Starting a franchise can be a great way to get into business. However, it can also be risky, with a failure rate higher than the average for all businesses — a staggering 50 percent, according to some estimates.
The failure rate for franchises is so high because of the high initial investment required and the fact that you’re essentially buying into a business model that may not be sustainable.
In addition, you’re often working with a company located far away from you, which can make it challenging to get the support you need to succeed.
What Is The Failure Rate For A Franchise?
In franchising, there is a lot of exaggeration which comes from those who ought to know better.
If you’ve been researching franchises for any length of time, you’ve probably already seen some eye-popping numbers.
According to experts, despite the myth that franchising is the safest method to choose when beginning a new venture, the research doesn’t support this claim.
In fact, the stats show that approximately 50% of new franchises will not make it to their fifth anniversary.
This number is eerily close to the failure rate for all small businesses, which is also estimated to be around 50%.
The main difference seems to be that people think of franchising as a low-risk investment when in reality, it is anything but.
The truth is, when you invest in a franchise, you are essentially buying into someone else’s business model.
This means that you are trusting that they have done their homework and figured out a way to make their business successful that can be replicated over and over again.
However, as we all know, no business model is perfect, and variables will always be out of our control.
This is why the failure rate for franchises is so high because even if the franchise you invest in has been successful in the past, there’s no guarantee that it will continue to be successful in the future.
The Annual Rate of Franchise Failure
While it’s difficult to find an exact number, most estimates put the failure rate for franchises somewhere between 5 and 50 percent.
As per Mark Scott, who managed the annual surveys conducted by NatWest and BFA, the rate of failure for franchisors has stayed between 8-12% for over 22 years.
He shares that some of the main reasons these businesses have failed are ill health, retirement, financial failure, and selling.
Interestingly, the research also shows that while seasoned franchisors saw profits ranging from 90-95% consistently over the years, new franchisors reported a loss during the early years of operation.
On the other hand, a 1995 study by Dr. Timothy Bates from Wayne State University found that the failure rate for franchises was much higher, exceeding 30%. Dr. Bates concluded that after 4 years in business, only 62% of franchise businesses were still operating.
This data should be taken with a grain of salt since it’s now over 20 years old.
However, considering the fact that today, around 50% of franchises do not make it past their fifth anniversary, it can be concluded that the failure rate of franchises over the years hasn’t fluctuated that much.
The Annual Rate of Franchise Success
The common false idea is that starting a franchise means you’re guaranteed success.
After all, many franchises and brokers claim that franchises have a 90-95% annual success rate. This is simply not true, as there’s no data to back it up.
While the majority of franchises have a solid track record and are still in business today, for every success story, there are dozens of others that have failed.
A more accurate assessment of the success rate for franchises can be found in a five-year study by FranNet, which found that out of the 1,500 franchises they surveyed, 92% were still in business after 2 years.
The study also revealed that after five years, the success rate had dropped to 85%, which still isn’t bad considering the fact that, on average, the failure rate for small businesses is around 50%.
1987 Franchise Failure Rate
Franchise Failure Rates (Based on the 1987 IFA Study):
- Failure Rate: 5%
- Success Rate: 95%
Small Business Failure Rates (According to the U.S. Bureau of Labor Statistics):
- First Two Years: 20% failure rate
- First Five Years: 45% failure rate
- First Ten Years: 65% failure rate
1994 Franchise Survival Rate by Timothy Bates
Survival Rates of Franchises vs. Independent Businesses (Based on the 1994 Study by Timothy Bates):
- Franchises after four years: 65.3% survival rate
- Independent businesses after four years: 72% survival rate
- Retail franchises after four years: 61.3% survival rate
- Independent retail locations after four years: 73.1% survival rate
The Franchises With Lowest Failure Rate
We have collected heaps of data on franchises that are safe to collaborate with, and they have the lowest failure rate.
According to the rating of Entrepreneur, here are the 3 best franchises to work.
1. Taco Bell
With an impressive turnover of $1,339,000 in sales per year on average and a profit of $259,000, taco bell is ranked as the number one business.
Here is a breakdown of initial investment and opening cost if you want to get a taco bell franchise
|Type of Expenditure
|Initial Franchise Fee
|$1,276,600 – $3,250,100
|$47,000 – $70,000
|$1,373,600 – $3,370,100
Here’s a summary showing how profitable the taco bell franchise is:
|Total royalty revenue
|Total revenue of all franchises
|Number of franchises
However, nobody can guarantee the success of your taco bell restaurant as it depends on the demographics and how you run it.
2. The UPS Store
Next in the list of lowest franchise failure rates, we have the UPS store franchise, which provides a variety of services to its customers and businesses too.
As of now, the store has 5,370 stores in America. The UPS store owner makes approximately $100,000 on average profit per year.
