5 Reasons Why Startup Franchises Can Fail, and What to Do About It

Griffiths University recently reported that the overall number of franchises fell between 2012 and 2014 largely because of small and unprofitable franchise closures. This wave of closures, in my experience, poses a real “uneasiness” to both aspiring franchisors and franchisees.

But why is this happening?

Is it because the franchisor’s business model is not appropriate for franchising? Or maybe the business owner does not have the necessary skills to operate a franchise system? More importantly, will this mean that the odds of being able to expand at this particular time are highly stacked against you?

It is worth noting that over the years, many successful franchise systems did start with only one outlet – Subway, Donut King, McDonalds among them. Most new franchise groups start with one or very few outlets. And there are other smaller franchise groups which operate with a small number of outlets and do not wish to grow. Franchises such as Bushman’s Bakery, which is a small, family-run regional franchise group with about 8 outlets, operating on the Mid-North Coast and hinterland now. All these systems have managed to prevail regardless of economic situation or the size of the group.

Knowing you have to start small, the key to having a successful business format franchise system is to start smart and avoid the franchise profit traps.

Here are 5 steps you can heed to not fall and get stuck:

Don’t think a franchise is just a Legal Agreement and an Operations Manual.

A common mistake made by most startup franchisors is not having a clear structure for the way their franchised business will operate. They get caught up in drafting the legal agreement that protects the intellectual property of their business and creating operation manuals that act primarily as a sales tool for prospective franchisees.

While the agreement and franchisee manual are crucial both for the protection of your business and keeping your franchise outlets uniform, you need first to get your franchise business structure right.

Every franchise is based on two kinds of businesses – one for your franchisee delivering your product to your customer and one for you, as a franchisor, providing support to your franchisees. The tasks carried out by these two sides of the franchise are completely different and both have their own franchise operations and procedures manuals and the arrangements between the two determine the details of the legal agreement. Writing the legal agreement before you sort out the arrangements between the two sides is fraught with danger because you don’t yet know what you need.

2. Take care with the product and the location (What product is the target market looking for – Demographics)

In every good business, the product or service is tailored for a particular target market, a group of people who love you and who spend with you. Your tribe. And it is your tribe who will make you profitable.

In a franchise group, knowing the demographic characteristics of your tribe and knowing exactly what they desire from you is even more important.

This is because you will want to hone your product and market it around the desires of your most profitable customers. Do they want upmarket wood-fired pizzas or is the speed of delivery and the price that the defining factor.

It is also because the demographic profile of your tribe feeds directly into the planning you need to do for your franchise territories. These characteristics will determine where your franchisees will be most profitable and how big each area needs to be to give each franchisee an equitable return.

Get these two interlinked things wrong and you will struggle with establishing profitable franchise outlets in the future. Get them right and you’re on the road to sizable growth.

3. Think carefully about ongoing fees to support your franchise outlets, especially for the long term

Many new franchisors overlook the need to charge sustainable ongoing fees to cover the support services they need to give their franchisees. It is not easy in the early days to work out exactly what you will need to do to keep your franchise outlets up and running and to keep your franchisees happy. Exactly what should you be doing to help them bring in customers, how much work will your support team need to do to keep them all up to speed, will you be making sure all your franchisees attend the annual conference and how much exactly will you need to run your franchisor side of the business – the list is long. And many of your responsibilities will be set in stone in the legal agreement you set up in the early part of your journey.

The thing is, in the early days, you will be receiving one-off payments for franchise territories which can cover much of this work. But, in the longer term, as all your potential territories are filled, this one-off initial income will reduce. Then it will be really important that the on-going frees cover your part of the deal.

Redspot Taxi Trucks very successfully developed in Perth in the 1980′s to around 20 franchisees. But once there were no more territories to sell, the franchisor business failed because their ongoing support fees had not been calculated correctly. They were not adequate to cover the ongoing support and training needed by a mature group franchisees.

To avoid a similar outcome, spend time carefully working out what support you will provide in the long term and the costs and make sure the way these are reflected in your legal agreement is flexible enough to grow with growing needs.

4. Think about support and marketing – especially in the long term

One of the most profound sayings from Greg Nathan, Principal of Franchise Relationships, is ‘Happy franchisees are profitable franchisees.’Franchise Relationships specializes in working with established franchise groups to improve the crucial franchisee – franchisor relationship.

Taken together with the notion that it is your franchisees who will bring in the money for both sides of the franchise in return for your services, you need to take care of your part of the agreement in detail or your franchises will be at risk of disintegrating.

Basically, as franchisor, you have two jobs.

You need to make sure the marketing for the whole group is strong. This involves making sure the brand looks, feels and acts the same throughout the group, and making sure the leads are coming in so your franchisees have customers to serve.

You also need to provide a strong support system for your franchisees. Something that makes sure they operate their outlets consistent with your brand and they get the attention and training they need.

5. Don’t hire the first person with the money to invest

The right person to take up the role as your franchisee is instrumental in propelling your business forward. You need to really understand the combination of skills, personality, experience and passion you want see your franchise business a successful one. The wrong characteristics can be devastating to the morale of the group, especially in a new franchise.

It is so easy to in the first instance to make your decision based on the money that this person offers, but don’t fall into this trap.

Consider my experience with Bedshed.

