This should not be a news alert but franchises do fail.
Franchise failures can stem from franchisor mismanagement and/or mismanagement of the franchisees own business.
However, in my opinion, most franchisor mismanagement can be revealed and mitigated through proper questioning & investigating the FDD throughout the franchise due-diligence process.
Use these questions to help vet out your prospective franchise.
Make no mistake about it; franchisees operate their own business and their ultimate success or failure is up to them; not the franchisor.
Five Reasons Why Franchisees Fail
1. They Try to Do it Their Own Way
Buying a franchise is purchasing a system to follow. If you truly believe you can design better procedures, recipes, ways of doing business, etc. then DO NOT PURCHASE A FRANCHISE. One of the best pieces of advice I can provide franchisees is to follow exactly what the franchisor dictates.
2. Absentee Owner
A challenge in franchising is absentee/investment focused owners. Franchising in certain scenarios can be seen as a tremendous investment vehicle but I caution these passive investors. Franchising is not placing your money in the stock market. The franchise owner must operate or find an operator to run the business at a high level. He must build a team and hold that team accountable to the formula the franchisor has built.
3. Wrong Location
Ever wonder why that one location in town has had a different restaurant each of the last 3-years? Perhaps, the failures are not an operational problem but a real estate problem. In retail franchising, the franchisor should provide support for real estate selection but the franchisee must do their own homework. When selecting real estate make sure to understand the brands target demographics, ideal co-tenants, occupancy cost metrics, etc. Then seek out a local market expert who will help you find the right location at the right price.
4. Capital Structure:
One of the most cited reasons for failures in small businesses is insufficient capital. Keep in mind a franchise may not be cash flow positive on day one of the operation. This means after the project is complete you must have cash reserves to keep the business afloat. If it were me, I would make sure to have 6-12 months burn rate in cash available. Speak with other franchisees to have a clear expectation of the cash flow cycle.
5. Skill/Value Set of Owner/Operator Does Not Align with the Brand:
Franchise owners should take into consideration brands which match their background, strengths, goals, expectations, values, and personality set.
The success of your franchise enterprise is mostly on your shoulders. Make sure to keep these pitfalls in mind if you launch your own franchise venture.
Here is a great article which helped me formulate my opinions and should be viewed as you consider franchise opportunities:
Ryan Rao is a Principal of Apex Franchise Development Group and is a franchise development expert who has grown multiple franchise based businesses into national and international brands. Franchising has allowed him to help individuals realize their dreams of business ownership, while permitting them to experience the independence, flexibility, and freedom that comes with being a business owner. He also serves as a franchise consultant, and is a personal growth advocate.
Follow or Connect with Ryan on LinkedIn at https://www.linkedin.com/in/ryan-rao/