Franchise Failures: Where Did It All Go Wrong?

28/01/2018 18:00 | Start a business

Franchise failure

Although research from the British Franchise Association (bfa) shows that the success rate of UK franchises is more than 95 percent, a small minority of franchises do experience failure. Even top franchises may struggle to make a profit during economic downturns, when consumer expenditure can fall drastically. Although its worth noting that many survived during the recessions of the late 2000s and early 2010s.

Is the cause of the failure due to the franchisee or the franchisor?

Before looking at the reasons why a franchise might fail, its important to determine whether the failure was the fault of the franchisee or the franchisor, or something outside of either partys control. For example, if a franchise fails but all the other franchises in the network are performing very well, this would suggest internal problems were the cause. However, if other franchisees have failed or are not performing as well as theyd hoped, this could be due to a lack of sufficient training and support from the franchisor, or a recent change in the franchise model.

Here are some of the most common reasons why a franchise might not succeed:

Location

One of the main reasons franchises fail is because of their territory. If there is insufficient demand for the franchises products/services in the area, or too much competition, the business may struggle to make enough sales to cover its overheads. The best franchisors will always conduct detailed research on prospective franchise territories, so they can determine whether there will be enough demand to make the new business viable at a particular location. A franchise could also fail if the exclusive territory is too small, as this could prevent the business from attracting enough customers to meet its sales targets.

No exclusive territory

Some franchises operate under an exclusive territory, which prevents the franchisor from setting up another franchise within a specified geographical area. However, if there isnt an exclusive clause, and another franchise starts operating nearby, this could put your business at a serious disadvantage, even if its highly profitable and has become one of the top franchises in your network. This is because many of your existing and prospective customers may start using the products/service of the new franchise, which could reduce your customer numbers to the extent that you're no longer able to operate at a profit, regardless of how successful your franchise model was.

However, an exclusive territory may not be necessary in areas with little competition

If you're concerned that your prospective franchise does not have an exclusive territory, you may not need to worry too much if the area doesn't have much competition. For example, if you're opening a new gym in a village with no other gyms, it's highly unlikely that your franchisor would want to open another franchise in the same community if the market is only large enough for one gym.

Generally, an exclusive territory should only be a concern if youre planning on owning a franchise in an area where theres plenty of local competition. For example, a restaurant franchise might seek an exclusive territory in a city suburb where there are several restaurants operating within a mile radius. Often, franchisors will perform their own research to determine whether a territory is viable, although others will allow the franchisee to choose the location.

Inadequate training and support

To ensure you understand your franchisors business model and can get your new business into profitability as soon as possible, you need to receive the right training and support. Even if the franchisor does provide extensive training and support, this may not be sufficient if it does not address the specific requirements of the business.

Without the right training, your staff won't have the skills or knowledge to deliver the best customer service and carry the brand forward. This can also increase the risk of material breaches of the franchise contract, which could give your franchisor the right to default on your franchise. For example, if you were owning a franchise in the food sector and your staff were not property trained on how to handle food hygienically, theres a chance your customers could get food poisoning.

Inadequate marketing

Because franchisees can only market their franchise within their assigned territory, its crucial that you market your business through as many channels as possible. For example, if you dont do enough online marketing with your website and social media, you wont be able to improve your rankings on search engines so prospective customers can find you online. Top franchises make the best use of social media outlets like Facebook, Twitter and Instagram, as well as other marketing services like e-mail newsletters, keyword-optimised website content and blogs to advertise their products offering and build brand recognition in their territories.

High franchise fees

Its not impossible for a franchisor to do very well even if one or more franchisees is operating at a loss. This is because the franchisor may be charging very high ongoing fees or other unreasonable charges that can prevent the business from becoming profitable. The bfa states that franchisors should charge an average ongoing fee of 11.7% of total sales, so if your fee is significantly higher than this, your franchisor might be acting unreasonably. Some franchisors may also charge for training and marketing, while others will include these services in the franchise fee.

High rent

When owning a franchise, your biggest cost will be rent, which can quickly eat away your profits if its too high. Sometimes, if a franchisor is the landlord, the rent may be higher if the business is achieving very strong sales. However, if profits suddenly fall, and the franchisor does not reduce the rent, the business could end up making heavy losses before it fails.

As this list of potential reasons for franchise failure proves; even though youre investing in a business with processes in place and a reputable brand name, it can still all go wrong. But avoid these common pitfalls and running a franchise will reward you both professionally and financially.

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