International Franchise Association (IFA) leadership has a track record for inflating the success rate of franchises, and a recent letter from IFA President Steve Caldeira to the Wall Street Journal claiming a 90% franchise renewal rate among franchisees is no exception. The IFA made a similar claim 20 years ago, although then the number was 95%; however, much like this year, the statistic did not take into account transferences, failed franchise systems and other negative data. The unvarnished truth is that, while there are many franchise success stories, a true accounting will reveal a less rosy picture, including many instances where renewals are a matter of necessity rather than one of free choice. For more on this continue reading the following article from Blue MauMau.
IFA President Steve Caldeira recently wrote a letter to the Wall Street Journal complaining that a recent article about the perils of franchising “ignores that more than 90% of franchisees renew their contracts with their franchisers at the end of their terms.” The obvious claim is that more than 90% of franchisees are successful and happy.
Here we go again!
Twenty years ago, the IFA was claiming a 95% success rate for franchisees, a claim that was thoroughly ‘debunked’ in study after study. It was discovered that the IFA was not counting failed franchise systems, failed businesses where the franchise was transferred (and thus preserved), or franchisees who were simply losing money but hanging on. If a store didn’t close (even though it may have changed hands a dozen times) it was claimed as a success!
Now we see a ‘rebirth’ of a false suggestion of franchising success by the seemingly happy statistic that ‘more than 90% of franchisees renew.’ The misrepresentation built into this statistic is every bit as draconian as the false ‘franchise success rates’ we exposed in the 1990’s.
Even if the claim was ‘technically true’ – and it cannot be so – the reason behind many renewals is more of a fact of ‘bondage’ than ‘delight.’ Virtually every franchise agreement contains a ‘covenant against competition’ that prevents a franchisee from continuing in business EXCEPT by renewing the franchise. Too often, franchisees have no effective choice but to renew, even though they may be deeply dissatisfied with the terms of their franchise agreement and/or their relationship with their franchisor.
But take a careful look at the technical claim. Does it not assume that a franchisee reaches the end of the contract term? Does it not assume that the franchisee is offered renewal? Does it not assume that agreement wasn’t terminated prior to ending the term? That the franchise still exists? Or that the franchise has not been transferred one or more times? What is the percentage of franchise owners who have happily decided to remain in business, without any form of coercion, following a term of financial success (as defined by suitable financial rewards and job satisfaction)?
All of the same defects that existed in the old ‘franchise success rate’ claims are renewed in this new ‘renewal rate’ claim.
My book, The Franchise Fraud: How to Protect Yourself Before and After You Invest, focused on the franchising industry’s false claims that most franchises succeed. The truth is that franchising per se is not a guarantee of success. All franchises are not created equal – the path to success in franchising remains investing in a strong brand that has a collaborative culture, a strong voice for franchisees and a franchise agreement that respects the legitimate business interests of both the franchisor and franchisee.
This article was republished with permission from Blue MauMau.