Franchise Failures: Where Did It All Go Wrong?

Franchise failure

Originally uploaded on 28/01/2018. Updated on 14/04/2019.

Research from the BFA-NatWest survey shows that 97 percent of franchises run in profitability and fewer than five percent experience a change in ownership. But while only a small minority of franchises fail, it is important to understand the potential hazards of the franchising model. Lets take a look at some of the issues that franchisors and franchisees could encounter.

Read more:

Is the failure due to the franchisee or the franchisor?

Before looking at the reasons why a franchise might fail, its important to determine whether a specific failure is the fault of the franchisee or the franchisor or something outside of their control. If a franchise fails but all the other franchises in its network are performing very well, you could suggest that the franchisee is responsible for the issue. However, the underperformance or failure of a number of franchised units could be down to a lack of franchisor support or a recent change to the franchise model.

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

Location

A franchises territory is key to its success. If there is too much competition or insufficient demand for the franchises products or services in the area, the business may struggle to make enough sales to cover its overheads. A franchise could also fail if the territory is too small, as this could prevent the business from attracting a good number of customers.

This is why the best franchisors always carry out detailed research into potential franchise territories. They must be able to perceive enough demand to make the new business viable in that location.

No Exclusive Territory

Some franchise agreements specify the exclusive territory within which the franchised unit can operate. This means the franchisor is prevented from setting up another franchise in the area. However, if this clause doesnt exist and another franchise opens up nearby, your business could be at a serious disadvantage even if its highly profitable. Of course, if your existing customers start to use the products or services of the new franchise, your profits will decrease and your business will be in danger of folding.

However, an exclusive territory may not be necessary in areas with little competition; for instance, if youre opening a gym in a small 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.

Generally, the lack of an exclusive territory should only be a concern if you are launching a franchise in an area with 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 one-mile radius. If franchisees ask about an exclusive territory, franchisors will often perform independent research to determine whether the territory is viable. However, others will allow the franchisee to select their own location.

Inadequate Training and Support

Getting your business into profitability as soon as possible relies on sufficient training and support. The best franchisors will not only provide extensive training and support, but will also outline 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. You are at risk of breaching the franchise agreement and giving your franchisor the right to take legal action. Lack of knowledge could also have a negative impact on your customers, reputation and long-term profitability; for example, if you opened a franchise in the food sector and your staff have not been trained how to handle food hygienically, there is a chance your customers could get food poisoning.

Inadequate Marketing

Because you can only market your franchise within the assigned territory, its crucial that you utilise as many platforms as possible. Technology is key; if you dont do enough online marketing through your website and social media channels, you wont be able to improve your rankings on search engines, which will limit the number of prospective customers who find you online. Top franchises make use of social media outlets like Facebook, Twitter and Instagram, as well as other marketing techniques like email newsletters, keyword-optimised website content and blogs to advertise their product offering and build brand recognition in their territories.

Pictures can be remarkably enticing, so be sure to take high-quality photographs and include them in your marketing content especially if you are in a particularly visual industry, like the food, clothes or travel industries.

High Franchise Fees

Its not impossible for a franchisor to make a profit even if one or more franchisees is operating at a loss. This happens when the franchisor charges high ongoing fees or other unreasonable payments that can prevent the franchised unit from becoming profitable. The BFA states that franchisors should charge an average ongoing fee of 11.7 percent of total sales, so if your fee is significantly higher than this, your franchisor could be acting unreasonably. Bear in mind that some franchisors may also introduce a separate fee for training and marketing, while others will include these services in the franchise fee.

High Rent

If you run a franchise from business premises, your biggest cost will be rent. This can quickly eat away at your profits. Sometimes the franchisor is the landlord, in which case, the rent may be adjusted to be higher if the business is performing well. However, if profits suddenly fall and the franchisor does not reduce the rent, the business could end up making losses in a short space of time.

Conclusion

Even the most successful business models can still experience a decrease in custom and profitability, damage to their reputation and even legal repercussions if the right steps are not taken. However, approaching the franchise model with diligence and an entrepreneurial attitude will help you to avoid these common pitfalls and be rewarded financially, professionally and personally.

Other recent articles
Did you enjoy this article? Please rate this article
Average rating (4.75/5) based on 2 vote(s)

0 Comments

post a comment

Characters remaining: 250