Are Franchises Safer Than Small Businesses? IFA Says No

Franchisors who claim that franchises have lower failure rates than independent small businesses based on data from a 1987 study could be misleading potential investors, according to a …

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Franchisors who claim that franchises have lower failure rates than independent small businesses based on data from a 1987 study could be misleading potential investors, according to a letter from the IFA to its member franchises. Read more on this topic in this article from Blue Maumau.

The International Franchise Association has asked franchisors to stop spreading claims that franchises are safer than independent small businesses. The organization issued a letter in 2005 urging members to "remove from their Web sites or printed materials "any information claiming that the success rate of franchised establishments is much greater than that of independent small businesses," calling the information "potentially misleading."

The IFA sent out this letter to its members in May of 2005. Alisa Harrison, Vice President of Communications and Marketing for the International Franchise Association, on Tuesday emailed the original document and its continuing relevent message to Blue MauMau.

A message from International Franchise Association
President Matthew Shay
May 2, 2005

Dear Friends:

It has come to our attention that some IFA-member companies may be providing information about franchising that is long out of date and no longer presents an accurate picture of the sector.

Of particular concern is information claiming that the success rate of franchised establishments is much greater than that of independent small businesses.

Many years ago, the U.S. Department of Commerce conducted studies about franchising which presented such statistics. That information is no longer valid. The agency stopped conducting such studies in 1987.

We strongly urge you to remove any information from your Web site and published materials that make such a claim. The use of such data, in the absence of current research, could mislead prospective franchisees who are attempting to conduct responsible investigations.

The International Franchise Association’s Educational Foundation recently released a study, The Economic Impact of Franchised Businesses, conducted by PricewaterhouseCoopers, which offers the first comprehensive view of franchising’s economic impact. This study, available at www.franchise.org, contains information that could be helpful to prospective franchisees and others in determining the size and scope of franchising.

Another study available on the IFA Web site is The Profile of Franchising, which collected data over three years from UFOCs and offers data averages on such important aspects of franchising as unit turnover, initial franchise fees, initial investment levels, contract terms and renewal, royalty and advertising fees. We recommend that you review these two studies and share the information in them instead of perpetuating outdated and potentially-misleading information.

As a member of the franchising community, you serve as a gateway to future generations of franchisees and entrepreneurs. Please join IFA in making an effort to present an accurate picture of franchising.

Sincerely,

Matthew Shay
President
International Franchise Association

Ms. Harrison notes that the economic impact study mentioned in the letter refers to an initial study. The IFA has released a second, updated study this past April.

At the end of 2008 many sellers of franchises continue to push such messages, despite this IFA’s efforts to stress that it is inaccurate to say that an average franchise is inherently safer than owning an average independent business.

One example is Central Bark Doggy Day Care. Its Website misleadingly declares, "While 40 percent of all startup businesses fail within the first year and 80 percent within the first five years, the U.S. Department of Commerce reports that every year since 1971, less than 5 percent of franchise-owned outlets have been discontinued as a result of business failure."

Central Bark Doggy Day Care is a member of the IFA.

In the United Kingdom, Brian Duckett, an Oxfordshire-based chairman of Howarth Franchising Group, reiterates that buying a franchise is safer than owning an independent business. He writes in The Oxford Times, "Even in the current economic climate, all the major clearing banks which have specialist franchise sections are keen to lend money to franchisees. This is because it has been proven to be many times safer than lending to independent start-up businesses, more than half of which disappear before their fifth birthday. The failure rate for franchisees is less than five per cent a year."

Mr. Duckett does not provide sources for his figures.

In the United States, many sellers of franchises have shifted to claims in the media and on their web sites that franchising is a "proven" and "safer" system. For example, All Business, a web journal of business news and resources, states, "As many first-time business owners find out, there is a high failure rate for independent, non-franchise businesses. Franchising provides a proven system and the support of a much larger organization."

The IFA would remind sellers to cease and desist such industry claims.

Jim Coen, a franchise consultant based in Boston, says that it is a worrying sign when a franchise system has to piggyback on bogus industry claims to sell a franchise. He asks, "If franchisors want to make a representation about being safer, why don’t they do that with their own system? The information already exists in Item 20 of their franchise disclosure document. Why not use that data instead of ‘industry statistics?’"

This article has been reposted from Blue Maumau. View the article on Blue Maumau’s small business and franchise news website here.

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