Because franchising has proven to be a very popular way of expanding a business or of getting into business, a myth has arisen that franchises can never fail.
The reality is that franchising is not failure-proof. Just like any other business, it will have its own share of failures. The only difference is that the failure rate will be much, much smaller than starting your own independent business.
REASONS WHY A FRANCHISE FAILS
Since franchising is a personal and contractual relationship between two parties, it’s easy to see that no one party has a monopoly of possibly causing a franchise to fail. Normally, both parties will contribute their share of failure factors; it’s only the degree of responsibility that will differ.
1. Getting into franchising for the wrong reasons
“… I will franchise because my competitor has expanded the number of its branches and I also want to expand.”
“… collecting franchise fees may be the best way to fatten my bank account and to enable me to travel wherever I want.”
“… I want to give my son or daughter a business, so I will get him or her a franchise.”
“… I better just get a franchise since I will automatically have very good sales and profits.”
When franchisers and franchisees have these mindsets, the franchise is definitely on its way to failure at the very onset.
To avoid failures, both franchisers and franchisees should be very clear about their reasons for going into franchising. They should manage their expectations and realize that their respective franchising goals are complementary to each other.
2. Unmanaged growth
Forward planning is an absolute must when a franchiser decides to expand his or her business through franchising, and the same is required of anyone who goes into business as a franchisee. Franchisers must ensure that their level of commitment and support to each of their franchisees is the same and consistent whether the latter is the first or, say, the 50th franchisee.
Franchisees must make sure that they are prepared and ready to meet the demands of increasing sales volumes. This is because customers can be very unforgiving when a franchised outlet fails to provide the standard service and quality products that a franchised product or service is known for.
Successful franchise systems provide for built-in mechanisms to cope with such growth challenges. For sure, mistakes will be committed along the way, but great franchise systems build on these mistakes, then move on and become stronger as they wrestle with the challenges presented by their growth.
In fact, franchising’s greatest competitive edge is that both the franchiser and its franchisees can work as a team to effectively address these growth challenges. This is the business synergy in franchising that other forms of doing business simply don’t have.
3. Low sales and losses
Most franchise failures result from low sales and operational losses, and the most common factors that lead to them are as follows: