Robert Berman
Many budding entrepreneurs are under the impression that buying
a franchise is a guarantee for success. They feel that the
franchise fee that is paid up-front ensures them a proven
business methodology and wealth. This couldn't be farther from
the truth!
It is difficult to quantify franchise failures because in many
instances to avoid having a franchise file for chapter 11 or
bankruptcy, a franchisor will buy the business back or assume
its operations. In fact, most franchise agreements allow a
franchisor to buy back or assume operational control of a
floundering franchise. In some cases the franchisee will loose
their entire investment. Some studies indicate that the
percentage of failure in the franchise industry may be no
different than situations where individual have started their
own business. Even the large franchisors such as McDonalds have
bought back or assumed control of floundering franchise
operations.
It may also be worth noting that many franchisors have gone
bankrupt taking their franchisees with them. Whether or not a
franchisors failure will affect the franchisees ability to
survive is relative to the day-to-day involvement that the
franchisor has in the franchisees business, the more involvement
the more likely a franchisor's demise will spell doom to the
franchisee. If the franchisee buys all of the necessary raw
materials to operate their business, be it food, cleaning
supplies, and/or specifically manufactured product the
franchisee must find alternative suppliers in the event that the
franchisor fails. In some cases this is doable in others it is
almost impossible. As an example, you have a franchise to sell
window treatments, blinds, and curtains. As the franchisee, your
company does the selling and the franchisor has a factory where
the products are produced. If the franchisor was to fail, you
are left without a supplier for your sales and replacing a
manufacture such as this would, if even possible, take a lot of
time. What happens to your business in the interim?
The fact that in most countries, franchisors have to register
and must follow specific guidelines and disclosures pertaining
to their franchises does not meant that the governing bodies
have done any due diligence on the actual survivability of a
franchise or franchisor.
As with buying any business the primary key is in performing due
diligence on all aspects. This includes considering whether or
not you should create your own business or acquire a franchise.