last updated 29/07/2020

Business survival rates - when numbers fail us

last updated 29/07/2020

March 2016 - What can statistics about small business failure rates usefully tell us about franchising? Not a lot, suggests Simon Lord

I’ve recently been asked about the failure rate of franchises versus the failure rate of small businesses in general. It’s not a new question, but it seems to be an important one for some people. I have lost count of the number of times I’ve heard someone – usually a franchisor – say ‘Franchises are three times less likely to fail than independent businesses,’ or five times or seven times, or whatever figure comes to mind. When I’ve asked them where they got the information, not one has ever been able to quote a reliable source. That’s not surprising – because there isn’t one.

A couple of authorities far better informed than me have confirmed this. Dr Callum Floyd, who has worked in franchising for many years, commented: ‘I used to know all of the research studies inside out and there was not one study that you could point to that provides the answer you’re looking for.’ And Jewli Turier of the renowned Franchise Relationships Institute said, ‘I wish I could provide you with some sound data around this (it would be like finding the Holy Grail for me) but unfortunately it’s not available.’

Given the success of franchising around the world and the millions of people who have invested in franchised brands, it seems odd that no reliable research should ever have been carried anywhere out into the failure rate of franchisees, but it’s true. And it’s true for two very good reasons.

The first of these is definition. What constitutes failure? If someone buys a franchise and later sells it because they don’t like it, is that failure? Is it failure only if they sell it for less than they invested in it? Is it failure if they sell it after one year, or three years, or five? If a franchisee sells a franchise because they can’t run it profitably, but the new owner who comes in makes a success of it, is that a failure of the business or of the first franchisee? Or is it only classed as ‘failure’ if the outlet actually closes down?

The second is methodology. As Dr Floyd pointed out, ‘You have to be really careful quoting old franchising research on franchisee versus independent business survival because most studies were based upon a flawed methodology (ie. asking surviving franchisors about failures in their own systems).’ Attempts at quantifying franchise or business failure by other means have been equally problematical. After all, even if you can define failure, how do you contact failed businesses in enough numbers to be statistically significant?

At the start of this column, I commented that the question ‘seems’ to be an important one. It seems to be – but it’s not. Whether a franchised outlet is five or even ten times more likely to succeed than an independent small business is a meaningless statistic, because what matters to the individual franchisee is the viability of a single outlet – their own. And that depends on a number of individual factors: the specific franchise they have chosen, the support it provides, its track record, the franchisee’s own abilities, their financial position, their response to challenges and opportunities, their family circumstances and so on. 

So quoting ‘overall statistics’, whether accurate or not, is not just unhelpful – it’s irrelevant. Rather than using mythical figures to reassure potential buyers, franchisors would do better to focus upon making the statistics for their own franchise as good as they can be.

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