Being forced to close a business can feel like a crushing defeat, but a failed franchise unit doesn’t have to influence your future. While you can use your newfound understanding to shape your next pursuits, there’s no reason you can’t succeed - in fact, you’re more likely to after experiencing failure.
Franchise failure can prompt feelings of shame, guilt and even depression. Many people become isolated, believing themselves to be negatively judged by others. But business failure is incredibly common, and the vast majority of successful entrepreneurs have experienced it at least once in their lives.
Although the concept might seem depressing, it’s a good idea to accept the prospect of potential franchise failure every time you initiate a new business transaction. By practically and emotionally preparing for the worst, you’ll be able to handle the situation more effectively than if you wait and stay in denial.
We celebrate the blazing fast growth of the Inc. 500 companies, but many of those entrepreneurs harbor secret demons: Before they made it big, they struggled through moments of near-debilitating anxiety and despair-times when it seemed everything might crumble.
—Jessica Bruder, Inc.com
Why do franchise businesses fail?
Franchising offers valuable security and support for entrepreneurs, but it’s not a guarantee of success, and some franchisees find themselves in tricky situations. Here are some of the most common factors behind failed franchise businesses:
- Insufficient funding - Most franchisors estimate the amount it costs to launch one of their branches, but the exact figure will vary from site to site. Franchisees may be hit with higher bills than they’d expected, or lack the working capital to keep things ticking over until they turn a profit.
- Poor training or lack of support - Franchisees pick up a proven business model and implement it in their own business, but achieving success is difficult without guidance from the brand’s leader.
- Unsuitable location - Even if a franchise has seen success across the globe, it may not be suited to every location. Franchisors and franchisees should do due diligence before signing a contract, to make sure the business will thrive at their chosen site.
- Lack of territory exclusivity - Most franchisors allocate exclusive territories, preventing investors from encroaching on their peers’ regions. If a franchisee doesn’t benefit from exclusivity, they may end up losing customers to others in the network.
- Expensive fees - If the franchisor sets the ongoing fees at a high rate, franchisees may struggle to cover all their expenses and turn a profit. Usually, franchises prevent this scenario by limiting payments to a percentage of the investors’ sales total.
- Substandard marketing activity - Often, franchisors plan national marketing campaigns while franchisees carry out local initiatives. If they can’t work together to promote the franchise effectively, the business may suffer.
Only recently, after the tragic suicide of Jody Sherman, CEO of a start-up called Ecomom, did the technology community begin to publicly acknowledge the problems with its 'entrepreneur as hero' narrative. Publicly admitting to failure, and examining it, can take guts. It also distills the narrative to a case study from which other entrepreneurs can learn.
—Erin Griffith, Fortune.com
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Coping with franchise failure
If you’re mourning a failed franchise business, you’re not alone - and there’s no reason to be ashamed. Even if you think you could have taken different steps, it’s likely there were other factors at play, from a lack of support to personal issues or the Covid-19 pandemic. A franchise failure is not a personal failure.
Regardless of the circumstances, you almost certainly have the ability to succeed after failure; you’ll be equipped with vital insight, understanding and determination you didn’t have the first time round.
If you find yourself facing franchise failure, consider taking these five steps to learn from your mistakes and come back stronger than ever:
1. Review your finances
Whether you’ve got an emergency fund or not, you need to get your finances in order. Put this task off for too long, and you could end up losing faith in your abilities and momentum in your career journey.
Depending on the severity of the situation, you may need to make money quickly in order to pay your debts and move on. The key is to find a temporary but stable source of income, so start looking for jobs to pay the bills while you find your footing. Be wary of loans unless you’re certain you can stick to the repayment schedule.
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2. Rest and recharge
Franchise failure can have a devastating impact on your mental health. Many people experience burnout as they work overtime to try to save their business, and suffer from anxiety or depression as things go downhill.
Even if you want to rush into a new project, take the time to grieve for your business and heal from the experience. Spend time on your hobbies and socialise with friends and family. When Steve Jobs was asked to leave Apple in 1985, he spent some time in Europe, before ultimately returning to the company in 1997 and helping it recover from bankruptcy.
3. Evaluate your mistakes
You can make the most of a bad situation by learning from your failed franchise business. Think about what went wrong and all the small contributing factors that can add up to catastrophe.
At this point, you might find yourself taking on the blame. While it’s important not to shy away from the facts and take responsibility for the events leading to the business’s failure, you should cut yourself some slack. You did what you thought was best for the unit at the time.
4. Analyse the market
Whether you intend to keep working in the same industry or not, you must take some time to review the market. It may have evolved since you launched your last business - which could have actually led to its downfall - so it’s important to do some fresh research.
You might discover changes in consumer demand or effective operational practices, for example. Taking this step will not only help you understand what went wrong, but also inform your next venture.
You might find yourself wishing you could lie low for some time, particularly if you feel embarrassed about your failed franchise unit. But putting on a brave face and meeting new people will help you regain confidence and access advice. Other business owners will appreciate you sharing your experiences and insights and you can make new contacts to support you in future projects.
Also, don’t be tempted to drop the people you worked with in your old business. They may be useful assets in your next venture, as employees, partners or advisors.
There are two responses to failure. You can get bogged down or you can grow.
—John Foy, attorney and founder of John Foy & Associates
More franchising guidance
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Alice Tuffery, Point Franchise ©