After more than 25 years in franchising, I’ve seen both franchisees and franchisors achieve spectacular success, and others lose it all.
There is no such thing as a sure bet in business but franchising can help reduce the risks of small business by providing a supported environment utilising both the resources of the franchisor and the community of franchisees operating under the same brand.
Franchisees do not invest in businesses to lose money but by the same token, there are times when they don’t always do enough to mitigate their risks either. If their business fails, the franchisor is the obvious target for the franchisee to blame, and on occasion, this is justified.
However, franchisees can also be the architects of their own misfortune for a variety of reasons that they can’t or won’t acknowledge in time to save the business.
So between franchisor-related reasons and franchisee-related reasons, here’s my top 10 list of causes of franchisee failure, which can occur in any order, depending on the business.
1. Bad business model
The franchisor’s business model might be the first thing that franchisees would like to blame for their failure but this is not always the case. Underdeveloped business models are likely to be found in new, start-up networks, and this should be factored into a potential franchisee’s assessment of the risks of joining.
While the business model risk may be greatest for a new franchisor, it can also re-emerge as a potential cause of failure in mature networks that are unable to match the pace of change set by nimble competitors, or which have otherwise failed to evolve with their market.
2. Inadequate training & support
Failure caused by poor training or subsequent levels of support is also likely to occur in newer, start-up systems compared to mature brands. Training and support is typically limited to operational matters in new brands, with little or no general business training provided.
Franchisees can better protect themselves from training and support problems by better understanding in advance the nature, content, frequency and assessment of training and support provided by the franchisor, and if this doesn’t seem adequate, to either ask for more or look for another system altogether.
When franchisors go broke, often their franchisees will be unable to survive because functions such as marketing, supply chain logistics, IT and other core activities that hold the network together may be wound back or ceased altogether. Again, the greatest risk of franchisor failure is among newer, start-up franchisors, but even mature brands on occasion can fail, such as Angus & Robertson in 2011 and Kleins and Kleeinmaid in 2008.
4. Wrong fit
A potential franchisee may love a business from a customer’s point of view, and from this, decide the business is one that they would like to run because they love the products or services so much. Unfortunately there is a big difference between loving the products or services, and loving the challenge of running a business that sells those products or services.
Sometimes franchisees, no matter how passionate they are about the product, the brand or the industry, just are not suited to the business. They may not be dynamic enough to evolve with the business over time, incapable of managing or retaining staff, or a whole bunch of other reasons that is best summarised by simply being the wrong fit for the business.
5. Insufficient planning
A failure to plan is a plan to fail. Despite the obvious wisdom of this saying, many franchisees still fail to prepare a business plan before commencing their franchise and on the flipside, many franchisors fail to insist on one either.
A business plan should be a road map that shows the way to achieve profits by certain milestones. The franchisor should be involved in the planning process and should analyse and constantly monitor business plans submited by franchisees to ensure that the franchisee operates their business acording to the plan.
6. Insufficient working capital and reinvestment
A lack of working capital and a lack of reinvestment are among the most common causes of all business failure, not just in franchising. Franchisees who start operating businesses without adequate working capital will be unable to pay their bills when they are due if the amount of cash coming into the business is not greater than the amount of cash going out.
Even if the business is profitable, it can still fail if its customers have not paid it on time and it runs out of money to pay its own bills when they are due. Understanding the difference between cash flow and profit can mean the difference between surviving and failing. Likewise with reinvesting in the business – a failure to do so progressively could eventually result in massive reinvestment works that can send a franchisee broke.
7. Unrealistic expectations
The best way to test whether or not a franchisee has unrealistic expectations about the future of their business is to examine their business plan. This will provide an essential insight into their financial expectations and when they expect to achieve them, but there may be other unrealistic expectations based around training, support and the flexibility of the business model, among other things.
The problem with assessing expectations in advance is that they are rarely articulated to the franchisor until after the expectations have failed to have been met.
8. Other distractions (or stealing from themselves)
Sometimes the cause of a franchisee’s business failure is not related to the franchise at all, but something else altogether. If a franchisee is comfortable with the performance of their business, they may look elsewhere for a challenge and find another business or interest to keep them occupied. Often this will take too much of the franchisee’s time and money away from the franchised business to suit the new venture.
Where this occurs, franchisees effectively steal from themselves by taking valuable capital and human resources from one business to support another. When the left hand robs the right hand, both hands risk losing the lot.
9. Failure to evolve (or complacency)
The market in which the franchisee’s business operates is constantly changing and if the franchisee doesn’t change with that market, they will ultimately become irrelevent. Fortunately for the franchisee, they are not alone on this journey of constant change, as the franchisor must also evolve to keep up with the market as well. However, if the franchisee is too complacent with their business or has their attention elsewhere to adapt to change, their business will inevitably suffer.
10. Failure to follow the system
Despite investing in a franchise with a prescribed way of doing things, some franchisees think they can do it better and instead of following the franchise system, they buck the system and try to do their own thing. Franchisors are the first to admit that franchisees can come up with excellent ideas to improve a whole system, but if some of their ideas are completely at odds with the brand offer and values then the franchisee may as well have bought an independent small business instead.
Not only do franchisees who fail to follow the system risk censure and even termination by their franchisor, they often sabotage their own business in doing so, cause sales and profits to decline.
This is not an exhaustive list of reasons why franchisees fail. Nor are these reasons independent of each other and sometimes two or more are responsible for a franchisee’s business to collapse.
So now that you’ve read the top 10 reasons for a franchisee’s business to fail, what are you going to do differently to make sure that none of these happen to you?
Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 25 years at franchisee, franchisor and advisor level.
He provides consulting services to both franchisors and franchisees, conducts franchise education programs throughout Australia and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.