A Modest Proposal to Franchisors
People are continuing to buy into franchises without a clear understanding of the risks.
By Dr. Gabriel Feldman •
Opinions expressed by Entrepreneur contributors are their own.
This is shaping up to be a great year for franchises. According to the International Franchise Association (IFA), the number of franchise businesses is expected to grow 1.7 percent in 2016. Franchises are also expected to add 278,000 direct jobs to the economy, an increase of 3.1 percent. It's no wonder that 43 percent of attendees to the recently-concluded International Franchise Expo (IFE) in New York City planned to invest $100,000 or more into a franchise. With franchising being presented as a safer path to big money and an ideal industry for entrepreneurs, now seems like the perfect time to get involved.
Yet according to a 2015 randomized survey of U.S. franchisees by Franchise Grade, only 34 percent say they are satisfied with their business. More than 50 percent say they do not make a fair profit or a decent living from their franchise business and 83 percent would not recommend buying into their franchise to friends and family. An additional 43 percent of franchisees pledge their primary home as an asset to invest. Since over 65 percent of these investors are over the age of 50, this is an issue that should be of key concern. But for whatever reason, these numbers have not gotten the attention they deserve. People are continuing to buy into franchises without a clear understanding of the risks.
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As a former franchisee myself, I think it's imperative that prospective franchisees get the full facts about franchising and not just the rosy picture painted by the industry. The International Franchise Association (IFA) agrees that franchisee satisfaction is important to the health of the industry. In fact, IFA's website published an article by Eric Stites, head of Franchise Business Review, explaining why a happy franchisee leads to a successful business.
Related: For This Franchisee, Every Day Is Christmas
As of this writing, however, Franchise Business Review is the only organization to my knowledge that releases annual franchisee satisfaction data to help rate their top franchises. However, their ratings include fewer than 20 percent of all U.S. franchisors. An annual survey not funded by franchisors would be even better. How can franchisees make informed decisions without easy access to unbiased information?
This is a problem for which there is no easy solution, but there are steps that can be taken. The first is for franchisees to ratchet up their due diligence. The Franchise Grade survey suggests that franchisees are doing their homework -- 87 percent said "yes" when asked if they spoke to one or more former franchisees. But franchisees need to do more. For instance, rather than just talking to a few former franchisees, I recommend talking to at least 15 to gather a full range of viewpoints.
Related: The Key to Working Well With Your Franchisees
I recently launched a new website to help people trying to decide between opening their own business and buying into a franchise better understand the risks involved. Visitors to TheFranchiseFacts.com can test their knowledge about franchising and assess their suitability through quizzes, infographics and other resources. The website is meant to be educational, is free to use, and is not funded by franchisors.
Ultimately, the franchise industry needs greater transparency. All franchisees should be entitled to:
- Unbiased, annual data on overall franchisee satisfaction and profitability rates of any franchise system
- A list of franchisors that explicitly refuse to publish or participate in systemized data collection by independent firms
- An executive summary of no more than 1,000 words that explains a franchisor's Franchise Disclosure Document (FDD) in simple English.
Current surveys strongly suggest that far too many franchisees are buying into franchises without a clear idea of what they are getting into. If franchisors can get behind greater transparency -- and franchisees can double their due diligence -- we can have an industry that works better for both franchisees and franchisors.
