So You Say You’ll Have 100 Units in a Year or Two?
Becoming king of the world may take longer than expected, a new FranchiseGrade study shows.
If I had a dollar for every young franchisor that says they’ll get to 100 units in a couple of years and surely 500 units in three to five, I’d have a whole lot of dollars. In fact, I edit such predictions out of the stories we publish in Franchise Times because they almost never come true.
A new report by FranchiseGrade backs me up: Only one out of five start-up franchises, or 20 percent, reached 100+ locations and that was after their eighth year of franchising. Twenty-three percent had 26 to 50 locations after six years in business, and 29 percent of franchises had only one to 10 locations after six years.
After two years in business, 65 percent of franchises had no locations; 27 percent had one to 10; and only 1 percent had more than 100.
What that means to new or young franchises: Plan for a lot more capital and time to get the business to a sustainable level, which FranchiseGrade pegs at 26 or more locations after five years. That’s an “acceptable rate of growth and provides a foundation to continue their franchise development,” writes Ed Texeira, COO of FranchiseGrade, in the report.
“Undercapitalization is the biggest challenge for start-up businesses and emerging franchisors are no different,” points out Lori Kiser, CEO of The Decide Group, in the report.
She advises would-be franchisors to first work out the bugs by operating three to 10 profitable locations in multiple markets; expand locally then regionally, building a strong presence in markets “close to headquarters where you have more support” in place; and understand “when you become a franchisor, you are operating two businesses—the actual operating business and then a franchise system.”
Other advice in the report: Be willing to adjust the franchise program. “Too often, a floundering franchise is unwilling or incapable of making changes to their franchise. The result is wasting resources trying to sell a flawed franchise,” Texeira wrote.
As for industry breakdowns, personal services, quick-serve restaurants and commercial/residential services accounted for 61 percent of the emerging franchises in FranchiseGrade’s study. Personal services represented the largest sector at 27 percent.
On the flip side, lodging, real estate, automotive and retail food totaled 12 percent of the emerging franchises in the study. “These low numbers are most likely the result of the investment these franchises require and the competitive challenges from comparable non-franchised businesses,” said the report.