What Percentage of Franchises Are Successful? (2024)

FAQs

What Percentage of Franchises Are Successful? ›

There's no real consensus on exact franchise success statistics out there, but for years franchises, brokers, and other websites have claimed a 90% to 95% success rate for franchisors.

A widely publicized statistic from a 1987 International Franchise Association (IFA) study showed that franchises have a failure rate of 5% (which would equate to an unbelievable success rate of 95%).

Just like independent businesses, cashflow problems are one of the major causes of franchise failures. You can be profitable, but problems with cashflow will still sink you. Simply put, cash flow is the amount of money going out versus the amount of money coming in.

Data from the BLS shows that approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.

It depends on the franchise you choose

It's a much better idea to look at failure rates for individual franchises than for the idea of franchises on the whole. If you do this, you will find that there are some with failure rates as low as 10% or 20%. These could be quite stable, especially compared to a start-up.

Like starting any business, buying a franchise involves risk. Although most franchisees are satisfied and successful, some do suffer financial losses. That's why you must be particularly wary of any company that “guarantees” profit or certain success.

As a wealthy franchisee, you live your life by your own design. Wealthy franchisees get to do what they want, as much or as little as they want. And they make plenty of money. That doesn't mean trillions of dollars, but relative to what they've invested, they're getting a great return.

Franchises can be a dangerous investment. The Agreement is stacked against you and favors the franchiser. You are putting up all the money, taking all the risk and personally guaranteeing everything.

On average, businesses take two to three years to become profitable. However, many factors determine profitability — while some small businesses fail within the first year, others with low start-up costs can even be profitable in the first year.

Needless to say, running a franchise as a solo act - or even with great managers - can be an insanely stressful experience. This is why burnout is so common among small business owners who try to take it all on at once. Remember, you're not a one-man-band.

How long should a franchise last? ›

What Is The Typical Length Of A Franchise Agreement? The typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee's initial investment, though market conditions and the type of franchise can also be factors.

How Much Do Franchise Owner Jobs Pay per Year? $28,000 is the 25th percentile. Salaries below this are outliers. $125,000 is the 75th percentile.

As a franchisee, you earn money from the franchise's profits. This means that after your overhead costs are covered, you can draw a salary from the remaining profits.

Buying a franchise might seem like easy money, but those royalties and fees will quickly cut into profit margins. The majority of franchise owners earn less than $50,000 per year.

1. McDonald's. Founded in 1954, McDonald's has since climbed to be one of the most widely-recognized franchises in the world. The company currently operates more than 33,000 locations worldwide, with profits exceeding $89 billion.

Using the definition above, yes, a franchise can definitely be passive income! In fact, many franchises are set up with the goal of passive income in mind. That's why some franchisees end up owning multiple locations of the same franchise, with a separate staff and minimal oversight to run each one.

Often the best answer to a franchise that is not succeeding is for the franchisee to sell the business to a third party who becomes the new franchisee for that territory. This allows the failing franchisee to terminate its obligations under the franchise agreement and under any lease.

On average, franchise fees range from about $25,000 to $50,000. However, these costs can get much lower or greater depending on the company you pick. You will also need to budget for ongoing payments like technology costs, marketing/advertising fees, and royalties.

The franchisee is the individual who purchases the right to sell the franchisor's goods or services using its existing business model and trademark.

Can a franchise lose money? ›

There is nothing more difficult to deal with than failure, especially for a franchise business. For franchises, the failure of their business means more than just the loss of their investment. It may also mean the loss of their livelihood. But business failure is normal, even in franchising.

You can set up small local businesses with 10k or less with the right knowledge and business model. The internet has made connecting with potential clients more straightforward than ever. Additionally, there is a range of free software tools that make it possible for small businesses to thrive with limited capital.

There are no hard rules for liquid capital requirements. You can expect to need a minimum of $50,000 to $100,000 of liquid capital for a service-based franchise concept. A facility-based franchise has a higher minimum of around $75,000 to $100,000.

Work Environment

Owning a franchise unit can be demanding, requiring work of 60 to 70 hours a week, but owners have the satisfaction of knowing that their business's success is a result of their own hard work.

Buying a franchise doesn't have to mean making a full-time commitment. Believe it or not, there are many franchises that can be run on a part-time basis, especially when you first start out.

One of the fastest-growing and most resilient sectors for franchising is health and wellness, which includes fitness, beauty, spa, and medical services. This sector benefits from the increasing awareness and spending of consumers on their physical and mental well-being, especially after the pandemic.

Although earnings can vary depending on the location and size of the franchise, an average Taco Bell owner can make an average of $80,000 – $90,000 a year.

What Is The Typical Length Of A Franchise Agreement? The typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee's initial investment, though market conditions and the type of franchise can also be factors.

10.5% of all businesses are franchises, according to the U.S. Census Bureau. About 14% of all franchisees are veterans. As of 2021, veterans own 66,000 franchises and generate $41 billion in GDP. The U.S. franchise sector is comprised of more than 780,000 businesses.

What are 5 disadvantages of owning a franchise? ›

One common misconception when it comes to operating a franchise is that once you sign on the dotted line and open for business, the customers and revenue will start flowing. This is typically not the case. It normally takes a year or two to become profitable.

Owning a franchise unit can be demanding, requiring work of 60 to 70 hours a week, but owners have the satisfaction of knowing that their business's success is a result of their own hard work. Some people look for franchise opportunities that are less demanding and may only require a part-time commitment.

Franchise royalties range from 4% of your revenue all the way up to 12% or more. The amount has to do with the type of franchise business.

3. Look at Net Profit, Not Just Gross Revenue. A franchise may call attention first to its eye-popping gross revenue as a carrot in attracting franchisees, but net profit tells the true tale. FranchiseChatter.com advises that a profitable franchise will show average profits of at least $100,000 a year.

At the end of 2021, it was at 32.49%. On the day you read this blog, it could be the same, higher, or lower than any of those numbers. In general, a 10% profit margin is usually considered average, 5% is low, and 20% or above is high (or “good”).

The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market. You may find that after some time, ongoing franchisor monitoring becomes intrusive. The franchisor might go out of business.

Disadvantages to franchisees include high costs and royalty payments, strict product rules, lack of support from uninterested franchisors, lack of flexibility in where to locate and how to trade, and other start-up challenges. Entering into an agreement with an interested franchisor is important.