Does Buying a Franchise Guarantee Success?

Does Buying a Franchise Guarantee Success?

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.