Franchises Seen as Path to Financial Independence

Franchisees have different reasons for getting involved in their business.  Some believe that owning a franchise is a path to financial independence.  Others feel they need more control in their lives and that owning a business provides this control.  For others, it may be the need for greater flexibility.  And yet others may feel that the new business is complementary to an existing business.

In an effort to better understand these reasons, the National Franchisee Survey asks respondents why they first got involved in franchising.  We believe that the first step to understanding franchisee satisfaction is to understand the reasons for operating a franchise.

The most common response to this question, by far, is that individuals perceived franchising as a path to financial independence.

We looked closer at this by considering the number or years a franchise has been in operation, the gender of respondents, ethnicity, region of the country and other criteria.  Regardless of the breakdown, financial independence remains the top response for each and every category of respondent.

The two tables presented here are typical of others that were reviewed for this article.  In all instances, over 50% of respondents cite a desire for financial independence as a reason they first got involved in franchising.  Depending on the correlating criteria (ethnicity, region of country, years in operation, etc.), the percentage of respondents citing a desire for financial independence exceeded 70%.

Looking deeper, there are some subtle differences noted by correlating data between two independent questions.  These differences suggest possible trends that we hope to follow in the coming years.  The responses we have seen suggest that there are differences between what men and women perceive to be important.  More women, for example, state financial independence as being a reason for becoming involved in franchising.  They also report flexibility as the second most important reason.  In contrast, men are more likely to consider franchising as a solution to being unemployed or as a way of having greater control.

Looking at this information based on the number of years a franchisee has operated their business presents quite different information.  Interesting, if not yet definitive, is that franchisees in operation for “1 to 4 years” and “10+ years” report similar percentages for three of the five reasons cited.  These two time periods roughly correspond to the current and last economic slowdowns in the USA.  It may also be relevant to note that franchisees in business the shortest period of time (under 4 years) are less likely to report either unemployment or greater control as reasons for getting involved in franchising.  We anticipate reporting on this trend as the economic climate improves to determine if these similarities are consistent during contraction and growth periods in the economy. 

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Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at franchisefactsusa.blogspot.com

Time to Profitability Shorter in Less Rural, More Populated Areas

Time to Profitability Shorter in Less Rural, More Populated Areas

 (Newer franchisees taking longer to become profitable)

It is often said that the most important criteria in determining success for a local business is location. What this means, however, has always been subject to interpretation.

A downtown business may have lots of potential customers but also lots of competition, high rent and more staff to service these customers. A rural business may have fewer potential customers, less competition and fewer fixed costs such as rent. Success depends on how a business is able to balance its revenues and expenses to produce the single factor that defines viability – profit. While a successful business involves many qualitative factors not measured in the National Franchisee Survey , we are able to look closer at some demographic information.

For businesses in operation 10+ years, one third of respondents state that they reached profitability in less than one year. Over 50% state that they reached profitability in less than three years. This is a dramatic contrast to newer franchises where less than half report being profitable in the same period of time. The more recently a business has opened, the longer it appears to take for them to achieve profitability. As a basis for comparison, Table 1 includes the percentage of stores not yet profitable based on years in business. As expected, this percentage decreases over time.

Franchises located in population centers of 250,000+ (Table 2) report achieving profitability in a much shorter period than those in smaller population centers. Frequently, these larger population centers are more costly areas in which to operate and often have more competition. Nevertheless, these operations report a much faster time to profitability.

Likewise, we found that franchises located in rural areas (Table 3) had a longer time to profitability than their urban and suburban counterparts.

Despite what can be assumed to be higher operational costs and cash flow requirements, it appears that franchises located in more urban and higher population centers took considerably less time to become profitable than those located in smaller/rural areas.

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FranchiseFacts  – Capturing the franchise experience

Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at franchisefactsusa.blogspot.com

Local Store Advertising – Yellow Pages Dominate, Internet Advertising Lags

Yellow Pages remains the most common form of Local Store Marketing utilized by franchisees.

Yellow Pages advertising is utilized by 69% of respondents to the National Franchisee Survey , followed by Print advertising –newspapers (58%) and e-mail to an internal distribution list (57%.) Purchased e-mail lists (4%), Television (14%), Billboard (15%) and Website banner advertising (17%) are the least commonly utilized forms of local store advertising by franchisees.


Click to view accompanying table.



Looking at local store advertising correlated against number of years a local franchise has been in business presents what is, to me, a surprising pattern. Print Yellow Pages is utilized by 100% of respondents that have been in business for less than a year. Other forms of local advertising have almost no representation among these businesses during their first year of operation.

