All businesses have the potential for failure. Risk is an integral part of any business venture and, in turn, all businesses are subject to risk. Franchise businesses are not immune to failure.
The Small Business Administration in the United States found that between 1991 and 2010, an estimated 17% of franchise loans ended in failure. For the period from 2006 to 2010, the rate actually increased to 19.3%.
A franchise, being a proven business model, often misleads prospective franchisees into believing that opening a franchise is an easy way to earn a good income and build wealth. Typically, an effective franchise system will provide franchisees with support and resources. The right resources will improve a franchisees likelihood of success.
This seems like common sense, but why are franchisees continuing to fail in large numbers?
A lack of skills to operate a franchise business successfully
First time franchisees are at the greatest risk here. Being in business requires new entrepreneurs to be a “jack-of-all-trades” jumping from managing staff, dealing with customers, to managing cash. If you are new to a business, the volume of work and the new skills that have to be learned can be overwhelming.
The challenges of owning a new business should be made clear to the franchisee prior to acquiring the business. Also, a franchisor should provide franchisees with resources to assist with these demands. This does not mean that the franchisor needs to get involved directly. Simply having a list of well-experienced external service providers for backoffice functions such as bookkeeping services can be a significant benefit.
Lack of franchisor support
Franchisors play an integral role in franchisee success. The more tools available, the greater likelihood of franchisee success.
Franchisors may be able to provide HR policy manual templates. Hiring policies have considerable importance in any business, and if not executed correctly, new franchisees could struggle when it comes to hiring and managing employees.
Training programs are imperative to the success of any business. Franchisors should provide training programs for staff on both customer service and technology. Franchisors create the culture for their organization and should therefore be involved in helping franchisees set the right tone with customers through organization wide training programs.
In addition, franchisors should make sure to train franchisees on the technology suite used in the business. Franchisees will have different levels of familiarity with technology. Ensuring that they are trained to maximize the use of technology will increase the likelihood of success.
Lack of clarity on the commitment required
A client of ours informed us that they had been for an interview with a large Canadian donut franchisor and were warned of the 12+ hour work days. This was a significant factor in our client’s decision not to proceed. It is extremely important that franchisees understand what they are getting into and that they do not believe that their investment will be hands-off.
A poor fit between franchisee and franchisor
Though a franchise business isn’t a franchisee’s own business concept, they should still feel a connection and passion for the product or service being sold.
Both franchisees and franchisors should do their due diligence on one another. Each party is responsible for this. Franchisors must ensure that they are partnering with the right representatives for the brand.
Franchisees must ensure that they are buying into a concept that they truly believe in. Above all, both parties must assure that they are fit to work together. Once the franchise agreement has been signed, both parties are bound by the terms, so comprehensive due diligence up front is critical.
Insolvency
New franchisees should be made aware of cash flow commitments. Poorly managing cash is a common reason for franchise failure.
Opening a franchise business may require that a franchisee go for long periods of time without an income. It is important that potential franchisees not be overextended when they are getting into a business and that they have sufficient cash to sustain no income for a period of time.
Franchisors should look at a potential franchisee’s other sources of household income. For example, a spouse who earns a good income may provide a safety net for the franchisee while the business is in its early stages.
So what does this mean for the franchise industry?
Before getting into a franchise business, significant due diligence should be undertaken by the franchisor and a potential franchisee. Franchisees and franchisors should engage in candid discussions about the requirements to succeed. Also, franchisors should take a greater role in helping to ensure that franchisees have the right tools and resources to operate their business.
