Reasons Why Franchisees fail in a well Run Franchise System

Friday, August 26, 2011

The reasons for failure largely mirror, the common reasons for failure in any business - lack of capital, lack of motivation, lack of skill, system failures, time spent on the wrong things.

Assume firstly that the hypothetical Franchise System is a properly run Franchise System. Of course this is not always the case. In this hypothetical system, what then are the primary risks to success?

It should be expected that the reasons for failure in small business are in many cases the same as the reasons for failure of a Franchisee within a franchise system.

The failure rate for franchised businesses is perhaps less than the failure rate in private small business as a whole because, while some applicants would not be accepted by any competent franchisor, there is no restriction on any punter starting a business. It must be accepted that some people are not suited to owning a business.

What however are the most common reasons for failure within a well run franchise system. I recently followed a panel of advisors who considered these to be the primary causes of failure:

1. Under- capitalization. If there is not enough money available to make it through the tough times then success will be dependant on luck. A good accountant can provide information about how much working capital is required. Under-capitalization will also cause other failures related to funding which are disguised as something else. For instance, inability to employ the right people and failure to obtain the right advice, are often related to under funding.

2. Not enough motivation. If for any reason the franchisee loses motivation to succeed in the franchise then it is unlikely that the franchised business will be successful. A genuine burning desire to succeed will overcome many problems. Some franchisees hold a belief that it is not necessary to work as hard in a franchise system. This is incorrect. Success in franchising requires hard work, particularly in the early days.

3. Lack of ability. If the franchisee does not have the necessary skills they should not be selected by the franchisor. Nevertheless, even in a good system, a franchisor will from time to time select the wrong candidate. This can happen for many reasons and is a cause of failure.

4. Failure to make genuine energetic effort to follow the system -”I know better than your system” or “I can’t do those things”. Franchising is about following someone elses system. Once a franchisee is not able to do this, then energy is focused on the wrong thing and the franchising system will work against the franchisee, not for them.

5. Failure to work on the business and in particular work on effective marketing. Read the E-myth. A franchisee should not try to do everything themselves

6. Conflict with the franchisor or a lack of "fit" can be a significant cause of failure and should not be underestimated. Anyone who thinks that personality does not play a part in the success of a business is mistaken. Partnerships break up because people do not get on. A franchisee who likes their Franchisor representative is far more likely to succeed.

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