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Franchise Business and Risk

By: Bill Bradley


Franchise businesses involve risk, just as all businesses do. While there is wide variation in the numbers produced by studies comparing franchise failure rates with those of independent businesses, one thing you can say for sure: lots of small businesses fail, including franchises.

The top reasons for failure are not that different for the two groups:
  • Insufficient capital — though franchisors try hard to avoid this by requiring a certain net worth and including much of the initial investing in the start-up fees, franchisees sometimes underestimate the time it will take them to become profitable and juggle numbers (or go into debt) to make their financial picture look strong enough to qualify.
  • Insufficient knowledge — while franchises specifically reduce the risk of this top cause of business failure, franchisees sometimes shoot themselves in the foot by failing to follow the winning system they’ve bought. Whether they think they know better or just have trouble following systems, those who go astray don’t benefit from the advantage of the having someone else’s know-how to help.
  • Insufficient marketing — franchisors typically charge fees that are used for nationwide advertising, and name recognition is a big help from the beginning, but franchises fail through lack of marketing effort just as other businesses do. In franchise models, the owner may be expected to do a lot of selling, and franchisees may not realize this ahead of time.
But comparing the risk of a franchise and the risk of an independent start-up may not be the right approach. While you certainly should be aware of the risk factors for failing in a business, you should also think about the risk factors of being an employee.
When we worry about the risks of business ownership, we are often mentally comparing it to getting a job. Here are some of the things that have happened to people who have jobs:
  • The business they work for goes out of business.
  • Their employer decides to offshore or to consolidate, and jobs disappear.
  • Their job disappears because of new technologies, a buyout, or other factors out of the employee’s control.
  • Their job changes in ways that make it unpleasant for the worker, even if they were happy at first.
  • They get a pay cut.
  • They do not get a pay rise, even if the cost of living has increased.
  • They lose benefits, or the benefits are changed in ways that reduce the value or increase the cost to the employee.
Altogether, some 4.2 million Americans leave their jobs every month, with fewer than half of those people having chosen to leave. If we used the same system of gauging success as we do for businesses and say that at the end of one year this many people are still at their jobs and at the end of 10 years so many are still at their jobs, we might well see the same kind of “failure rate” for employment as for business ownership.
Choosing a franchise involves putting in money as well as time, while being hired does not. This adds an extra layer of risk for franchisees. On the other hand, franchisees also have an extra layer of control. Employees may lose their positions even when they have worked hard to help the company succeed; franchisees have much more control over their destinies.
This article was originally published by America’s Best Franchises
Published: May 26, 2015

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Bill Bradley

Bill Bradley

Bill Bradley is founding member and CEO of America’s Best Franchises, LLC.  Bill founded three financial services firms, Ocean Shores Ventures, Denali International and William Bradley Enterprises. In addition, to launching America’s Best Franchises in 2005, Bill orchestrated approximately 20 private equity transactions in excess of $31 million, and launched five specific purpose private equity partnerships.

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