A great way to get into different businesses is to start a franchise, in spite of this, there is a lot of risk involved in doing this as well, and the failure rate for franchises can be just as high as it is for a standard business. Most estimates show that the failure rate for a franchise is around 50% so you are just as likely to succeed as you are to fail.
The reason for the failure rate of franchises being so substantial is because the investment which is initially required to start a franchise is so significant that you are putting yourself into a business model, which depending on the franchise, could not be sustainable.
As well as this, you will essentially be working for a business which is quite far from your actual location, this can make getting the support needed for running a business more challenging than it usually would be. When it comes to franchising there can be a fair amount of exaggeration which is exacerbating by people who want you to buy into the system.
If you have put some effort into researching franchises, you can likely recognize the successes some people have experienced but also the failures. It is largely a myth that franchising will be one of the safest ways for a business owner to go with the failure rate being so high.
This misconception is likely fueled by the fact that people think that franchising is low risk, however this is not the case. When you are investing into a franchise, as we have mentioned, you are buying into a business model which you have very little control over, and there are many variables which you will not be able to control.
You will have no control over whether or not your franchise will continue to be successful in the future. So why is it that some franchises fail, and why do some succeed?
What are the Reasons Franchises Fail?
While the umbrella explanation for why franchises tend to fail, it is due to the high initial investment which is needed, but there are many separate and sub-explanations which should be explored before you consider moving on with franchising!
Table of Content
1. The Concept
This should be considered if you are franchising your own business, or buying into a franchise, but you will need to consider how the concept of franchising will affect the community and how they will perceive this. While what you are selling may appeal to people on a base level, you will want to consider your brand and how your community will react to buying from it.
This can also affect you if the business plan you are working with is too complex, and you will want to make the process of franchising as simple as possible. If the model is going to be too difficult, then franchising will likely not be viable. If the base business is not properly functioning, the results from franchising will be even worse.
2. Unsupportive Franchisors
Perhaps one of the most important steps is ensuring that the franchisor will provide the right level of support to the franchisee, for example, giving proper training and resources, as well as continuing support after the initial investment period.
A good franchisor will provide materials like a template for HR, plans for marketing, and guidelines on how to operate the business. These systems are proven to aid in functioning franchise. You will need to have systems in place to ensure that employees are trained properly as they will be what is interacting with the customer base the most often.
3. Poor Advertising And Marketing
If no one is aware of your franchises presence, it will not be able to flourish. Some businesses will not need to put too much effort into marketing since they have a natural appeal and reputation, but this is not the case for all franchises, and because of this, you will want to make sure that the franchisor has systems in place to ensure that people are paying attention to their franchises and will want to visit.
One of the most common explanations for franchises failing is a lack of proper management for the cash flow and this can very easily lead to insolvency. If you want your franchise to launch properly, you may need to forego the proper support financially for certain lengths of time, but ensuring that you are not going into debt.
This is why franchisees will need to ensure that they have a financial buffer to be able to rely on if the cash flow is rough. This is also important for franchisors to consider since investing in a franchisee who is unable to manage cash flow properly and has no safety net will likely become an issue.
5. Lack Of Experience
If you are a franchisee, you will want to have a proper level of business knowledge, as well as experience managing people, otherwise the process of managing a franchise will be far too challenging and will feel like being thrown in the deep end.
While your franchisor may be able to help with some guidance and support, you as a franchisee will still have most of the responsibilities for your branch and you will need to be very self-reliant to be able to cope with this.
This means you will need to be able to deal with daily operations, in charge of hiring as well as firing the staff, managing the finances, keeping on top of customer satisfaction, and knowing when and where to delegate tasks. If there is no experience or skill in this area, you will struggle as a franchisee.
Hopefully this guide has made you aware of how franchises can fail, and what you can do to stop running into the mistakes which can lead to this.
Franchising is not something which should be done on a whim and you should ensure that you are doing proper research beforehand! So knowing the reasons why a franchise can fail is a piece of foundational knowledge you need before moving on!