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Franchised Business vs Independent Business Ownership

Statistics

Many articles have been written on the success of owning a franchised business vs an independent business.  Years ago an article appeared on About.com stating that franchised businesses have a success rate of about 90% as compared to starting a new business, which had a success rate of only 15%.  The article argued that the increase rate of success outweighed the franchise fee and royalties that needed to be paid to the franchisor. Unfortunately, there is little hard data to confirm or refute that statistic.

Basis for the Claim

In 1980 the U.S. Chamber of Commerce published a survey of approximately 2000 franchisors who voluntarily submitted data to them. The data was analyzed and some analysts stated that over a 5 year period, 5% of the franchisor’s units closed. This was then touted as a 95% success rate for franchised businesses.  The problem with this data is that the data was never audited and also consisted of franchisor’s who volunteered to participate, not a random sampling.  Unfortunately there has never been a formal study done of the success rate of a franchised business vs independent business ownership, so there really are no reliable statistics.

Newer Studies

There have been newer studies that indicate that defaults on SBA loans are high for both franchised business and independent business owners.  These studies were taken during the recession, so may be skewed by the troubled economy.   Other studies have shown very high success rates for franchised businesses.  None of these studies were formal, audited, scientific studies.

Conclusion

If you are considering a franchise, it is important to be working with the right advisors: (i) find a good consultant to help you narrow down your search and pick the best franchise opportunity for you; (ii) validate the franchise business by calling franchisees in the system and learn about their experiences; (iii) read through the 23 Items of the FDD (in the front section of the FDD); (iv) have an accountant evaluate the franchisor’s financial statements to ensure that the franchisor is financially sound; (v) have an attorney review the FDD and franchise agreement to advise you on the contract you are entering into and your obligations to the franchisor; (vi) go to Discover Day to meet the franchisor and learn more about the system. If you do your homework and properly validate the system in which you intend to invest, you should avoid the mistake that some others have made when choosing poorly.