Buying a Franchise Is a Good Idea? Professor Richard Parker Responds to Member 1711781 (Part One)

On January 17, Trump University Professor Richard Parker wrote a post on this blog, entitled Seven Reasons Why Buying a New Franchise Business Is a Disastrous Mistake. It triggered a strong response from Trump University Member 1711781, who offered arguments in support of franchise ownership.

Professor Parker has now responded to member 1711781. The result is an exchange that contains a lot of valuable information for anyone contemplating business ownership. So much good information, we are publishing it today on this blog.

Due to the length of this post, the post will appear in two installments: the first half today, and the second half next week.

Put on your thinking cap and get ready to learn from this exchange of ideas.

It would have been easy to rationalize not publishing the comments made by member1711781 on 01/18/2008. Nevertheless, I fundamentally believe that those comments echo precisely what the problem is regarding new franchises and how easily one can be misinformed when comments are made that are completely subjective, void of any fact, or ripe with rhetoric.

The great thing about blogs is they provide an open forum to discuss and debate ideas, and they allow a global audience to participate, which is something I embrace. Many blog publishers are highly selective in the comments they allow to be published, which I believe defeats the core of the blog concept altogether.

Having said that, I do wish to thank member1711781 for your feedback however, it is critically important that I dispel the myths you have presented in order to provide the readership with accurate information.

First, your perspective is based upon references to two individual franchisees who you know (one of which does not even franchise their operations) and yet another franchise that requires a $250,000 liquid net worth in order to qualify, which is simply not an option for most people. Drawing conclusions from such an insignificant sampling is neither accurate or effective.

Further, you have not cited any specific personal experiences whatsoever either as a franchisee or business owner altogether unless you inadvertently omitted it.

Conversely, as background to my posting, the resources that were called upon to make the comments I did include:

1. A nationwide survey involving over 1000 franchise owners conducted by Johnson Franchising Consultants.
2. A study of franchisees conducted by Dr. Timothy Bates, a professor at Wayne State University in Detroit.
3. I have personally been involved in this arena for eighteen years.

Before I reply to your comments made, let me state unequivocally that I have a core principal to only attack the point, not the person and so let me address the comments made by member1711781 on a point-by-point basis

Member comment: “Seven reasons why buying a new franchise is a DISASTROUS mistake? I believe you've taken this concept to an extreme. You can't HONESTLY think starting a new franchise is a disastrous mistake. If that was true, why does owning and operating a McDonald's make so many people millionaires? And McDonald's isn't the only example! I personally know a Chick-Fil-A owner who is ALSO a millionaire! And there's three other Chick-Fil-A's in my city!”

Parker’s Response: I absolutely believe it is a disastrous mistake. Using your McDonalds example is simply not a reasonable example because it is completely out of touch for most people.

According to McDonalds own criteria:

• McDonalds requires franchisees that have significant business experience who have successfully owned or managed multiple business units or have led multiple departments and who have significant financial resources.” This clearly eliminates most people financially and anyone first-timers.
• The cost is prohibitive for most people. The minimum amount for a down payment will vary. “Generally, we require a minimum of $250,000 of non-borrowed personal resources to consider you for a franchise. Individuals with additional funds may be better prepared for additional or multi-restaurant opportunities.”

Member Comments: “Whether you're opening a franchise or non-franchise, chances are the business will fail! According the American Chronicle, you have a 1 in 5 chance of succeeding in your new business! An entrepreneur is defined as someone who assumes the usually substantial RISK of operating a business. No matter what business you're getting into, you're taking a risk.”

Parker’s Response: The study by Dr. Timothy Bates, professor at Wayne State University in Detroit, found that the franchise failure rate actually exceeded 30 percent and that franchises made lower profits than independent entrepreneurs. Dr. Bates' study also found that the average capital investment of franchisees was $500,000, compared to $100,000 for independent entrepreneurs.

The failure rate you cited from American Chronicle is exactly my point - an 80% failure rate for new businesses. If that alone is not ample data for you to emphatically agree with my point, I am not certain what other data you would require. While the rate may be somewhat lower in franchises, it is certainly nothing to boast about.

Of course any business is a risk. The question is the magnitude. One simply cannot argue that buying an existing business (franchised or not) where you have demonstrative proof of historical performance immediate puts you at an advantage over a new business - the facts bear this out.

Member Comments: “Of course you have no assurances the business will be successful! The success of the business is determined by the entrepreneur, in both franchises and non. And not all of the time does the franchise company choose the location. And even if they do, that's not necessarily a bad thing! Most franchises are such because they have a business model that entrepreneurs want to mimic because the model is EFFECTIVE, and since their model is effective that means they're pretty good at doing business, which means they're also pretty good about CHOOSING A LOCATION.”

Parker’s Response: Wrong! First, in the vast majority of cases, the franchisor either chooses or is the final approval on location. Second, the franchise concept if based on the model that the franchisee must follow the system - there is little if any room for interpretation. That’s what makes a franchise work. The franchise concept is based upon the notion that the business model has worked to varying degrees in other locations. While the better franchisors will conduct demographics studies and clearly they should be in a better position to suggest locations, it is very much an “if you build it, they will (hopefully) come. While franchisors do not want their locations to fail, their agenda is to sell franchises and populate the landscape with their brand.

To be continued soon . . . stay tuned.