Franchise Failure Rates, Part 1

If you are considering starting a franchise, knowing about failure rates is crucial. 

While there are many different metrics you may be interested in, failure rates is a typical thing that a prospective buyer is looking at.

Why? While it doesn’t necessarily predict how successful you will be if you open up the same type, it at least shows you how others have done in the past. 

I personally think there’s a lot more to understanding whether a specific company is the right one to open for you, but failure rates are a great place to start. Before you get started, there are tons of other things you’ll need to do as well, like look at the company’s FDD (franchise disclosure document), and ideally also get a second opinion on your options so you make sure you’re making the right choice. 

In this specific part 1 of our franchise failure rates segment, we’ll look at McDonald’s and Firehouse Subs. 

McDonald’s 

Rather than skirting around the topic, we’ll just jump straight into it. Getting a McDonald’s franchise has several benefits over other potential companies, and the failure rate of around 4% is a testament to that. Historically speaking, it’s a company that has done well, and rates have been stable over time as it’s a company with its SOPs in place and a lot of brand recognition. 

Many Americans aren’t shy when it comes to making their way there for a quick meal. We have to give it to McDonald’s – 4% is a lot better than the industry average, but it doesn’t necessarily mean it’s right for you. 

The company offers great scale and support, so you’re not jumping into an unknown entity if you make it through the vetting process. 

The good news about this company is also that there is often an alternative to just closing up shop. Owners often end up recouping a portion of their investment as struggling location shift hands more often than not. 

However, we don’t love McDonald’s for all prospective owners. Over the years, there have been a number of controversies that can’t be overlooked. In 2022, aa record 1,700 changed hands as internal disputes and high costs influenced the franchising landscape. While not typical, it does show that even the most established company will struggle on occasion. 

It’s also important to know that there have been lawsuits that could affect whether you think this is a right choice for you. For instance, McDonald’s was accused of black former franchises who were saying they received less-profitable locations. While the lawsuit ended in a settlement, you’ll want to take that into consideration. With owners making an average profit of $150,000 to $200,000 at McDonald’s, it’s definitely worth considering. 

Firehouse Subs

Firehouse Subs is another popular option as it has a failure rate of roughly 7% over a 3-year period. We definitely love this number. 

While there are things in the FDD that could make it a less interesting option for you, it’s worth considering. There’s some context to know before you start venturing in this direction, though. 

Firehouse Subs’ failure rate is surely something other companies are envious of, but you should know that the company is under new management as it was acquired in 2021. The sale price was $1 billion. Not shabby for slinging sandies! 

What we love about this business is so many things. There aren’t any significant scandals you should know about, and with its firefighting theme, they’re keeping it fun! 

The brand also has a charity aspect to it that may be appealing. From our research, we weren’t able to find any major complaints by franchisees, but that doesn’t mean it’s necessarily the right choice for you. 

What you need to know is that there are many competitors when it comes to creating subs. What we do like about this opportunity is that the numbers seem to make sense. While it’s not a company that has been around for as long as McDonald’s, for instance, it’s still an established brand. 

Despite being somewhat less established than McDonald’s, our analysis indicates that sales per store typically sit at roughly $932,000. The profit a Firehouse Subs owner is estimated to be roughly $140,000 as a consequence. 

That estimate is based on you playing an active role in managing the restaurant. From our research, it’s clear that Firehouse has strong customer loyalty, even if they’re a premium sub with a price tag associated with it. 

The profitability numbers above are, of course, not a given, as they rely on many different factors. Without a location in a high-traffic area and under poor management, you can expect these numbers to look vastly different. With its solid profit potential, it is an option I like pointing potential franchisees to when evaluating what’s their best option. 

Thomas Jepsen
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