CFA says Bank says Franchises 4 times more successful?

waynestateuusdeptcommerce1In a Blue MauMau post called Canada’s Misleading Franchise Success Rate Claims, Lionel Hutz PA quotes Ms. Lorraine McLachlan, president and CEO of the Canadian Franchise Association, as claiming:

McLachlan said that a recent study released by BMO [Bank of Montreal] indicated that nearly four times as many franchises succeed compared to independent small business.

“When you go into an established system, which is the hallmark of a franchise, the probability of success is obviously incrementally increased,” McLachlan said. “The fact that there are more than a couple of locations currently operating using that brand, using that system, suggests that it’s not a flash in the pan and that there is some history that it will succeed.”

… “in economic times such as these, the fact that you are dealing with an established system that has predictable success means that the bank in all likelihood is going to look somewhat more favourably on your application,” McLachlan said. “In many cases, the franchisor will help you work with the bank.”

The full article can be found at The Sudbury Star.

This is problematic because the franchise industry historically has been very loose with their success/failure statistics. Indeed this is what Dr. Timothy Bates of Wayne State University had to say:

Knowledgeable scholars who study franchising issues routinely express contempt for the failure rate statistics publicized by franchisors.

Francine Lafontaine, for example, states ‘one of the major selling points of franchising to franchisees over the years has been the statistics vehiculated by the trade press on the very low failure rates of franchised businesses compared to independent operations. These statistics never had real scientific basis’ (p. 14, 1994).

Such criticism does not deter the industry.
– Survival Patterns among Franchisee and Nonfranchised firms started in 1986 and 1987, U.S. Department of Commerce, p. 6.

I am unaware of any study since that time that would contradict this.

UPDATE

BMO Bank of Montreal: I had telephone conversation with Steve Iskierski, Senior Manager, National Franchising Services for BMO Bank of Montreal. Iskierski was unaware of the basis for this 4 times notion and their is certainly no study that he is aware that BMO has. He was unclear as to why Ms. McLachlan of the CFA would quote that figure and ascribed it to reporter misquotation.

Canadian Franchise Association: Emailed for copy of report. No response.

The Sudbury Star: Left a message for Janice Leuschen. No response.

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One Response to CFA says Bank says Franchises 4 times more successful?

  1. Carol Cross says:

    Of course, the durability of franchising is based on DISinformation for the franchisees who are merely expendable resources under the law for franchisors to grow the gross sales of their systems while avoiding the risk of failure of the physical units that wear the brand name and produce the gross sales of the system.

    The parties that benefit from franchising are only too happy to indulge in the same old game of indicating that franchises are much more succesful than independent small businesses. which. of course, is not true in the case of the franchiSEES. There is no reliable government research on franchiSEE failure rates and academic research is generally limited to study of the franchiSORS and their success rates. There has been some research published on Blue Mau Mau that indicated that franchisee rates of failure are even higher than independent ventures.

    It may be true that big franchisors and small-business franchiSORS sometimes beat the odds of startup failure because they are permitted to churn and turn startup franchisee failures to their advantage much of the time. In the United States, this activity can be obscured in the Transfer Columns of Item 20 of the Federal Disclosure Document because naive franchisees don’t connect a transfer sale with a complete failure of the franchisee who has made the fire sale transfer to a second-generation franchisee to perhaps avoid bankruptcy by getting out from under the long-term (ten or fifteen year term) lease that he signed to qualify for the purchase of the franchise. Those failed franchisees who avoid bankruptcy by giving their businesses away continue to subsidize the franchisor when they continue to pay on their startup debt, usually collaterized by their home equity or other personal assets and savings.

    There is NO discussion of the startup failure rate of ALL small businesses as indicated in a Google Search on Small Business Trends Startup Failure Rates.

    Big business franchisors who get into trouble rely on the visibility of their system to keep on selling franchises, even as the concept itself is going down hill. They can’t allow a contraction of the total units and gross sales and rely on churning and turning and pumping and dumping to sell both new franchisises and the highly discounted franchises of failures to keep their numbers looking good to investors and to new buyers of the franchises.

    New franchisors are encouraged by government regulation to overseed and if only 60% or less of the new startups succeed, this may produce enough gross sales for the franchisor to succeed if he can acquire directly or indirectly the assets of some of the failed startup franchisee for a second-generation franchisee who will have lower overhead and practically no startup debt to service.

    The business media, of course, supports the ugly status quo of franchising and the law. Obviously, if that portion of the public who buys franchises knew the risk of failure in so many of the franchise systems, they would not invest because the risk would not be justified by the possible rewards.

    The franchisor associations and business media apparently finds it in their best interests to cooperate with government policies and to help all concerned to hide the actual risk and rewards as demonstrated by unit performance statistics from new buyers of franchised business plans.

    But, perhaps, in the end, the due diligence of the banks and investors in the franchiSORS will offset the irresponsibility and dishonesty of the current status quo of law, process, and procedure surrounding the industry of franchising.

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