Here is a summary of the different UPS store franchise costs that you need to pay:
|Type of Expenditure
|Initial Franchise Fee
|at least $100,000
|Monthly Royalty Fee
|5% of gross sales
So, if you are looking for a franchise that will provide a good return on investment in the estimated time of 3.5 to 4 years, then getting the franchise of the UPS store is the best option.
However, this also depends on how you run it, as not all profitable businesses are the right option for you.
3. Dunkin’ Donuts
The Dunkin Donut franchise was born in 1955 as a quick-service restaurant, and today, they have more than 12000 franchise stores in the USA.
Here’s a summary of the different costs that you need to pay:
|Type of Expenditure
|Initial Franchise Fee
|$40,000 to $90,000
|$24,400 to $277,000
|$462,500 to $1,442,500
Dunkin Donuts franchise makes a sale of $1,56,000 per year, making a $305,000 profit in a year.
Here is a graph explaining which industries are growing
The Franchises With Highest Failure Rate
Not all franchises are successful. Some had to face significant downfalls due to various reasons. Here are some franchises with the highest failure rate:
Curves was first opened in Harlingen, Texas, in 1992. They introduced the new concept of 30-minute fitness, strength training, and weight loss guidance.
However, they couldn’t cope with the changing trends like the tough economy and flexible hours for busy working women, and this led to their downfall.
From 2017 to 2019, Curves faced a franchise failure rate of 189%, the highest among all the failing franchises.
Next up in the list of failed franchises, we have Quiznos. It was started in the year 1981 and expanded to 4500 stores on a low-profit foundation.
As a result, the franchise owners were earning almost no profit.
The downfall started with the intervention of the 2008 recession, where Subway made its way to success.
From 2017-2019, Quiznos faced a franchise failure rate of 122%. Now it has left with only 238 locations.
3. Papa Johns
Papa John’s franchise is the franchise model in the food and beverages industry. It is an international pizza restaurant company that carries out the business of serving pizza and delivery.
However, the company has been facing some major supply-chain inflation.
In 2022, the company faced a decline in its total revenue of 526.2 million to a whooping decrease of $2.7 million.
Franchise Fails Case Study
Introduced in 1985, this was a video rental store chain. It grew from a single store in Dallas to a chain of 9000 locations.
But with just one mistake, it went from a big retail store to a nostalgic memory.
Ahead of its time, this company offered its customers a selection of 8000 VHS tapes with the help of a computerized checkout process.
The trouble started with the introduction of Netflix in the market. This trouble turned into a hazard when the company decided not to buy Netflix for only $50 million, which is $193.14 billion today.
According to Forbes, the company lost 75% of its market value from 2003 to 2005.
The end of Blockbuster came in 2013 when they decided to close all their stores.
2. Starbucks In Australia
The Next failed franchise case is the largest coffee brand in the world- Starbucks.
It failed to market its brand in Australia, and it was so challenging for them that it had to close two-thirds of its stores in 2008.
Here are some reasons for the failed franchise Starbucks:
1. Rapid Expansion Plans
In Australia, the first Starbucks opened in 2000, and since then, it has expanded and launched 87 stores till 2008.
This rapid expansion didn’t give a chance for the customers to build an appetite for its brand.
2. Local Competition
Starbucks wasn’t cost-competitive in Australia. They offered expensive coffee options as compared to the cheaper options in the local market.
Their biggest competition was Gloria Jeans which included many expressos and Australian specialty drinks that attracted Australian customers even more.
One of the biggest problems with Starbucks was that they thought that their business model would roll out in any environment and would cater to any customer.
Franchise Success Case Study
1. Marriot International
A well-known hospitality brand- Marriot International, is the best franchise success example.
It was founded in the year 1927. Marriot International is the largest hotel chain by number of available rooms.
To be more specific, it is expanded across 131 countries, having 1,400,693 rooms from 30 different brands.
According to Microtrend, Marriot International gives a return on investment of about 38.25% on 31st March 2023.
Next on our list of successful franchise examples is Subway. It is the second-best fast-food advertiser in the United States; the first one is Mcdonald’s. Here is a detailed breakdown of Subway franchise costs.
|Type of Expenditure
|Initial Franchise Fee
|$150,050 – $328,700
|Minimum Net worth
|$80,000 – $310,000
So, when it comes to buying a food franchise, Subway is the cheapest option.
What Are The Reasons Franchises Rate Fail?
As we mentioned before, the number one reason franchises fail is the high initial investment. However, that’s not the sole reason.
Here are some of the other top reasons behind franchise failures:
Whether you are franchising your own business or investing in a franchise system, how the idea is perceived by the community is crucial.
For example, while hamburgers appear to be something that appeals to everyone, not all fast-food restaurants have widespread appeal.
