Over the years franchising has been aggressively promoted as a less risky way to go into business instead of starting your own independent business. This is supported by statistical figures of low failure rates in franchising and high failure rates in independent businesses. This article will briefly discuss the lure this creates for potential franchisees. It will then outline our view of the reality and risks of franchising. Lastly, some recommendations are made for anybody interested in franchising.

Before we kick off, it should be mentioned that the writer of this article is an ex-franchisee and academically qualified. He is also the founder of EnFranchise (the word enfranchise means to empower), a company focused on making franchisees stronger, better and more profitable. Our view is that franchising implemented properly could be a significant wealth generator. Franchising poorly implemented exposes franchisees to potential abuse and losses.

Most people interested in entrepreneurship must have frequently heard a statement that goes something like this:

95% of franchisees succeed while 80% of independent businesses fail

What is the problem with this statement? The problem is that people are lulled into a false sense of security because franchising, and not a particular franchise, is promoted as less risky. The above statistic may be true for large blue chip franchises (we call them Blueies). But can it be applicable for newly established (under five years) franchises (we call them Greenies)?

Lets have a look at the statistics used to promote franchising. In a book written by Robert Purvin, chairman of the Board of Trustees of the American Association of Franchisees and Dealers, it was found (in the US) that the claim "95% of all franchise businesses are still in business after five years" was attributed to a US Department of Commerce study called "Franchising in the US economy 1981-1983". Recent studies in the US have, however, demonstrated that franchise failure rates are similar to, or worse than, failure rates of all business start-ups. One of the problems found with older research findings was that only closed franchise stores were counted as failures. What this means is that if a store is transferred to a new franchisee, even if the old franchisee has lost everything, the franchise store is not considered a failure. So, because the original statistics exist, they are used to promote franchising systems.

These statistics are then supported by the success of the Blueies such as McDonald's, Wimpy, KFC etc. These franchises cost a fortune and generate a large portion of the turnover of all franchise systems. They are sometimes in the hands of a few, for example KFC has over 350 stores but only about 80 franchisees. McDonald's in South Africa only has 37 franchisees from 103 stores, the rest are company owned.

The Greenies then use this perception of franchising to entice potential franchisees to invest in their franchise system by underplaying the business risk and over stating the potential of their business. Greenies make up the majority of the franchise systems (they are affordable to many) but generate a small portion of the total revenue of franchise businesses. You will also find that the majority of Blueies are registered with the Franchise Association of Southern Africa (FASA) while many Greenies are not registered members of FASA. On this point, out of about 450 franchise systems in South Africa, less than 150 are registered members of FASA. But let us not think there is no risk with Blueies.

According to recent articles in the media, McDonald's closed 15 of their 103 outlets in South Africa. This is 15% of their total stores. If the 15 closures where franchise stores then this is a 41% failure rate (calculated from figures mentioned earlier). McDonald's has been quiet about whether the stores closed were franchised stores. If McDonald's can experience failures so can many franchise systems, especially Greenies who are more vulnerable to risk and failure than Blueies.

The point we are making is that potential franchisees should identify what is marketing hype and what is reality. Once you have done this you should satisfy yourself that the chosen franchise is a business whereby you can use your skills and expertise to generate wealth. Don't just go into any franchise because it is the newest and hottest thing around.

Be realistic about - the potential of the franchise, the risk of the franchise and the returns that could potentially be achieved. Be conservative when estimating your potential sales figures and less conservative when calculating your expenses.

Gavin Mc Alpine is the Founder of Enfranchise. See www.enfranchise.co.za. Gavin can be contacted at (011) 477 8503 or gavin@enfranchise.co.za.

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