Is Franchising for You?

It can be a road to riches, but one littered with failure

   

Is Franchising for You?

You know the economy is getting better when you begin hearing “buy a franchise” ads every day on the radio!

I’ve been taking notes. So far — just this week — I’ve heard spiels for these franchise types: Smoothies, men’s fitness, yogurt shops, men’s hair salons and hamburger joints.

So I thought I’d do a little research to find out the current state of the franchise industry.

First of all, let’s define franchising as essentially adopting someone else’s successful (or at least hyped as successful) business model. Franchising has grown tremendously — especially in good economies — as it is promoted as easier and less costly than building your own business.

You might be surprised to know — according to Wikipedia — that Isaac Singer, the fellow who improved sewing machines, began one of the first franchises in the U.S. in the 1850s. But it is said that franchising goes much further back — maybe as far as 200 B.C. in China.

As of 2011, Statista.com says there were some 735,571 franchises operating in the U.S. That’s pretty amazing, isn’t it? It sounds like a great idea — walking right into an already-successful business strategy. And you only have to look at the multimillionaire franchisees who were smart enough to sign on with McDonald’s (NYSE:MCD) — whose franchises currently cost between $1.07 million and $1.89 million — when they began franchising, back in 1953; or the many who joined in with the following Top 5 American franchises — to see that, indeed, franchising can be the ticket to riches.

Franchise Start-up Costs
Hampton Hotels $3.75M-$13.11M
Subway $84.8K-$258.8K
7-Eleven $30.8K-$611.1K
Servpro $123.05K-$180.45K
Days Inn $202.17K-$6.76M
Source: http://www.entrepreneur.com/franchise500/index.html

And since the economy — as I’ve been saying for months — is definitely on the upswing, it’s no surprise to see new momentum in both business start-ups as well as the franchise world.

So far in 2012, here are the most popular new franchises:

Franchise Business Type Start-up Costs
No Mas Vello Laser Hair Removal $84.1K-$122K
Complete Nutrition Weight Loss & Nutrition Products $150K-$220K
Yogurtland Franchising Inc. Self-Serve Frozen Yogurt $329.8K-$615.6K
ShelfGenie Franchise Systems LLC Custom Shelving & Accessories
for Cabinets/Pantries
$70.1K-$125.25K
The Senior’s Choice Inc. Assisted Living & Health Care
Staffing Services
$54K-$71K
Source: http://www.entrepreneur.com/franchises/rankings/topnew-115520/2012,-1.html

When I ran banks for a living, I often would see customers who wanted my advice (or the bank’s money) on buying a franchise. And it was just as true then as it is now that franchising riches are not guaranteed, and it’s sad but true, that “buyer beware” should be the first thought in a potential investor’s mind when considering a franchise.

That’s because franchise failure rates can be as high as 94%, according to the U.S. Small Business Administration. Here’s the SBA’s list of the Top 10 franchise failure rates, mid-2011:

Franchise Failure Rate (%)
Wings-N-Things 94.12%
Tilden for Brakes Care Care Center 92.86%
Bear Rock Cafe 80%
Noble Roman Pizza 77.27%
Super Suppers 76.92%
Pro Golf 76.47%
La Paletera 75%
Steak Escape 75%
Executive Tans 74.47%
Golf Etc. of America 71%

Statistics show that by type of franchise, bagel stores — with a 23% failure rate — are the worst franchises, as a group, to own. They are followed by smoothie stores (23% failure rate), pet supplies and pizza restaurants (15%) and tanning salons (14%).

As to why the failure rate is so high, GlobalBX says the top five reasons are:

  1. Ineffective parent company
  2. Poor location
  3. Too much competition
  4. Lack of adequate marketing
  5. Unrealistic goals

Consequently, should you be tempted to follow your dream of owning your own business by investing in a franchise, please make sure you do your homework and put your money to work in a business that has a strong potential for success. Franchising can be a tremendous path to that success, but only with the right idea and joining a company with a great track record.

As of this writing, Nancy Zambell did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/is-franchising-for-you/.

©2014 InvestorPlace Media, LLC

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