What is the success rate of a franchise versus an independent?

The first two rows are bogus statistics. See below for an explanation.

Let's Look at the Opposite, Failure Rates

Franchise Failure Rate: After studying 800 franchisors and 250,000 franchised outlets from 1993 to 1997, Steven Holmberg and Katheryn Morgan of the Kogon School of Management, American University, observe:

"Overall franchisee turnover rates are significant and appear to have increased. The result is a 1997 median franchisee turnover with a transfer rate of 10.49% (8.86% in 1994).

Start-up Failure Rates: Prof. Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, observes that some 71% of start-ups will have gone out of business by year ten. Prof. Shane shows that some 25% of start-up businesses cease in year one.

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This is an ongoing project, a collection of studies and success rates of franchises, independents and small business as a whole. There is a wide range of variation of results.

As you can see from the table, success rates vary greatly by studies. Success rates of independents most likely are as low as 35% (considering 5% and 23% as outliers) versus a low of a 62% success rate for franchises in a 4 year period (throwing out the low of 55% that was assigned specifically to franchise retail outlets).

The most exaggerated success rates for franchising have been overheard from sales persons at a franchise show and are quoted above -- possibly a variation of the incorrect Department of Commerce numbers with a sales twist. (The 5% success rate of independents appears to incorrectly complement the 95% franchise success rate to make 100%. i.e. The bad logic might go like this: If 95% of franchises succeed, then that must leave only 5% for independents to succeed, since both must equal 100%. That's bad math. Both are mutually exclusive and do not need to add up to 100%.)

Part of the problem is in the details of each study. One study defines a small business as anything less than 20 employees while another defines small business as having at least one staff member. There is a problem of comparing apples and oranges. The D & B study measures "small businesses" without breaking down whether they are independent versus franchises as Dr. Bates' study does. Time frames differ as well.

It is safe to say that a franchise's success rate really depends on the franchise system that you buy a franchise in. Some franchise networks succeed better than others while other franchise systems might be worse than independents in their industry.

"Many years ago, the U.S. Department of Commerce conducted studies about franchising which presented such statistics.  That information is no longer valid.  The agency stopped conducting such studies in 1987. We strongly urge you to remove any information from your Web site and published materials that make such a claim.  The use of such data, in the absence of current research, could mislead prospective franchisees who are attempting to conduct responsible investigations."

This statement can be read in its entirety here.

²NFIB is the National Federation of Independent Business Education Foundation. Their estimates are for businesses with employees who close their doors within a five year period. It should be noted that this leaves out the majority of start-up businesses who initially DO NOT employ someone.

³Unable to find original work online but this statistic is quoted on Joshua Sharf's blog at View From a Height. He references Shane, Scott and Spell, Chester, "Factors for New Franchise Success," Sloan Management Review, Spring 1998, pp. 43-50.

⁴There is another set of data released by the SBA that has a 39.5% success rate at six years of start-up businesses with employees. (See Survival Rate After Startup Source: SBA, "Small Business by the Numbers," May 2002)

Other readings:

Startup Failure Rates,The REAL Numbers

Franchise, Go It Alone, Or Keep My Lousy Job?

What's Behind High Small-Biz Failure Rates?

Interview with Peter Birkeland, Author of Franchising Dreams