A franchise is generally considered to be less likely to fail than a stand-alone business. Some of the reasons often cited include the effective methods and ongoing support that franchise companies provide to new franchise owners. However, unlike independent entrepreneurs, it is difficult to accurately determine the failure rates of franchisees.
The fact is that any business could fail, but knowing the most common causes of failure can help lower the chance that it will occur.
A franchise failure can result from weaknesses on the side of the franchisee, franchisor, or from both parties. Unfortunately, franchise failures sometimes occur, and the failure is often due to one or more of the following reasons:
Franchisor Weaknesses
Successful businesses enter the franchising world to take their ideas to the next level through the help of shared partners. They want to remain successful and have reasons to see that every franchisee under them succeeds. Still, franchisors are sometimes responsible for franchise failures in some ways:
The support and training may be inadequate. Although all franchisors support and train franchisees to replicate what has worked for them before, some companies are better at this than others, regardless of how effective the franchise model may be. When researching franchises, new owners need to ask existing franchisees how satisfied they are with the training and support provided by the parent company.
Ineffective franchise model. While a franchise company may think that a model is effective, you need to note that newer models have a higher chance of failure than the franchisor’s old models. It’s possible that the model has not been used long enough to be sure that it’s reliable. That’s one of the reasons why new models are usually less costly than old ones – because the risk is higher.
Inadequate demands. A new franchise owner may not have the time or interest in making all the planning necessary for business success, but a good franchisor will insist on it. However, some franchisors may not require a solid plan, including financial expectations and business plans, from those who want to join up with them. And when there’s no particular roadmap to follow, it’s easy for a franchisee to go off track, leading to a franchise failure.
The franchisor goes out of business. When this happens (no matter the reason), franchise owners may be left high and dry without the resources and supply chains that were part of the franchisor’s infrastructure. That’s why it is important to thoroughly review the franchisor’s financial health when looking to invest in a franchise.
Franchisee Mistakes
The failure of a franchise business can also be due to mistakes from the franchisees. A lot of new franchisees do not have experience in running a business or commit errors along the line. Some of the common mistakes that cause franchise failures are:
Inadequate working capital. It’s rare to achieve maximum success in a business when you reduce anticipated investment. Making up numbers or undervaluing your net worth will only put you in a tighter financial situation. You need enough working capital to successfully run a franchise business, especially in the first few years of operation, to pay expenses while growing revenue.
Unrealistic business plan. Another mistake that many new franchisees make is creating an unrealistic business plan, and a good franchisor will help you avoid this error. While it’s nice to have high hopes for a business, they are just hopes unless they are realistic and written down on paper. A great business plan will include measurable goals that are tracked regularly (by both the franchisee and franchisor) to ensure the business remains on track.
Not following branding methods. Franchising involves operating a business in a pre-defined way. For top-quality brands, it’s a method that has proven to lead to success. Maverick franchises may have nice ideas, but running a franchise requires that you follow a well-established system. Refusing to do things the franchisor’s way can result in lost sales and consequences of breaching the franchise contract.
Unfocused and distracted ownership. A lot of franchise owners take out of the profit to cover what’s not included in the business plan. Or take a step back and stop paying attention to a business that appears to be flourishing. Or don’t recognize when a market shift is necessary since they are not focused on the business. A franchise requires committed leadership and management from the owner to be successful.
Every business has its own risk, but understanding where the weaknesses usually lie can help lower the chance of failure. Franchisees and franchisors can come together to address these common issues and work toward achieving a brighter future.