After a local franchise has been in operation for at least a year, we note significant usage of virtually all forms of local advertising. This appears to be a period when franchisees experiment with different forms of advertising during which Newspaper (69%) and Yellow Pages (62%) advertising are dominant. After four years in business, we begin to notice a reduction in the use of these other forms of advertising as noted by the increasing dominance of Yellow Pages advertising and a reduction in usage of all other forms of advertising. After ten years in business this migration appears to be complete. Local franchise owners once again rely on Yellow Pages advertising with 83% of respondents reporting its use. More notable, however, is the dramatic reduction in use of virtually all other forms of advertising.

If one looks at the most experienced store owners for guidance, it appears that they find Yellow Pages advertising to be most suitable for promoting their local businesses. While Internet advertising in all its forms retains a presence, the reduced use of these advertising methods suggests that Internet advertising may not yet produce the same measurable results as print media.

Despite the inroads made by the Internet, Social Media and other technologies, the responses we’ve received to date from the National Franchisee Survey suggest that local franchise owners are not yet comfortable with the use of new media. The most experienced store owners appear to rely on Yellow Pages advertising to the near exclusion of all other options.


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FranchiseFacts – Capturing the franchise experience

Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at franchisefactsusa.blogspot.com

Women in Franchising – Better Educated, Risk Averse

Are women who own franchised businesses more or less successful than their male counterparts?

A recent NPR news item informed that women earn $0.77 for every dollar earned by men. That same day, an unrelated newspaper article described how women have a greater aversion to risk than men.

Li-Jun Ji, a professor at Queen’s University in Kingston Ontario, studies how decisions are made. According to Ms. Ji, men are “natural risk takers.” She suggests that “women tend not to get the same kick out of taking risks.”


“When it comes to a risky situation which usually involves some kind of uncertainty, women tend to perceive negative consequences to be more likely and perceive negative consequences to be more severe.”
Li-Jun Ji, professor, Queen’s University, Kingston, ON
Globe and Mail, April 24, 2010


Franchising, a risky business venture, falls into this category where Ms. Li suggests that women are more likely to “perceive negative consequences to be more severe.” Does this impact on those likely to get involved in franchising, and their relative success? Preliminary data from FranchiseFacts’ National Franchisee Survey (currently underway) was used to develop profiles for men and women who own a franchise.

Women, when opening a franchise, report as being more educated than their male counterparts but lacking a comparable level of prior business experience. These women are more likely than men to open their franchised business in a smaller population center (under 250,000 people) that is rural or suburban.

As franchisees, the vast majority (61%) of these women have owned their business for no more than four years whereas 70% of men have owned their franchised business for more than five years. Women also work fewer hours in their business.

	Women (46% of respondents)	Men (54% of respondents)
Age	40-64 yrs -- 82%	40-64 yrs -- 78%
Education	College/University or Higher - 84% High School - 0%	College/University or Higher - 81% High School - 4%
Years to Profitability	Not yet profitable - 89%	Under 1 yr - 25% 1-3 yrs - 27% Not yet profitable - 25%
Prior Business Experience	None - 11% Bus Exp / No Mgmnt exp - 27% Middle Management - 39% Upper Management - 23%	None - 8% Bus Exp / No Mgmnt exp - 14% Middle Management - 39% Upper Management - 39%
Years in Operation	1-4 yrs - 61% 5-10 yrs - 25% 10+ yrs - 9%	1-4 yrs - 29% 5-10 yrs - 41% 10+ yrs - 29%
Hours Worked	Under 40 hrs/week - 18% 45+ hrs/week - 75%	Under 40 hrs/week - 10% 45+ hrs/week - 78%
Meeting Financial Expectations	Meeting Expectations - 7% Below Expectations - 93%	Meeting Expectations - 15% Below Expectations - 77%
Investment of Money/Time greater than expected	Agree - 57%	Agree - 56%
Optimistic about long term growth of the business	Agree - 11%	Agree - 33%
My operation is superior to the local competition	Agree - 52%	Agree - 78%
Profitability	Unprofitable - 81%	Unprofitable - 31%
Local Population	Small centers (under 250k) - 68%	Large centers (250k+) - 66%
Density	Urban - 32% Suburban - 55% Rural - 14%	Urban - 39% Suburban - 51% Rural - 10%

Women report as having a different perception of their business as compared to their male counterparts. Women are more likely to feel that their business does not meet their own financial expectations. They are also less optimistic about the long term growth potential of their business. Finally, women participating in the survey are less likely to believe that their own business is superior to that of their competition.

