Net growth numbers provided by Franchise Grade indicate that the franchise industry is in crisis.
According to Franchise Grade, between 2010 and 2018, franchiSEES invested $459.6 billion dollars in franchising. Yes, that’s billion with a ‘B.’ Franchise Grade also reports that during that same time period, the industry’s net outlet growth was 78,878.
To Franchise Grade, net growth is the net increase in number of outlets calculated by counting up all the outlets that opened between 2010 and 2018 and then subtracting all the outlets that closed. (Read this article for more information about net growth.)
On LinkedIn, Jeff Lefler, the founder and CEO of Franchise Grade used these numbers to make the claim that “Franchising is alive and well in the US!”
The timing of Lefler’s claim is significant. He made his post on Tuesday August 6th, just one week after Senator Cortez Masto of Nevada introduced a bill that many franchiSEES hope will open the door to future reform.
On Lefler’s LinkedIn profile, he states that “Franchise Grade is designed to objectively analyze and compare every franchise opportunity.” He goes on to state that Franchise Grade believes “in the opportunities offered by franchising. We also believe it’s time to level the playing field with critical, unbiased information.”
But can Lefler and Franchise Grade really remain unbiased if the company’s purpose is to assist in franchise sales?
The Coalition of Franchisee Associations as well as several individual FranchiSEE owners’ associations (7-Eleven, Subway, Little Caesar’s, Supercut, Kumon, Dunkin’ Donuts, etc.) are supportive of Senator Cortez Masto’s new bill. The franchiSEES are also saying that they want a level playing field, but in their minds, the current field is so far from level that they have to go to congress to fix things.
And let’s face it…. anyone who goes to CONGRESS for help in 2019 must truly be desperate. Desperate!!!
Let’s look at the numbers:
This is the Franchise Grade graphic Lefler posted with his claim that franchising is “alive and well”:
According to Franchise Grade, between 2010 and 2018, franchisees invested $459,600,000,000 for a net growth in number of outlets of 78,878.
Using these two numbers, we can easily calculate how much money franchiSEES invested per each outlet in net growth.
All we have to do is divide the total amount franchiSEES invested by the net number of outlets that opened. So… that’s 459.6 B divided by 78,878. Bingo. Now we know that for every franchise outlet in net growth, franchiSEES invested approximately $5,900,000.
Wait….. say again? What? Was that enough zeroes for million with an ‘M’?!?!!
Yes, it’s true. Lefler’s graphic tells us that for every outlet in net growth, franchiSEES invested approximately $5,900,000! Wow! That’s a lot of cash for one family’s investment!
What this graphic really signifies is NOT, of course, that 78,878 families each invested $5,900,000 and now own an awesome business that they can resell for $7 million $10 million or even $20 million someday.
No, what this means is that a lot a lot a lot of families invested a lot of money to open a lot of different outlets. Some of those outlets succeeded and a huge number of those outlets failed.
Think about that for a second.
What that means is scary for America.
If we continue to think in terms of franchiSEE investment per outlet of net growth, we can run a few simple calculations to find that 78% of the money franchiSEES put into franchiSORS’ business opportunities went towards outlets that were sold but did not stay open (see the * at the bottom of this post for the calculations).
That’s a cost of $357.1 B to family franchiSEE investors! who are NOT now operating successful franchised businesses today. Theirs are the outlets that closed.
Yes, that’s billion with a ‘B’!
And, because franchise agreements are so imbalanced in favor of the franchiSORS, chances are that a very high percentage of the families who invested in these failed outlets lost everything. They’d initialed dangerous ALL CAPS clauses and signed personal guarantees. In a lot of cases, franchiSORS were able to go after future royalties in court to take the families’ homes. Sometimes the FranchiSORS used liquidated damages clauses.
And… as you can imagine, all those families who lost their homes aren’t very happy about their investments in the franchise system.
WHY FRANCHISORS ALMOST ALWAYS WIN IN COURT:
Total family, taxpayer and other investment:
But remember, families didn’t make all these investments alone. If I’m understanding the Franchise Grade numbers, the $459.6 B represents the total amount franchiSEES put into their initial franchise investments. If I’m correct, that would mean that some of that money was lent by the Small Business Administration (i.e. the taxpayer) and that some of it came from other lenders.
But the franchiSORS are lobbying against Senator Cortez Masto’s new SBA Franchise Loan Transparency Act that would protect taxpayers!
The correct way to interpret the Franchise Grade numbers:
Franchise Grade numbers can be used to draw positive conclusions about individual franchiSORS, not the entire industry.
Lefler’s LinkedIn bio goes on to state, “The data we collect provides a foundation for successful franchise opportunities and our Franchise Intelligence platform supports franchisors, prospective franchisees and franchise brokers to better compare and understand the health of any franchise.”
I emphasize Lefler’s words, “the health of any franchise,” because Lefler’s net growth data is only valuable to help unwind the health of any single franchise system. His net growth numbers do nothing to indicate the viability of the franchise industry as a whole. In fact, they do the opposite: they accentuate the crisis.
The claim he made in his LinkedIn post was false. Franchising is not “alive and well in the U.S.” as Lefler claimed. And his graphic is misguiding because it attempts to use overall net growth and franchiSEE investment numbers to make a point about the entire franchise industry rather than using individual franchiSORS’ net growth numbers to make a point about individual franchiSORS.
I get that it’s scary to think that a franchise industry crisis is coming. But anytime a system that is exceptionally profitable to a few while many many others lose everything is allowed to perpetuate, it will hit a crisis point.
That’s what’s happened to franchising.
FranchiSORS have used franchiSEES’ homes and life savings to expand their businesses beyond what consumers were spending when they walked into the door to buy a slice of pizza. That’s illegitimate expansion folks!
The franchise industry is in crisis:
A lot of franchiSEES have lost a lot of money to franchiSORS’ businesses after being defrauded into signing dangerous contracts. They’ve since learned more than they ever wanted to know about litigation. Many have faced bankruptcy to support the franchise industry.
FranchiSEES aren’t being quiet anymore. They’ve created owners’ associations and even associations of associations.
They don’t know how much congress can do, but they’re talking to congress.
The way to prevent the crisis would have been to resolve the inequity and the taxpayer-backed lending problems a long time ago.
Please comment on this article on LinkedIn.
* 78% = [(353,685 – 78,878) or net number of outlets that closed x ($459.6 B/353,685) or the franchiSEE investment per outlet opened] / $459.6 B or the total amount invested by franchiSEES
