Franchise Failure Rate Research Stirs Debate

Timothy M. Bates, a researcher at the Woodrow Wilson International Center for Scholars in Washington, stirred up a hornet’s nest late last year when he suggested that the failure rate of franchised businesses is higher than that of independent start-ups.

“I’ve been in the (research) business for a long time, and I’ve never seen a reaction like this,” Bates said of response to the franchise study. “I must have gotten 200 phone calls” from disgruntled franchise holders and their lawyers.

Bates’ findings clash with longstanding research funded by the Washington-based International Franchise Assn., which uses data gathered by the Gallup Poll and Arthur Anderson & Co. to back its claim that franchisees are more likely to succeed than independent businesses.

But Bates, who analyzed federal Census Bureau data, said that franchises are more likely than independent businesses to fail in the formative years and that franchisees seem to take longer to recoup costs.

Bates said that the success rate of the nation’s best-known franchise names is noticeably higher than for new franchising operations that aren’t as well known: “It indicates that you get what you pay for.”

IFA statistics provide a decidedly rosier view of franchising: The Gallup Poll reported that 94% of franchisees are satisfied with their investments.