The Big Mac Attack

The Big Mac Attack

A new study finds conventional start-up businesses often fare better

Every 17 minutes, a new franchise outlet opens somewhere in the United States. They range from auto to truck dealerships to soft drink bottlers to gyms and hardware stores, and their numbers have zoomed from 521,135 in 1990 to over 1,000 000 in mid-2010., according to the International Franchise Association. Entrepreneur magazine traditionally devotes its entire January issue to the 500 top franchises in the United States.

Why the mad rush? Conventional wisdom holds that franchising is a low-risk way to start a business.  For a hefty investment, up to $600,000 or more for a McDonald's, for example, you get all the training and marketing support you need. Then, you manage your business and collect the revenues.

But that's not exactly the way it unfolds, according to a study by the Wayne State University. Bates tracked the performance of some 21,000 fledgling franchises for four latest years. The findings are startling: 35 percent of the franchises fail every year today, compared with 28 percent of conventional start-ups. Franchises whose companies survived earned just 20 thousand a year, compared wit 30 thousand for other start-ups.

How can that be? Franchises have annual sales of 600,000, compared to 150,000 for non-franchises, and they are also better capitalized ($100,000 compared to $35,000). The university draws several conclusions. For one thing, franchises may be picking already saturated markets, or at least areas with tough competition. For another, perhaps franchisees aren't getting the much-touted management advice and support they need. Finally, says the University, maybe it's all in the nature of the franchisee versus the self-starter: franchisees are inherently less likely to take risks.

The study is not cause to dismiss franchising altogether. After all, the study found that nearly two-thirds of franchises do survive. But do look before you leap into a franchise. For starters, contact the Federal Trade Commission, which offers a free packet of information that includes the pros and cons of franchising and explanations of information that franchisors are required to disclose by law. Another good source for nature franchisees: the International Franchise Association.

Kosher Hot Spot in Jamaica. Photo by Elena.

Do You Fit the Mold?

People who go into business for themselves are most likely to be:

• Offspring of self-employed parents.
• Previously fired from more than one job.
• Immigrants of children of immigrants.
• Previously employed in business of fewer than 100 employees.
• The oldest child in the family.
• College graduate.
• Realistic, but not high risk-takers.
• Well organized.