share key financial metrics with prospective buyers, such as franchisees’ first-year average sales and failure rates. Further, there’s no central regulator that checks franchise disclosure documents. But these days, many franchise systems are just a few years old and have limited track records for prospective buyers to assess.”
In the second article (“Franchise Brands With Higher-Than-Average Default Rates”), Sarah E. Needleman and Coulter Jones note that:
“Quiznos, Cold Stone Creamery, Planet Beach Franchising, and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of Small Business Administration loan defaults. Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-backed franchise loans in the past decade.”
“Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013. That finding comes as franchising is booming in popularity, in part because many people see it as an easier route to entrepreneurship in an uncertain economic landscape.”



This entry was posted in Part 1: Overview/Planning, Part 2: Ownership, Strategy Mix, Online, Nontraditional, Part 4: Store Location Planning, Part 5: Managing a Retail Business and tagged , , , , , , , , , , . Bookmark the permalink.

3 Responses to Franchising Can Be Much Riskier Than Some Believe

  1. Pingback: Franchising Can Be Much Riskier Than Some Belie...

  2. Reblogged this on Retailing: From A to Z by Joel Evans and commented:

    Dispelling some myths

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