For every franchising success story, there are many other stories of people who made little to no money. There are people who wasted thousands of hours of their lives to earn what amounted to minimum wage. And there are those whose lives were thrown into a tailspin – people who spent their life savings investing in a franchise, only to end up with nothing.
Often, the franchisors defend their companies by claiming the entrepreneurs hadn’t followed the system. Hadn’t worked hard enough. Didn’t put their heart into it. I understand why they do it, but it turns my stomach. They’re saying people who worked for years and invested their life savings didn’t put their hearts into the business? That’s just not true.
The truth is much simpler. No franchise model is perfect, and there will always be business failures. Some franchises fail with alarming frequency, and others, a little less often. According to SBA data for the year 2012, Wings-N-Things franchises failed an astonishing 94% of the time. That’s the percentage of franchisees who failed to pay back their SBA loans. It doesn’t include successes or failures form those who had no SBA loans.
In order to understand the situation, you need to first understand the way all this works. First off, franchisors earn a huge amount of money from new franchisees. There are a lot of up-front costs, and even if you fail right away, there’s a very good chance the franchisor is making money on you.
A great many franchisees get their start with SBA-backed loans. SBA loans are backed by the government up to a certain percentage, so even if the franchisee fails after a few years, the investors who actually put up the money will get nearly all of it back (plus interest and fees). Those who succeed are also profitable, since they’ll be paying back the loans (with interest and fees) for years to come. The franchisor gets a nice chunk of money up front, so even if they fail most of the time, they can earn a small fortune on all the startup costs.
Basically, the system is set up to benefit franchisors and financiers. If the taxpayers (whose money funds the SBA) and franchisees fail, oh well. No big deal to the people in charge. This Mother Jones article (opens in a separate tab) tells a different story than what you’ll hear from the companies who try to get you to become a franchisee.
Does that mean you should NEVER invest in a franchise? Of course not. Plenty of people have made a great deal of money with them.
Does it mean you should consider the situation VERY seriously and take steps to limit your downside? Absolutely.
Does it mean you should consider alternatives like starting your own business? Definitely. Even though some studies suggest franchises occasionally have higher success rates, they also bear a much higher risk. In many cases, you can start your own business for a fraction of the cost involved with starting a franchise.
Please, before you invest your life savings in a franchise so you can carry out some other entrepreneur’s vision – consider the alternatives and really weigh your options before committing. Don’t be pressured into investing quickly just because a franchisor tells you territories are going fast. There will always be other opportunities, but you only have one life savings.