Does the Franchise Industry Have a Turnover Problem?

For every 10 new franchises that open in the U.S., nine close, according to a new report.

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By Kate Taylor • Oct 10, 2014 Originally published Oct 10, 2014

Opinions expressed by Entrepreneur contributors are their own.

Franchises have a lot to gain by opening up new locations: franchise fees, new business, increased sales. But what about franchises caught in the vicious cycle of shutting even more locations than they open every year?

Between 2010 and 2013 in the U.S., 135,289 new franchise locations opened, according FranchiseGrade.com's Franchise Industry Report. But net growth during the period was way smaller: only 16,644.

What happened? About half of the 118,645 franchises that disappeared in the last three years ceased operations, meaning they went out of business or simply closed up shop. A third were terminated due to alleged franchise agreement violations. The remaining stores were either reacquired by franchisors or their owners decided not to renew. Transfers – meaning stores that franchisees sold to another owner – were not included in the figure.

While the industry's growth rate of 3.8 percent from 2010 to 2013 is nothing to sneeze at, it is unsettling that, for every 10 franchises opened, almost nine have closed.

Related: At Jimmy John's, Sandwich Makers Have to Sign a Noncompete Agreement

Fortunately for most of the franchising industry, that number is being skewed by a few particularly rocky franchises. "You're always going to have a baseline turnover rate," says Jeff Lefler, CEO of FranchiseGrade.com. "But habitual problems stand out like a sore thumb for us."

The fast-food franchise industry provides examples of both "sore thumbs" and swift growth. Quiznos is often given as an example of a franchise gone sour, for good reason: even though the franchise opened up 599 new locations in the last three years, it also closed 2,844 franchises. That's almost five times as many closed as opened, or a 475 percent turnover rate, according to FranchiseGrade.com.

Quiznos isn't alone in fast-food franchisees dragging down the system. Coldstone had a 264 percent turnover rate, and Hot Stuff Pizza had a 163 percent turnover rate, the report says.

In comparison, Subway had a 20 percent turnover rate. As one of the largest chains the world, Subway's 819 departures make up less than 1 percent of their total store count. Meanwhile, Quiznos' departures accounted for nearly 30 percent of its total store count.

The numbers don't lie: when you enter franchising, you can join a system that helps propel you to success, or one where franchisees are dropping like flies. You don't want to invest in a franchise where franchisees cannot keep the doors open or are frequently forced out of business due to overly aggressive franchisors.

Franchisees invested $59.4 billion in their businesses from 2010 to 2013. Do your research, and make sure if you're thinking about opening a franchise, you're investing that money in one that will pay you back.

Related: Report: 10 Brands Most Likely to Have Franchisees Default on Their Loans

Kate Taylor

Reporter

Kate Taylor is a reporter at Business Insider. She was previously a reporter at Entrepreneur. Get in touch with tips and feedback on Twitter at @Kate_H_Taylor. 

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