Franchising has become the dominant mode of retail entrepreneurship in the United States. There are 1.5 million franchised outlets, accounting for approximately one-third of all U.S. retail sales. Franchising is growing at roughly 6 percent per year, as franchises replace independent businesses in industries as diverse as fast food, banking, and Internet services.1
In each of the past several years, more than 200 new franchise systems have been born.2 Eager franchisees pay franchisors large up-front fees, sometimes more than $1 million, to buy the rights to establish a new outlet. The franchise fee is just the beginning of the investment. New franchisees are often required to purchase specific assets, like signs, menus, equipment, and training, that cannot be recovered or easily put to other uses.
While all investments have an element of risk, many people assume that franchisors are selling a formula for success. However, roughly three-quarters of all new franchise systems fail within twelve years.3 Since the average initial franchise contract is for fourteen years, fewer than one in four new franchise systems survives until the end of the contract. Because an investment in a failed franchise system has little value for the investor, this failure rate means a high level of risk for the thousands of Americans... To read the complete article, login or sign-up using the form below.
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