Is Franchising A Risky Business?

11/03/2018 08:00 | Start a business

Is franchising risky business?

Buying into a franchise comes with many benefits, but it's far from bulletproof. Even the most successful franchises face risks and potential pitfalls. So, what are the risks associated with the franchise business model?

The franchise business model cannot be replicated.

For a franchise to be a success, its franchisees need to be able to replicate the business model easily. A business may have been very profitable, but if the concept only succeeded because of specific factors that can't be duplicated, then it's doomed to fail as a franchise.

If the business benefited from a unique location, or it launched at the right time, or because the owner dedicated blood, sweat and tears into making it work, its unlikely that a franchisee will be able to recreate these elements. For a franchise to be viable, it should have a straightforward business model which can be easily adapted to a range of markets.

Inadequate operations manuals

The concept may be easily replicated in principle, but even the most successful franchises on paper will fail to succeed in reality if the operations manuals are of poor quality.

The risk of not having a well-written set of manuals is real for a franchisee whose franchisor hasnt invested in this critical area of franchising. Not only do the manuals detail areas of the franchise agreement that need to be followed, but they also ensure that the integrity of the brand is protected. They also make sure that no matter which franchise a customer visits, they will receive a consistent product or service. It is through this uniformity that a strong and reputable brand is created and sustained.

Research commissioned by the British Franchise Association and NatWest in 2015 revealed that 91% of franchisees are satisfied with their franchisor. This percentage has never been higher, but there are risks associated with buying into a franchise with the wrong type of franchisor.

A franchisor who fails to innovate

You may be part of one of the most successful franchises, but if the franchisor lacks creativity and refuses to move with the times, the franchise business model will become outdated. Failure to meet the demands of customers and reluctance to evolve with an ever-changing market can mark the beginning of the end for a franchise. Customers will look for a more relevant, up to date and advanced competitor that can meet their needs.

Poor protection of the brand

The foundation of a successful franchise is consistency. This is why there are strict rules in place that franchisees must adhere to for the whole franchise model to succeed. If a franchisee within the network doesn't comply, the franchisor must be strong enough to reprimand the franchisee accordingly. Failure to do so will send out the message to other franchisees that there are no repercussions of choosing not to follow the rules. If service and product quality drop as a result of lack of uniformity, this may signal the beginning of the end. Consistency breeds trust for customers, and they won't buy from a brand they don't believe in.

Taking on too much, too soon

In a franchisors quest to grow rapidly, they may take on new franchisees without having enough resources to support the franchisees that they already have on board. If too much focus and attention are placed on recruiting franchisees, then the training and ongoing support for those already within the network can fall by the wayside.

Not only does this result in dissatisfied franchisees, but eventually it will lead to poor performance from the unsupported franchisees who in turn will provide a lower quality of customer service. If franchisees are left without adequate resources in place, the consequences can range from the brands reputation being jeopardised to bankruptcy of the franchisees.

So, the franchise system itself, and the franchisor can sometimes be at fault for the failure of a franchise. However, much of the risk associated with being a franchisee can come from the franchisees themselves.

Having a false sense of security

Buying into a franchise does have many benefits, particularly for first-time business owners, but this doesn't mean that success is guaranteed. If a franchisee enters into a franchise agreement believing that they can build a profitable business with minimum effort, they're going to be very disappointed.

Owning a franchise takes hard work and dedication, and the franchisee must take full responsibility for their business results. Of course, good franchisors will offer support and guidance to help achieve the desired results, but the main ingredient for the success of the franchise is the franchisee.

Not willing to conform Franchisees who are unable to stick to the franchise rules will end up ruining the relationship with the franchisor and fail to succeed as a franchisee. It can be challenging to adhere to someone else's business model and predetermined rules, so those with a fiercely entrepreneurial spirit may be better suited to starting an independent business, rather than investing in a franchise.

Lack of funding

Being undercapitalised is one of the most common reasons for why franchisees fail. Very often prospective franchisees can underestimate precisely how much money is involved in starting a new business. They assume the franchise and royalty fees are the only expenses that they need to cover and often overlook the importance of working capital.

Having a full understanding of the cost of franchising will ensure that you budget effectively. Youll be able to secure adequate funds to cover both the investment costs and operational costs until the breakeven point. Experts recommend that you have access to a minimum of 12 months of working capital so that business and personal expenses can be met until the franchise is in a position to be able to fund itself.

Yes, there are risks involved in buying a franchise, but there are also lots of opportunities too. Understand what challenges you may face on your franchising journey and prepare how youre going to overcome them before they even happen.

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