Reports: Franchisees going out of business – and losing money on transfers

Two recent reports highlight the financial risk of investing in a franchise. According to an analysis from independent franchising research firm, the number of franchised units going out of business increased last year. And a Franchise Grade survey of ex-franchisees who transferred their units revealed that nearly half were unable to recoup their initial investment. The analyses use data from 243 franchise systems representing 62% of all franchise outlets in FranchiseGrade’s 2,419 franchise system database. Franchise Grade’s data cover the vast bulk of the estimated 3,000 franchise systems in the U.S.

Franchise Grade tallied Franchise Disclosure Document data on units that “ceased operations” for any reason except termination, nonrenewal, or transfer to another franchisee or to the franchisor. The firm found that though this metric declined in the aftermath of the recession, it increased in the past year, climbing from 5,842 in 2013 to 6,900 in 2014. According to FranchiseGrade, ceased operations can mean that the franchisor’s business model is not profitable and franchisees cannot generate a reasonable return on their investment. FranchiseGrade’s data analysis is one indicator of franchisee distress, as is the high and rising rate of franchise loan failure reported by WeAreMainSt.

Franchisees who do not “cease operations” and instead are able to transfer their outlets expect to make money on the sale. FranchiseGrade surveyed 324 franchisees who had sold their units and found, however, that 46 percent of surveyed franchisees were unable to recoup their initial investment.  Transfers, furthermore, also increased over the last year.

Franchisees are urging the FTC to investigate franchisor abuses and the financial risks of franchising. To join the call for an investigation, click here.