Poll: Small-Business Franchisees Face Goliath Franchisors

A new poll finds that a majority of owners of franchised businesses have taken on significant debt to buy their franchise, have experienced franchisor-imposed changes that raised costs but not revenue and have faced the threat that their franchisor will take away their business. The poll of over 1,100 franchised business owners also found that franchisees are overwhelmingly small enterprises: Most own only one unit, and most run their businesses at break-even or a loss.

The survey was conducted as franchisee rights legislation advances in California, and the poll finds that in some areas California franchisees face stiffer challenges than those in the rest of the country. The poll was conducted by FranchiseGrade.com, Inc., a leading market research and analysis firm for the franchising industry and was commissioned by Change to Win, a federation of unions that includes the Service Employees International Union, the United Food & Commercial Workers, the Teamsters and the United Farm Workers.

FRANCHISEEGRAPHIC

Key results include:

  • Most franchisees are inexperienced: 63 percent of franchisees nationally (64 percent in California) had not owned any type of business before investing in their franchise system. Sixty-nine percent (72 percent in California) had never been a manager in the industry their franchise system operates in.
  • Most franchisees are in debt: Nationally, two-thirds (68 percent) borrowed to buy their franchise system (74 percent in California), with 43 percent pledging their home as collateral (49 percent in California) and 20 percent using or pledging their 401(k) retirement savings (18 percent in California).
  • Most franchisees take small salaries and run at a loss or on a break-even basis:
    • Four of five (79 percent nationally and in California) reported a personal salary or draw last year of less than $50,000.
    • A combined 68 percent (71 percent in California) reported operating at a loss or making no profit.
  • Franchisees are forced to spend money on initiatives without a financial upside: Fully three-quarters (75 percent nationally and 78 percent in California) report their franchisor made changes in manuals or procedures that hiked costs without increasing revenues.
  • Franchisors threaten retaliation when franchisees speak up or join together: A combined 46 percent (52 percent in California) report at least one threat or negative action by their franchisor related to speaking out about problems or joining a franchisee association.
    • 30 percent reported their franchisor suggested there could be negative consequences to speaking out about problems in the franchise system (34 percent in California).
    • 19 percent (both nationally and in California) indicated their franchisor has increased the frequency of inspections after the franchisee spoke out about problems in the system.
    • 12 percent (15 percent in California) reported that their franchisor has indicated there could be negative consequences to participating in a franchisee association.
  • Many franchisees experience the threat of the franchisor taking away their business:
    • 38 percent (40 percent in California) responded that their franchisor has indicated they might be terminated based on actions they thought were appropriate for the operation of their business.
    • 80 percent (82 percent in California) reported that their franchisor had suggested they could be terminated or not renewed based on violations found during inspections. Franchisors typically retain the right to inspect franchisee businesses unannounced at any time, and some franchisees have claimed  that some  inspections were in retaliation for criticism of the franchisor.

Full national poll results.

Full California poll results.

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