Why is the Failure Rate Lower for Franchisees Than it is for Independent Businesses and What Advantages Does That Convey to the Nascent Entrepreneur?

Why is the Failure Rate Lower for Franchisees Than it is for Independent Businesses and What Advantages Does That Convey to the Nascent Entrepreneur?

Franchisor support services vary widely from franchise to franchise.  Some things such as the method of doing business, use of the established brand name, and training programs are common amongst all of them.  These by themselves can be extremely useful to the budding entrepreneur. 

For someone who may have never owned a business the exact procedures and methods of running one are probably elusive.  Owning a franchise provides a proven and successful way of learning.  Franchise support services generally require full training before purchase and as an ongoing exercise throughout ownership.  This can be the single biggest hurdle for any business owner let alone the greenhorn.  Use of the brand name is also valuable not only in and of itself.  For the grooming entrepreneur seeing how a nationally recognized company targets its market and cares for its brand can have enlightening results in the event that the franchisee/entrepreneur ever decides to create a brand of their own one day. 

Additionally franchisors may or may not offer additional value-added services.  The list includes but is not limited to; financing, networking, sales assistance such as sales leads or training, ongoing education or additional educational services, on-sight support and/or support via other communication mediums, and last but not least experience.  Obviously the more support a franchisee can get from a franchisor the better.  This is one crucial area the entrepreneur should do research on prior to committing to any franchise.

In regards to some of the additional services franchisors offer let’s take a look at the financing options.  Some franchisors offer financing in two different ways; direct financing which is rare but does happen occasionally and third-party financing.  Direct financing allows for the franchisor to not have to come up with any cash up front.  The franchisee and the franchisor come up with an agreement on how the franchisee will pay the franchise fees over a period of time.  Third-party financing is more common and the franchisor usually has lenders that they work with and point the franchisee to them.  The Small Business Administration is one of the lenders that are pointed to for they usually offer better financing terms and additional support.   How important is it for the aspiring entrepreneur to have in-house financing as an option or be led to a lender who has a strong relationship with a particular franchise?  Pretty important I would say.

Some additional benefits might include local, regional, or national advertising by the franchisor.  This is one area that shouldn’t be underestimated and is usually part of the monthly franchise fees.  Additionally franchisees may be part of a buying co-op or have negotiated costs that lower the cost of doing business which could range from ingredients to supplies.  Franchisors also often give their franchisees a protected market or territory in which no other can open a similar franchise.  As you can see there are many benefits to owning a franchise that allow the entrepreneur to really learn not only about the business they are in but how successful business is achieved.

After you see what franchisors do for the franchisees is it any wonder why the failure rate is lower than it would be for someone starting a fresh business?  Franchisors want their franchisees to succeed because it increases their bottom line.  If a franchisee fails so does the franchisor.  Though the franchisor may not take the hit as hard as an individual franchisee the overall investment is a recipe for success.  The franchisee must stay motivated and staying focused shouldn’t be hard with all the support potentially available.  No more having to scratch your head when a potential business problem comes up.  A solution is just a phone call away.  You can see why owning a franchise is a promising opportunity for some.  The question really isn’t why should you own a franchise it’s really why shouldn’t you.

1. Franchising For Dummies By Michael Seid, Dave Thomas

2. Careers in starting and building franchises By Carlienne A. Frisch

1 Comment

  1. I appreciate your explanation of direct financing and third party financing. Do you see a big difference between the two? I would think that the direct financing option would be easier. I know Chick-Fi-A tends to handle all their franchises this way but the franchisee doesn’t seem to make as much money as potentially other franchises.