The Rags to Franchise Riches story is well-documented and oft repeated (especially by franchise salesmen). Rather than take the traditional route of addressing the widely known problems with franchises, let’s examine one of the generally agreed upon benefits of franchises to see if it holds up under scrutiny.

One of the most loudly trumpeted benefits (especially at franchise trade shows) of buying a franchise is the greater chance of success, especially when compared to someone who starts a business from scratch. This sacred tenet of the franchising industry seems innocuous enough… buy a piece of a successful business and help grow it further. Logical premise, but the actual results are less clear.

Fairly exhaustive internet research failed to reveal any data other than the frequently cited (by franchisors and franchise salesmen) Department of Commerce 15 year study (1971-1986) examining the survival rates of independent startup businesses after 5 years and pegging the failure rate at 95%. With a bit of hocus pocus masquerading as statistical mathematics, franchise proponents extrapolated that the success rate of franchisees during this same time period MUST be 95% so that the combined numbers add up to 100. This “fact” was quickly reduced to words in a pamphlet and voila… a can’t miss selling proposition was born.

It doesn’t take a statistician to see this for the bunk that it is. Independent startups and franchisees are mutually exclusive groups. As such combining the percentage of independents failing with the franchisees that succeed (and vice versa) need not equate to 100%. In fact, there is substantial anecdotal evidence that the survival rate of many franchisees is well below 95%. One has to wonder how those Blockbuster and Executive Tans franchises are treating the owners.

So what is the survival rate among new franchises? It depends a great deal on many things… most of which are outside the control of the franchisee. What is the product? How recognizable is the franchisor’s brand? Is the franchisor’s market position defensible? Where is the store located? These are just a few of the questions that determine the viability of a franchisee’s purchase. At any rate, since most franchisors are private, it is next to impossible to get clean data for comparison. When conducting due diligence, one can only rely on her direct information gathering. A good rule of thumb is the more viable the franchise system the more expensive and time-consuming it will be to launch and maintain.

As if that presumed positive shown negative weren’t enough, well-known potential downsides for franchisees include: lack of independence (from the goods and services they sell to the color of the paint on their walls); mandatory company-wide promotions that may not work in their market (price cuts, new products or services), yet cost money to implement; costly required redesign of their unit(s); and, after signing a 10- or 15-year contract, a change in management or ownership that takes the brand in a new, unwanted direction.

No business is a panacea. There will be ups and downs no matter what form you choose. Take your time and conduct strenuous due diligence as well as investigating alternatives.