Over the years most people have heard that investing into a franchise is less risky than opening your own business. You've probably heard things like "can't lose" or "invest in business for yourself but not by yourself".
There are quality franchise investment options for all investment levels but there are also a lot of bad franchise investments. Franchising has it's risks and for those who believe the hype even moreso.
The investment risk can be increased in part because most prospective franchisees do not perform their own due diligence.
FranchiseGrade.com is an independent market research firm within the franchise industry. We collect data from 1,700 franchise systems and analyzed four years worth of franchised outlet growth.
Between 2010 and 2013 there were:
- 135,289 new outlets opened
- 46,187 transfers
- 40,113 terminations
- 11,997 non-renewed
- 8,431 reacquired
- 58,104 ceased operations
Put that into context; there were 135,289 new franchised outlets opened, for a total of $59.4B in franchisee investments, but there was only a net growth of 16,644 outlets. This works out to 0.95% growth per year and a Franchisee Turnover Rate of 9.9% per year.
Consider that within a 10 year period, the average length of an initial franchise term, there is an aggregate 99% franchisee turnover rate* This does not mean that 99% of all franchised outlets will turnover once, but that some will turnover 2 or 3 or more times within that 10 year period.
The simple fact is that franchising has its risks. Just look at those statistics.
The prospective franchisee needs to perform extensive due diligence and needs to find key benchmark comparisons to ensure they invest into a sustainable and healthy franchise system.
All investments have risk and there is no such thing as a "safe" investment. But there are ways to reduce your investment risk by spending the time and energy to perform your own due diligence.
Be a smart investor and don't buy into hype. It will be too costly for you and your family.