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General wisdom says that franchises have lower failure rates than a go-it-alone business. The reasons touted include the proven methods and support that franchisors provide to new franchisees. However, there is no conclusive measurement of franchise failures compared to solo entrepreneurs.
Any business could close its doors, of course, but understanding the reasons for failure helps reduce the chance that it will happen.
In franchising, weakness can occur on either side of the franchisor-franchisee relationship that results in a failed franchise. Franchise failures do happen, unfortunately, and the failure is usually due to one or more of these reasons.
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Franchisor Weaknesses
Successful businesses expand into franchising to take a successful idea to higher levels with shared partners. They desire continued success and have a vested interest in having every franchisee successful. Yet, franchisors sometimes contribute to franchise failures in a few key areas:
The training and support are lacking. For all the hype about support and training franchisees to mimic what has worked before, some organizations will be better at this than others, no matter how good the franchise model might be. As part of researching a franchise, new owners should query existing franchisees on their satisfaction with training and support.
Poor franchise model. The franchisor will believe the model to be sound, but keep in mind that newer models are more likely to fail than large franchisor designs. A model simply may not have been tested well enough or long enough to be reliable. It is part of the reason that newer franchise models are less expensive—the risk is greater.
Inadequate demands. A new franchisee may not be interested in all the planning needed to create a pathway for success, but a good franchisor will demand it. From financial expectations to business plans, a franchisor might fail to demand a tight plan from prospective franchisees. Without the roadmap, a franchisee will be easily detoured.
The franchisor dissolves. If this occurs (whatever the reason), franchisees may be left hanging without resources and supply chains that were part of the franchisor infrastructure. A critical review of the franchisor’s financial status should be part of any franchise purchase consideration.
Franchisee Errors
Franchisees often make errors that contribute to the demise of their business, too. Sometimes, they are not experienced business owners or make mistakes along the way. Most fall into these categories:
Insufficient working capital. Minimizing anticipated investment seldom creates maximum success. Fudging numbers or underestimating your net worth will tighten the financial noose. Businesses need working capital, and they need more of it in the first years to cover expenses while building revenue.
Unrealistic business plan. A good franchisor will help prevent this error. Still, high hopes are only hopes if they are not realistic and put on paper. A solid business plan should have measurable goals that are monitored regularly (by the franchisor and the franchisee) to keep the business on a manageable trajectory.
Resisting branding methods. Franchising means running a business in a pre-set way. And for solid brands, it is the proven way to success. Renegade franchisees might have good ideas, but a franchise means following an established system. Resisting the franchisor’s methods can lead to lost sales and breach of contract consequences.
Distracted and unfocused ownership. Many a franchisee will borrow from revenue to pay for something outside of the business plans. Or step away and lose the pulse of business that seems to be doing well. Or fail to see when a market shift is needed because the focus is not on the business. Every franchise needs committed leadership and management to ensure its success.
No business is free from risk, but knowing where weak spots appear most often will help reduce the likelihood of failure. Working together, dedicated franchisors and franchisees can address these common problems and work towards a bright future together.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.