You will also struggle if your business plan is complex. You want to make a good example of your business so that potential franchisees can understand and replicate it.
If the business model or prototype is difficult to replicate, the likelihood of success is less likely, even if the company is operated by a great franchisor.
Ultimately, the franchisor needs to have a well-oiled machine before it can offer franchises to other people.
Non – Supportive Franchisors
The success of franchisees is greatly influenced by the franchisor. The possibility of franchisee success increases when the franchisor provides adequate training, continuous support, and helpful advice.
Franchisors should offer templates for HR policy manuals, marketing plans, and operational guidelines. These help franchisees implement proven systems in their businesses.
Programs for training employees are also essential to the success of any franchise. Franchise owners must offer staff training programs in both technology and customer service.
Franchisers should be involved in these programs to ensure that their methods are being properly communicated and executed.
Poor Advertising And Marketing
A great number of well-known and highly regarded franchisors have marketing and promotional funds to which franchisees must contribute.
Franchise giants like McDonald’s and Subway undertake national advertising campaigns that support all their franchisees, unlike some other brands that might have a more ‘hands-off’ approach.
This type of national advertising is vital for building brand awareness and creating name recognition.
When people see a McDonald’s commercial, they don’t just think of one store in their town – they think of the entire company.
This is the power of national advertising, and it’s something that all franchisors should strive for.
Unfortunately, the poor economy has forced many franchisors to cut back on advertising and marketing, which has had a negative effect on franchisees.
With less support from the franchisor, it’s up to the franchisee to find creative ways to market their business.
The cash flow commitments need to be laid out for potential franchisees to understand them.
One of the most common reasons for the collapse of a franchise business is poor management of cash flow, which can lead to insolvency.
In order to launch a franchise business, a franchisee might be required to forego financial support for protracted periods of time.
When starting a business, it is essential for franchisees not to incur an excessive amount of debt and always to have a financial buffer to fall back on should trading conditions become tough.
The franchisor must take into account the potential franchisee’s extra income streams before awarding the franchise.
For instance, a franchisee with a high-earning spouse could provide a safety net for the business while it is still in its early stages of development.
Lack Of Experience
Franchisees need to have some business knowledge and management experience before they can be successful.
While the franchisor will provide support and guidance, the franchisee is ultimately responsible for day-to-day operations.
This includes tasks such as hiring and firing staff, keeping on top of finances, and ensuring that customers are satisfied.
Franchisors should only award franchises to people who have the requisite skills and experience. Otherwise, the franchisee is likely to fail, which reflects badly on the franchisor.
The location of a franchise is just as important as the franchisor and the franchisee. A franchise business will not be successful if it is situated in a less-than-ideal location.
The perfect location for a franchise depends on the type of business. For example, a fast food restaurant needs to be situated in a high footfall area, such as near a shopping center or close to a busy road, so that people can see it.
Conversely, a luxury goods franchise might do better in a wealthier area where people are more likely to have the disposable income to buy its products.
Franchisors should carefully consider the location of each franchise before awarding it to a franchisee. The wrong location could result in the failure of the business.
Poorly Trained Staff
Franchisees are responsible for hiring and training staff. However, the franchisor must provide guidance on how to do this effectively.
Poorly trained staff can have a detrimental effect on a franchise business. For example, if customer-facing staff are not properly trained, they might give customers the wrong impression of the company. This could lead to a loss of business.
Franchisors should provide comprehensive training materials and support for franchisees so that they can train their staff effectively.
Here is a graph showing the average total initial investment and closures of franchises over 5 years:
The failure rate for a franchise is a jaw-dropping 50% after just five years in business.
There are many reasons why franchise businesses fail, but some of the most common include poor management, lack of experience, and poorly trained staff.
The key to success for a franchise business is choosing a reputable franchisor, carefully considering the location, and ensuring that the staff is properly trained.
By taking these precautions, you can give your franchise the best chance of success.
What is the most successful franchise ?
Mcdonald’s franchise model is one of the most financially successful franchises to own.
What business have the highest failing rate?
The businesses with the highest failing rate are the construction, transportation, and warehousing industries.
Can you become rich by franchising?
Yes, you can become a multimillionaire by owning a franchise. Many franchises make millions of dollars by owning multiple units. However, it depends on various factors like the location and your business strategy.
Amit Gupta is an experienced expert in digital marketing and co-founder of DrFranchises. With more than 11 years of knowledge in franchise digital marketing, SEO, email marketing, and social media marketing, Amit has helped many brands achieve incredible success online. As a passionate entrepreneur and owner of 7 franchises, he continues to study franchise models, looking at costs, revenue, and profitability to guide brands toward profitable growth. When he’s not working on digital marketing, Amit enjoys spending time playing with his beloved dog.