5 Reasons Why Franchisees Fail
There are a number of reasons why a franchisee can fail. Some reasons may be readily apparent, while others may be less obvious. In any case, it’s important to understand the various factors that cause a franchisee to fail before buying a franchise.
1. The franchisee doesn’t have the skills to properly operate the franchise.
I’ve witnessed a number of situations where an individual purchased a franchise that required certain skills the franchisee didn’t have, despite due diligence on the part of both parties. For example, a franchise requires strong selling skills and the franchisee is not a sales person. Although the solution might be for the franchisee to hire a salesperson, it’s easier said than done. It can be difficult for a franchisee lacking the required business skills to successfully operate the franchise.
2. The franchisee lacks the working capital needed to fund the franchise operation.
A leading cause of a franchisee failure is the franchisee being undercapitalized. A lack of sufficient working capital can be the result of a slow start-up or the franchise operation requiring more working capital than the amount disclosed in the franchise disclosure document.
3. The franchisee believes that success is easier to achieve than it really is.
There are situations where a franchise candidate may think that operating the franchise is easier than it really is. I recall a situation when one of my franchisees failed. When I did an exit interview the franchisee said: “We just didn’t realize what it took to be successful. When we made our franchise discovery day visit it just seemed that operating the franchise was easier than it was.” This is another reason that conducting a thorough due diligence process is critically important.
4. The franchisor fails to train and support the franchisee.
Although this may not be a primary reason for failure, a franchisee that is not properly trained and supported can have problems succeeding.
There are a number of reasons why a franchise can fail. Some of the reasons are based upon a lack of capital and/or particular skills necessary for a particular franchise to be successful. On the other hand, there may be factors that are out of the franchisee's control: a franchise program that has a lack of customer demand or a poor product, for example, can lead to failure despite the franchisee’s best efforts (another example of why the franchisee should have done their research before investing).
Understanding why franchisees fail is important when choosing a specific franchise opportunity and especially when conducting due diligence. Obtaining quality feedback from current and former franchisees is still one of the most valuable ways to evaluate a franchise opportunity.
About the Author: Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. He has spoken on the subject of franchising throughout the world. Ed operates FranchiseKnowHow which provides information and advice to prospective and existing franchisees and franchisors.
Watch out, Franchisees! 10 Franchisor Red Flags
Only a limited number of states require registration by franchisors, and franchisors are by no means required to register in states where they have no intention of selling franchises. However, if a mature franchisor appears to be consciously avoiding the registration states, this may suggest some level of internal concern about the FDD, the franchisor’s sales tactics, or the franchise system as a whole. The cover pages of the FDD will identify where the franchisor is required to register (and whether it has registered or not), and the charts in Item 20 of the FDD will explain whether the franchisor has ever sold a franchise in any of the registration states.
Why Franchisors Don’t Like Negotiating
The first impression that the franchisee gets from reading the franchise agreement is total incomprehension, unless they are well versed in legal terminologies and phrasing. The FDD is required to be in plain English but the franchise agreement has no such requirement. Typically, the franchisor’s legal department works extremely hard to secure the franchisor’s position through the Agreement and makes it impenetrable for someone who is not a lawyer to understand. The uniform nature of the agreement for all franchisees makes it assumed that the franchisee must sign the agreement so that all the franchisees follow the same terms. Even though that is partially true, the franchisee can plead their case and negotiate terms where they believe that they are offering something unique to the franchisor.
How Do You Pay for a Franchise?
Whether you’re purchasing a whopper from Burger King or joining the Burger King franchise system, the old mantra holds true: there’s no such thing as a free lunch. When you first get started running a franchise you need to pay a fee to allow you to enter into that franchise. These fees are the largest fees that you will normally pay a franchisor and typically range between $5,000 and $1,000,000 depending on the franchise. The franchisor charges this fee as a way to recoup the costs of expanding the franchise and to continue to grow. From a franchisee perspective, this is a major outlay and can take a long time to make back, but is a necessary step. Aspiring business owners must understand how much capital is available to them so they can ascertain how much they can afford. The cash you have at your disposal is known as liquidity, and there are numerous ways to increase your liquidity above the balance in your bank account. As a result, many people don’t realize how much capital they actually can use for investments, like launching a franchise branch. We’ll run through some of those methods below.