Being more risk averse, one might expect women to incur less debt and have lower business expenses. They would also be less likely to gamble on future growth. In a poor economy, these actions should result in a mitigation of business losses and possibly higher profits. The data I’ve reviewed suggests otherwise. More than 81% of women report that their business is not yet profitable, as compared with 31% of men. Possibly related to this, 61% of female respondents owned their business for less than four years. Their male counterparts report operating their business for a much longer period of time. Perhaps women entered franchising much later in the business cycle and, consequently, far more of them had not yet achieved profitability by 2009. If correct, one would expect the above statistics to look more favorable for women in 2011 and beyond.

The responses we’ve received to date from the National Franchisee Survey do suggest that Ms. Ji’s findings are consistent with what occurs in franchising if one considers some of the demographic results. Smaller population centers, and rural and suburban areas, are usually less costly areas to open a business and are more consistent with an aversion to risk. As more data becomes available, and covering more years, I hope to revisit this topic and rebuild the above profiles.

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FranchiseFacts – Capturing the franchise experience

Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at franchisefactsusa.blogspot.com

Dunkin Donuts, Meineke rank highest in Franchisee Satisfaction

FranchiseFacts’ Index (FFI) is a comparative rating created to measure franchisee satisfaction with their business and their franchisor. This index is designed to allow us to evaluate franchises in different industries using a standard criteria. We believe that, over time, relative changes to this rating should correspond to changes in franchisee satisfaction.

The FFI is a weighted average calculation based on responses to ten specific questions in the National Franchisee Survey. Each question addresses, specifically or indirectly, factors that we believe impact on a franchisee’s level of satisfaction with their business and/or their franchisor. The maximum rating available is 105 points. (This is not a percentage calculation and should not be evaluated as such.)

While the survey is in progress, we provide this peek at the current index ranking for the top and bottom franchisees based on responses to date.


The FranchiseFacts Index can be correlated against demographic information to evaluate specific franchises. For example, an FFI rating can utilized to determine if franchisee satisfaction levels vary by sex, ethnicity, education level, overall profitability or other factors. The FFI can also be used to determine if franchisee satisfaction is improving over time. Looking at this information for a specific franchise could help to target franchise sales efforts with an eye toward increased profitability for both franchisor and franchisee.

This is the first publication of information utilizing the FFI. I look forward to hearing from the industry (franchisors, franchisees and others) with comments or suggestions regarding the compilation and use of the index. The remainder of this article explains how the FranchiseFacts Index is derived.

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Following are the specific questions in FranchiseFacts’ National Franchisee Survey comprising the FranchiseFacts Index (FFI) and their numeric contribution to the index.



Some factors in this index, such as financial success and future prospects, are at least partially dependent on the overall economy. Other factors, such as franchisee relationship with their franchisor, are directly impacted by the franchisor. The index blends these factors to develop a single rating that we believe to be measurable at a specific point in time and also over a period of time.

We remain open to comments about the derivation of this index. When the current National Franchisee Survey is closed later this year, FFI results will be included in the Franchisee Satisfaction Report that will be available.

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Perry Shoom, FranchiseFacts
Capturing the franchise experience!
Franchisee Survey in progress at www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!
Follow our Blog at franchisefactsusa.blogspot.com
e-mail: FranchiseFacts1@gmail.com

Profit (or lack of it) in Multi Unit Franchisee Operations

Is multi store ownership a path to increased profitability? While FranchiseFacts’ National Franchisee Survey provides some support to this belief, our preliminary results suggest that multi store operations may be riskier, and result in a greater likelihood of business losses. Put differently, these preliminary results suggest that multi store ownership leads to either higher profitability or no profitability. There does not appear to be a middle ground here.

For a multi store operation to be successful, two factors should be considered. First, the business must be one where tasks and knowledge requirements are sufficiently straightforward so that training of staff is simple. Second, the franchisee must have above average business and organizational skills. Operating more than one location requires that the owner’s expertise be split among multiple locations. In some instances, the owner lacks the skills to make this work. In other instances, the skills that make a single operation successful are not in sufficient supply to support multiple operations. When both factors are in place, the franchisee is likely to be extremely successful in operating their multi unit operation. When one or both of these factors are lacking, the result appears more likely to be failure. Dunkin Donuts is just one example of a major franchise that I think has been quite successful with their multi store ownership business model. The tasks needed to service one customer are relatively simple. And an employee normally services one customer at a time. Other franchises, such as The UPS Store, require a higher level of knowledge, experience and organizational skills that I don’t think are conducive to a multi unit franchisee operation.

The FranchiseFacts survey asks respondents to provide their profitability for the prior calendar year. Later in the survey, respondents report on the number of locations owned. This article considers the correlation between these two questions.

