The Myth of the Franchise Success Rate -Where Did it Come From?

| 9 Comments | 0 TrackBacks

I hear franchise salespeople say, and read franchisor source printed material that says, that franchising provides a 90% success rate after three years in business!

I have been lecturing on the subject and will share my observations about investment grade franchises.

The Myth of the Franchise Success Rate - Misleading, even if True

I don't believe that was ever true. It was provided by a bozo in the Department of Commerce who later joked about all the "courtesies" he received from the IFA for having put out that porky.

The SBA, which certainly knows this because of its tracking SBA guaranteed franchise start up loan failure rates, still makes this absurd statement in its materials on the subject - another example of lobbying gone wild.

Could you so configure the base data to ever have made that statement true?

I have tried and tried, and I think you could create a false database that appeared to have corroborated the statement maybe 40 years or so ago.

Here's how someone wanting to perpetuate that fraud would/could have gone about it.

1. General Motors, Ford and Chrysler were all franchisors and at that time their franchisee dealers were pretty successful. If you only counted those within your statistical universe of data, a charlatan could claim that franchising was 90% successful.

2. If you included gasoline filling stations but did not count as failures all the dealers who went broke but considered the locations to be successful due to location churning to keep them open, you might still have high (but phony) success rates.

3. The same, back in those days could be said if you included KFC and McDonalds.

This would provide you with the basis for a "true" but highly misleading claim.

However, the claim would not be true as to franchising for other franchise systems.

The claim would be false and intensely misleading for most other franchise systems.

Worse,today's universe is nowhere near that level of franchisee success.

Today's Franchise Systems

Even the franchisees of the great systems are suffering now in comparative terms from the natural flow of concept life cycles having taken them into their decay stage. If you did a search on McDonalds today you would see hundreds of reports about that very subject.

We never thought we would live to see McDonalds go over the hill, but it clearly has. KFC is now really a dog.

AAMCO now enjoys almost a 40% SBA start up loan failure rate and is accused by hundreds of its franchisees of hanging on by its fingernails through churning - constant rapid reselling of failed locations.

Quiznos and Cold Stone Creameries were always nightmares.

Hundreds more are in the same boat.

New so called franchise "concepts" are by and large thin air fairy tales being sold as viable business models.

Cereality, Soup Man, Dagwood Sandwiches are just a few examples of total nonsense "concepts" sold to the suckers who have no idea in the world how to vet franchise investments; who believe ridiculous stories with no possibility of corroboration; sign the most ridiculous agreements you could ever imagine and go miserably into financial failure and bankruptcy, sometimes preceded by suicide.

How You Can Protect Yourself and Your Family

But the mantra continues and the morons keep signing checks.

By the time they figure out that they were defrauded they don't have money to pay for the requisite legal services, and, even in the face of fraud, they are bound to arbitration clauses that preclude exemplary damages, jury trials and attorney fees to them if they win.

Once you sign the agreement you are toast!

But people with advanced business degrees and years of "experience" as employees of substantial companies think they can see through the deception. They can't and they don't.

Last year around this time, as I predicted when the bill was first introduced, the California legislature failed to adopt a revision to its franchise law that would have imposed a duty of fair dealing on franchisors. Fair dealing has been the pipe dream of every defrauded franchise victim for at least twenty years now.

Shysters make livings telling franchisees that if they just join this association that the shyster has created, they can have that "Fair Dealing" rule adopted and their lives resurrected from the financial grave.

Having been cheated by the franchise sales process in the beginning, they are being cheated all over again by the Fair Dealing shysters promising relief from their suffering.

It is just more nonsense, and here is why it is just nonsense.

The commercial law was not created to wipe the noses of suckers who sign ridiculous contracts for bozo business deals. At sign up time you tell the franchisor all about your wonderful business experience and money in the bank to show what a qualified business person you are.

Later, when you have been fleeced, you want the law to assume that you were just an innocent child with no possibility of parsing lengthy commercial agreements to inform yourself of what you were agreeing to. This contradiction is too absurd ever to become a rule of commercial law.

Grow up. If you are an educated, experienced adult you are expected to perform the obligations of commercial agreements that you sign.

Franchise agreements are commercial agreements, not consumer agreements that Deceptive Practices Laws that the law will assume were morons when they signed up for the deal.

Moron signed consumer agreements are usually for amounts of money small enough that if they get set aside the markets will not fall. But, business investment agreements do not get treated that way.

If you act like a moron and sign bad business to business agreements you are held to them unless you can prove they were induced by fraud. (There are one or two other ways out, but they are just as hard to prove and in most instances the fleeced franchisee cannot afford legal representation anyway).

As the sucker who finds himself out of money you will not find a competent contingent fee lawyer in most instances because your agreement recites that you were not told what you now claim you were told, and that if someone inadvertently did say those things to you, you didn't rely on them in making your investment decision anyway.

