Does an entrepreneurial start up businesses have a better success rate than an equivalent franchised business? While there are no clearly defined statistics to provide a definitive answer all the typical indicators tend to point in favour of franchisee success over that of an entrepreneurial individual start-up.
Businesses fail for many reasons as would be expected however, there are 3 main areas where businesses consistently fail. Those 3 failure areas can be summarised as, Money, People and Planning.
Start-up businesses fail at an alarming but consistent rate. Only about 80% of start-up each year will reach their first anniversary date. One in five new businesses is statistically heading to failure in their first year. Unfortunately, the curve does not flatten out after year one as statistics show an even greater failure rate in year two at 30% and of those remaining businesses 38% are destined for failure in year three of their lifespan.
Some industries will perform better than others but the underlying reasons for failure are inherent in all types of business therefore starting an enterprise in a particular industry is no guarantee for success.
We cited Money as a one of the 3 reasons for early demise and this may indeed be the main reason for failure as so many ventures commence operations undercapitalised and with no clear plan as to how to deal with the inevitable event of cash resources running out. Entrepreneurs are probably, by nature incredibly optimistic people, if not they would probably never take the initial step of starting a business. However, optimism alone without a basic and sound financial plan is not a recipe for success.
While many companies start in an undercapitalised manner many at least have a contingency plan and course of action to take when the cash flow dries up. Without such a plan success is hard to achieve.
The second component of our top 3 reasons for failure is People. Having already said that entrepreneurs by their very nature are optimistic individuals many also see themselves a one-person organisation and they fail to realise from the outset that they cannot undertake every task in the business. It is therefore a critical start-up step to create a solid management team that can cover not only the start-up phase but hopefully the meteoric growth that all entrepreneurs anticipate.
One of the reasons often cited as to why a business owner did not create the all-important management team is money. This takes us right back to the need for adequate start-up capital. A mature management team is without doubt a costly element for a start-up business and so to offset that cost entrepreneurs can look at ways of using contract professionals to contribute on an as needed basis rather than being permanent pay-roll fixtures, a little creativity can often solve the ‘people’ issue.
The third reason in our list is that of planning. To some extent this is a catch-all for both money and people. No individual should even consider starting a business until they have created a business plan and marketing plan that clearly sets out the road map for their intended business. You cannot reach your business destination until you have defined the destination and mapped put a course of action to get you to that point.
That all important planning a process should start with a very basic understanding of your product or service and the intended marketplace. Lack of planning in this area incorporates another high failure facet that of going to market only to find that there is no market, or it is not exactly as you thought it would be. Often that realisation comes at a time when initial capital is low or even exhausted and leaves little room for a re-engineered approach to the market. Knowing the intended market and thoroughly researching it and then creating a well-crafted business plan is an area so often overlooked.
The 3 reasons for early failure can in fact be reduced to one-lack of planning. If a proper business plan is created, it will cover the projected cash flow needs for the start-up phase and will also contain a contingency for changes in the market as the business evolves. Few businesses experience a faster growth plan than forecast and so the contingency capital aspect is crucial.
Money, People and Planning are all constituents of a start up business and similarly they are all elements of a new franchise operation and as such the same level of risk and research would seem to be appropriate.
We stated at the outset that indicators showed that star-up franchise businesses may not suffer from the same high rate of attrition as stand-alone start-ups. The often-quoted statistic from The U.S. Department of Commerce indicates that less than 5% of franchise outlets fail annually, a long way from the 20% level in non-franchise start-ups.
If the planning requirements are similar in both business models, then why would franchisees have a better success rate? Simply put with a franchise an individual buys into an established business model. The market research has been completed, the financial model together with provisions for contingencies has also been created and the template for day-to-day operations has been established.
The prospective franchisee has a wealth of expertise to draw from as they commence business-something that in an entrepreneurial start-up must often acquire as business develops.
If the success rate for franchisees is much greater than a regular stand-alone start-up, then why wouldn’t every entrepreneur look to a franchise format? Firstly, not every business is able to be franchised and secondly and perhaps more importantly not every entrepreneur would make a good franchisee. Entrepreneurs tend to build their business ‘on the fly’ and often expand in directions that were not in the original business plan. Such individuals therefore would probably find it difficult to work in a franchise environment where the ‘rules’ are already established.
Clearly Entrepreneurism is alive and well and the same goes for franchising, both have much to offer in terms of the opportunity to be your own boss.
Image Picture of David Banfield from last issue, suggested images People, Money Plans
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