Not surprisingly, single location operations account for 86% of all respondents with declining percentages for multiple store operations. To better evaluate the profitability of multi store operations, the table below separates single unit franchisees from multi unit franchisees.

	All Respondents	1 Location	2-3 Locations	4-5 Locations
		86% of reporting franchisees	9% of reporting franchisees	5% of reporting franchisees
$100,000+	3%			3%
$75k-$100k	6%	6%
$50k-$75k	6%	6%
$35k-$50k	5%	5%
$20k-$35k	3%	2%	2%
Under $20k	17%	17%
Not profitable	61%	52%	8%	2%

Percentages subject to rounding

It can reasonably be assumed that franchisees who own more units have invested more money in the hope of greater profitability. That is, opening four locations costs more than opening a single location and should result in higher overall profits. However, there is also the risk of greater financial losses since success is never guaranteed. This is consistent with our preliminary findings. Franchisees with four or five units (the highest level reported) were the only ones to report in excess of $100,000 in total profitability and accounted for 60% of all responses in this category. However, 40% of those franchisees with four or five units report being unprofitable. There was no middle ground. Reporting suggests either high profitability or no profitability.

At the other extreme, single location franchisees account for 86% of survey respondents. They report a wider range of incomes with 17% reporting income in the range of $35,000 to $100,000.

Most surprising are the results from franchisees owning two or three locations. None reported profitability in excess of $35,000 for the most recent calendar year and a disproportionate percentage report being unprofitable during the same period of time.


Note: When reading the accompanying table, the “All Respondents” column adds up to 100%. Likewise, the three Location columns combine to reflect 100% of respondents (subject to rounding.) For example, franchisees owning 4-5 Locations AND reporting $100,000+ in profitability last year reflect 3% of all respondents.

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FranchiseFacts – Capturing the franchise experience

Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at
www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at
franchisefactsusa.blogspot.com

Average Franchisee Reported Earnings -- $149k+ or under $50k?

"He uses statistics as a drunken man uses lamp-posts... for support rather than illumination." - Andrew Lang (1844-1912)

To me, one of the more frustrating franchise statistics repeatedly quoted is average income. Inevitably, this statistic always suggests that the typical franchisee earns $100,000+ per year. To cite one example, the USA Franchisee Statistics page on www.franchiseseek.com states that “In 2000 …. over 30% of franchisees earn over $149,000 per year.” I recently read a press release citing a similar figure for 2009.

It is my opinion that such a high figure falls into the “too good to be true” category. In a country where the average income is under $50,000 a year and the unemployment rate is in the 10% to 20% range, this figure just doesn’t sound right. Even in good times, such a high average income sounds exceptionally good. If we are in a recession, as I believe we are, is it possible that franchised business operations are a safe haven offering a guaranteed substantial income during these difficult economic times?

The National Franchisee Survey asks respondents to report if their business was profitable and, if profitable, their profitability over the most recent calendar year (2009). Our preliminary findings are that only 3% of respondents earned more than $100,000 over the past calendar year and only 15% claimed to earn in excess of $50,000 a year. This is quite a contrast to the $149,000 figure cited above. Being in the early days of the survey, which will run for most of the calendar year, it is difficult to determine if these percentages will remain consistent. At the other extreme, 61% of respondents state that their business is not profitable.


To be clear, none of this is suggestive of problems in the franchise industry. The economy has ended an overheated phase where too many people paid far too much for businesses. They financed their businesses rather than starting slow and building through natural growth. Overly optimistic revenue projections were used to justify high purchase prices, opening expenses and operational expenses. These businesses, and their owners, now are saddled with financial obligations that many are unable to pay out of current revenues. Consolidations (closures) are inevitable.

To further put these percentages in perspective, it is generally accepted that most small businesses do not survive their first ten years. And we have gone through a period of approximately ten years during which the economy expanded to a point where it is no longer sustainable. This leads me to assume that a higher percentage of small businesses are operating at reduced profitability than at any other point in my lifetime.

FranchiseFacts explores franchisee profitability in detail as part of its National Franchisee Survey. In the coming months, we will attempt to provide a more detailed understanding of this topic. The insights we provide will remain preliminary since the survey is currently in progress. Results reported in this blog are subject to change as more surveys are received throughout the year. Once the survey is closed, our final report will make this information available in its totality.

In the coming months, this blog will look closer at some of the attributes and demographics of profitable franchises.

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FranchiseFacts – Capturing the franchise experience

Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at
www.FranchiseFactsUSA.com
If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at
franchisefactsusa.blogspot.com