Understanding Why Things Are Not Going As Planned

Owning a franchise is a dream come true for many entrepreneurs. You have all the kudos of running your own business, with the help and support of a trusted brand behind you. It’s always a challenge, and if it pays off you could be looking at a secure financial future and pride in a job well done.

But what if it goes wrong? What if the customers simply don’t walk through the door, or you struggle to keep the business afloat due to an ever-dwindling capital float, you can’t get the staff, or you cannot put in the time you should to make the franchise a success?

It’s normal to fail

Over 90% of new businesses fail in their first year. Franchises are, effectively, new businesses too. That makes them subject to the same risks as any other venture. If you go into a franchise contract thinking it guarantees you a successful business, then we suggest you go back and read the small print in more detail. Taking on a franchise does not automatically mean you’re going to succeed, and it’s important to understand why sometimes things don’t go quite as you planned them.

How a single failure can impact on the franchise system

A franchise failure doesn’t just impact on the franchisee – it can have a knock-on effect to the overall franchise system too. In large systems, this impact may be quite small, but in a small system with just a few franchise contracts, the effect can be devastating. Not only can it mean the loss of royalties, but it can also potentially pollute the brand. Franchise failure can be construed as the failure of the overall model, even if the fault lies exclusively with the franchisee.

Currently, there are no reliable statistics that compare the failure rate of franchises to those of normal start-ups, so it’s difficult to say conclusively that you’re more likely to fail in one or the other type of venture. What you can do, though, is to examine the root causes of franchise failure, and try to avoid falling into the same traps.

Causes of failure

#1 – not having enough capital to maintain the business

This is probably the most common cause of any business failure, including franchises. Under-estimating the cost of setting up and, more importantly, maintaining a franchise can very quickly lead you into troubled waters.

Your franchise contract will include a breakdown of not just your licence fees, but the expected investment levels your franchisor demands. There is, however, a big difference between the ‘Minimum investment’ and the ‘Overall investment’ numbers. A minimum investment is the absolute bare minimum your franchisor will want to see before they grant you a licence, approximately 30% of which you will have to fund yourself (the other 70% can be through loans from specialist lenders).

Never go into a franchise contract with just the bare minimum capital funding. Even low-cost franchises will eat through your finances in record time, and those that require a bigger list of expenditures to get them going will stretch your funds to the limit in weeks, not months.

Anticipated cash flows can only give you a guestimate of the actual returns, so don’t base your decision purely on these somewhat arbitrary numbers alone.

#2 – picking the wrong site

Just like any other business, franchises rely on the right location (with maximum passing footfall) to succeed. Open in the wrong place (where there’s not enough passing trade to sustain you, or you’ve got too much competition) and your franchise could fail within weeks.

Work with your franchisor to ascertain where you should be positioned, and if your position is robust enough to beat off competition from other franchise holders or direct competitors.

#3 – failing to deliver a customer-focused service

The clear majority of franchises are customer-facing, which means you’re going to have to deliver a service that not only gives customers a great experience, but meets their expectations of the brand too. If your franchise contract is with a high-profile chain with much greater levels of brand awareness among its customer base, and you fail to deliver what they’re expecting, then your franchise will be in trouble very quickly.

Make sure you understand the model the franchisor wants you to adopt, that you are meeting customer expectations, and giving them that premium quality experience they demand.

#4 – Trouble recruiting staff

You won’t be running your franchise on your own – you’ll need to recruit staff as well. Struggling to bring in the right people quickly enough to get the franchise up and running can send it spiralling downwards, and fast. Work with the franchisor to establish exactly what kind of workforce you need, and how best to recruit (and maintain) good quality staff.

#5 – Managerial inexperience

It can be a tough admission to make, but sometimes failure is simply down to inexperience. If this is your first time in a managerial role, it can be difficult to understand about concepts such as delegation. Taking on too much yourself can lead to burnout, and simply not understanding the job of a franchise manager and what it entails can lead to mistakes being made.

There is a degree of ‘learning on the job’, but it’s important to have at least a basic understanding of business management before you start. If necessary, take night classes in the subject, so that you know what you’re getting into before you start thinking about managing a franchise.

#6 – Not enough support from your franchisor

Sometimes, franchises fail not because of the fault of the franchisee, but due to a lack of support from the franchisor. Obviously, they’re not there to hold your hand every moment of every day, but a franchisor should offer you some support to help you establish your outlet and smooth over those bumps in the road during the early stages. That could be intensive training and then online support, or it could be a more ‘hands on’ approach with regular mentoring and ongoing training throughout the first year or two.

Make sure that you know exactly what level of support your franchisor is offering during your negotiations, and that it’s clearly laid out in your franchise contract what measures are in place to help you set up and run your franchise from day one.