The franchise agreement also recites that there are no promises other than those contained in the written document you signed. And there are those clauses limiting you to arbitration with no exemplary damages, no appeal and no way to recover attorney fees if you win (that are enforceable even if the agreement was in fact induced by fraud). The contingent fee lawyer doesn't have much of a chance to be paid for his work and won't take your case unless he is as stupid as you were.

Most franchise opportunities offered today are worthless, but people still keep investing in them.

The sobering up process is beginning to accelerate because it is easier to do good research if you hire someone who knows what to look for and how to find it to help you with pre investment due diligence. If all you hire is some bozo lawyer to "read you the contract and tell you what it means" you are doomed.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

If you think you can afford to buy a franchise, then you can afford to call me first -

Act now & call me before you buy a franchise -281-584-0519.

(See what others have said about my expertise in investigating franchises and franchise remedies.)

9 Comments

Franchisors and their franchise sellers should hear what Richard is saying about bogus statistics and deceptive franchising.

While I'm not for government intervention through fair franchising laws, I think it would be easy for a private right of action at the federal level to become a reality if these bad practices continue.

Joe, many franchisor counsel forget why there is no private right of action under the FTC Franchise Rule.

Near 40 years ago, a Federal Court decided that the FTC should have a broad jurisdiction on Unfair Business Practices. Ousting temporarily any private cause of action under Section 5.

Section 5 outlaws deceptive business practices. Including lying to the public about the success rate of franchising.

Matt Shay, the former President of the IFA, recognized this and instructed those selling franchises to refrain from using bogus statistics.

However, the deceit continues.

It is only a matter of time until some smart attorney realizes that the grounds still exist for a private cause of action for a violation of the FTC Franchise Rule.


How can someone be against FAIR franchising laws? Doesn't FAIR mean a balanced approach considering the concerns of all parties?

If the industry wants to move past the concerns Richard shares, don't we have to be in favor of what is "fair"? And, after 50 years of franchising, if "fair" hasn't been achieved, then perhaps some type of government action is required?

Definitely, an eye-opener for me, Richard. Appreciate your candor. Sounds to me that there are two phrases (terms) every franchisee should know - "caveat emptor" and "due diligence".

Richard,

It appears that Australia will be, or has already adopted the "fair dealing" standard.

Have you followed the situation on this topic regarding the situation there ?

Fantastic article!

Stu

Well said Richard!

You get to the heart of the matter without any of the side issues.

I recently told a client that the world has changed. Those buying into a franchise today seem to be doing so based on old assumptions and without an adequate understanding of business.

It is a recipe for failure to sign any contract that is not adequately understood or which puts you at a disadvantage.

I think that it is an overstatement that "Most franchise opportunities offered today are worthless. . ." or that most franchisees are "morons". I agree that in the 70's and 80's it was common to see exagerated success rates of franchisees. This problem has largely been solved by two developments beginning about 25 years ago: 1) Item 20 of the FDD was improved to show detailed 3 year success and failure rates; and 2) the IFA and SBA each commissioned several comprehensive studies of actual success rates of all franchisors, and the latest of these is still posted on the IFA Web site. These are segmented by industry, avoiding the problem that Richard mentions of selecting only certain franchisors. The results show that franchisees fail, but at rates generally somewhat than independent businesses, but the results vary by industry and franchisor.

We provide a service for prospective franchisees to evaluate the proposed FDD and agreement for a reasonable flat fee. I have found most franchisee investors to be astute, and to follow our advice to negotiate changes to unacceptable franchise agreements, and in a rare case, to walk away from risky franchise offerings.

Failure rates of franchisors is a separate issue that is in the title of this discussion, but not discussed In Richard's post. Franchisors fail too, at rates similar to businesses in general, according to studies of state franchise registration records. When we represent prospective franchisors we try to screen them for the most common causes of franchisor failure, which in my 30 years experience are:

1) the concept is not a proven business, and doomed to fail in both company-owned and franchised locations;
2) it is not clonable, so not suitable for franchising (e.g. high tech manufacturing, artists and entertainers);
3) a poorly developed franchise program (e.g. inadequate manuals, systems, training, support); and
4) legal problems (e.g. making unlawful financial representations, causing franchisee claims).

Gary Duvall, C.F.E. 206 903 8700

Re; "I think that it is an overstatement that "Most franchise opportunities offered today are worthless. . ." or that most franchisees are "morons"

Perhaps you are correct. They are not morons.

I do think it is safe to say that the majority of franchise opportunities are not investments (or businesses, if you prefer) with a reasonable possibility of success. Also that those franchisees buying into these risky ventures, typically without proper due diligence or advice, are setting themselves up for failure.

This is a blunt and startling franchising deception article.

But of all the articles in the past extolling the importance of franchise pre-purchase research and due diligence this one gets people's attention.

Leave a comment

Archives

Search

Follow Us

About this Entry

This page contains a single entry by Richard Solomon published on April 14, 2015 7:23 PM.

How Much Can I Make Buying a Franchise? was the previous entry in this blog.

Some Fun Franchise Facts for a Friday is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.