By Albert Alba

Fast food chains, coffee shops, bookstores and all other business enterprises that are often seen by many as attracting a lot of customers do become attractive business propositions for would-be investors. And for people with the resources to invest either in starting a new company or franchising an existing business outlet that is perceived to be doing well, are but some of options available to satisfy entrepreneurial instincts.

However, as far as the second option of franchising is concerned, an ex-franchisee has expressed caution particularly on the aggressive promotion over the years of franchising as a less risky way to go into business instead of starting an independent business entity.

According to Gavin Mc Alpine, founder of EnFranchise (the word enfranchise means to empower), a company focused on making franchisees stronger, better and more profitable, franchisees should identify what is marketing hype and what is reality.

“Once this is done, then one should satisfy himself that the chosen franchise is a business whereby he can use his skills and expertise will generate wealth. One should not just go into any franchise because it is the newest and hottest thing around,” Mc Alpine warns.

“Be realistic about - the potential of the franchise, the risk of the franchise and the returns that could potentially be achieved. Be conservative when estimating your potential sales figures and less conservative when calculating your expenses,” Mc Alpine added.

Mc Alpine points to the frequently heard statement: “95% of franchisees succeed while 80% of independent businesses fail.”

The problem with such a statement, according to Mc Alpine, is that people are lulled into a false sense of security because franchising, and not a particular franchise, is promoted as less risky.

“The above statistic may be true for large blue chip franchises, but can it be applicable for green chip or newly established (under five years) franchises?” Mc Alpine asks.

For certain sectors promoting franchising, their success claims are derived from a book written by Robert Purvin, Chairman of the Board of Trustees of the American Association of Franchisees and Dealers. His book points out (in the US ) that the claim "95% of all franchise businesses are still in business after five years" was attributed to a US Department of Commerce study called "Franchising in the US economy 1981-1983".

Statistics like this are supported by the success of blue chip franchises like McDonald's, Wimpys, KFC etc. These franchises cost a fortune and generate a large portion of the turnover of all franchise systems. They are mainly in the hands of a few, for example KFC has over 350 stores but only about 80 franchisees. McDonald's in South Africa only has 37 franchisees from 103 stores, the rest are company owned.

However, recent studies in the US have demonstrated that franchise failure rates are similar to, or worse than, failure rates of all business start-ups. One of the problems found with older research findings was that only closed franchise stores were counted as failures. What this means is that if a store is transferred to a new franchisee, even if the old franchisee has lost everything, the franchise store is not considered a failure. So, because the original statistics exist, they are used to promote franchising systems.

Green chip franchises then use this perception of franchising to entice potential franchisees to invest in their franchise system by underplaying the business risk and over stating the potential of their business. They make up the majority of the franchise systems (they are affordable to many) but generate a small portion of the total revenue of franchise businesses.

Furthermore, one may also find that the majority of blue chip franchises are registered for instance with organizations like the Franchise Association of Southern Africa (FASA) while many green chip franchises are not registered members of FASA. On this point, out of about 450 franchise systems in South Africa , less than 150 are registered members of FASA. But one must still be careful to not think there is no risk with blue chip franchises.

According to recent articles in the media, a major burger chain closed 15 of their 103 outlets in South Africa . This is 15% of their total stores. If the 15 closures were franchise stores then this is a 41% failure rate (calculated from figures mentioned earlier). The franchise compoany has not revealed whether the stores closed were franchised stores. If a blue chip franchise can experience failures so can other franchise systems, especially green chip franchises who are more vulnerable to risk and failure than blue chip franchises.

Apparently, the bottom line is that franchising implemented properly could be a significant wealth generator but franchising poorly implemented exposes franchisees to potential abuse and losses.

Albert Alba is the Assistant Editor of B2B Buyers Digest