First-Time Franchisees Face a Tougher Road

Start up Journal:

Amid strong profits at franchising giants such as Domino’s Pizza, Yum! Brands and McDonald’s, buying a franchise may sound like an attractive way to go into business for yourself.

But be careful. A franchise is an investment, and like many complex investments, it merits a big “buyer beware” sticker.

Buying the right to operate a business under a nationally recognized name can give you a leg up compared with starting a restaurant or other business from scratch. But start-up fees can be steep, ranging from under $50,000 to over $1 million. Later, advertising fees and royalties will cost about 8% of gross sales, on average, according to the International Franchise Association and FRANdata.

Franchise fans often boast that buying a franchise increases the odds that you’ll be a successful entrepreneur. But Timothy Bates, an economics professor at Wayne State University in Detroit, found that’s not necessarily the case. He found that 38% of young firms that open a franchise fail within five years, compared with 32% of young firms that go it alone.