My first experience with Bedshed was where, as a franchisee, I bought out a couple of existing franchisees who struggled with the business. Although they had the funds to purchase the business, they did not have the skills or experience to run the outlets successfully so the outlets were failing. With my business experience, I was able to grow the franchise outlets and then resell them for a profit.

3 Critical Franchise Benefits

Investing in a franchise business may make sense for you, particularly if it’s your initial move into business ownership. By selecting the right franchise, you can reduce some of the common challenges associated with small business startups. Leveraging the franchisor’s proven model and systems, you should ideally be able to mitigate many of the risks associated with opening a new business. From initial site selection through ongoing day-to-day operational best practices, a strong franchise will provide significant benefits to help you achieve success. There are three critical benefits, however, that I believe you should consider when evaluating and selecting a franchise that’s right for you: the brand, the leverage, and the systems.

The Brand:

What is the value of the franchise brand in your target geographic market? Perhaps the brand has a great presence in the Northeast, but that may have little to no value for you if you are considering opening the first unit in the Southwest. A big part of what you are paying for is the brand recognition that the franchisor has ideally already invested in and developed.

A strong, positive and established brand is one of the biggest advantages of franchising. It would be extremely difficult to build a brand by yourself to the level that a successful franchise can achieve. A great brand should have positive value in the eyes of the customers or clients you’re trying to attract. Important considerations on this point include:

What is the value of the brand in your market?

Does it have a positive reputation, or have there been issues in the past that have tarnished it?

Is it a tired and dated brand, or is it fresh and relevant?

If the franchise you are considering is just getting started, or has limited to no presence in your area, then you should evaluate their ability to execute. What are their plans for building a brand that will benefit your location over time?

As other franchise locations open in the same area, is there a budget and plan for marketing the brand image specifically?

What is your monthly cost to participate in developing and maintaining the brand (this is typically the marketing component of the monthly dues to the franchisor)?

Franchise Leverage:

A successful franchise system should provide opportunities to leverage economies of scale that would simply not be possible or available to an independent small business. These points of leverage may include everything from preferential access to lending, to the combined buying power of the entire system.

When I owned several units of a local pizza franchise in the 1990′s, for example, I was able to buy cheese and other ingredients at a much lower price through the franchisor than I would have been able to negotiate as an independent operator. Advertisement is another area where franchise leverage can provide an advantage. You may be able to budget for an effective radio or television campaign as a franchise group, for example, that you would not be able to afford as a stand-alone business. The opportunities for leverage offered by a franchise may include:

Preferred access to lending (banks may prefer to lend to established franchises with whom they have experience).

Lower operating costs through group purchasing (for raw materials, equipment, and other operating supplies).

Cooperative and leveraged advertising campaigns.

Lead generation through websites or call centers.

More favorable consideration by landlords who value the reputation and historical success of the franchise.

Network of fellow franchisees to provide advice and moral support.

The Systems:

The quality of the systems offered by the franchisor should be the most important consideration in your selection of a franchise. The systems include everything that is used to operate the business in a standard and repeatable fashion. It includes the initial startup and training, the operations manuals, and the ongoing best-practices that drive continuous improvement in the business model. A comprehensive and proven system is what enables a self-managed company, as opposed to an operation that is dependent on a few key people who have all of the knowledge in their heads.

The systems are the core of any successful franchise. Without effective, proven and repeatable systems there is no franchise. The benefits of a great franchise system typically include:

A proven and repeatable business model.

Shorter time to opening your business (including assistance with site selection and design).

Comprehensive initial training (including operations and marketing).

Little to no direct experience required (the franchisor teaches you how to bake the cookies).

Ongoing support & innovation (including improvements to the systems).

There are certainly other important benefits and criteria to consider when evaluating a franchise, including their history and track record, their management and support team, protected territories, and how the business concept fits with your lifestyle and vision.

As with any business opportunity, there is no guarantee of success and there are trade-offs. When you own a franchise you must adhere to their policies and structure, and you are committed to the franchise for the length of the franchise agreement – often 10 years or more. This can create a conflict with your desire to be your own boss, and to have complete control over how you run your business. You are also exposed and affected to some extent by how other fellow franchise owners operate their units and their potential impact on the brand’s reputation.

There are no definitive or reputable data on the success rate for franchises, despite the often cited and debunked statistics to the contrary. That’s due, in large part, to the fact that franchises vary widely across many industries. There are thousands of franchise models available today. You must carefully consider the value you may be able to derive from a franchise, versus building your own independent business. With the correct expectations and planning, a franchise that meets your needs may well be the best option for you. A franchise that offers a strong brand, an opportunity for collective leverage, and comprehensive and proven systems can help you realize your dreams of successful business ownership.

How To Select The Right Franchise For You

If you’re looking for a franchise to purchase and start your business from, you’ve probably looked at sites such as Franchise Gator or Franchise Direct. You’ve probably seen different businesses and different price ranges and are trying to find the right business for you. Although there are many criteria that go into deciding what business is right for you, this article will introduce some considerations that you should have in mind when selecting a business.

#1: Remember That In Terms of Results, You Usually Get What You Pay For

Every business is different, so this consideration may or may not apply. Businesses vary in their price range from three to six figures. But you should always be wary of the businesses that cost less than 1000 dollars. These are usually businesses in which you will make little to zero amount of dollars or where you will have to work especially hard to attract the right customer in order to turn a profit. Examples of these kind of businesses include online stores and turnkey opportunities. One can make money from these businesses but it requires attracting the right kind of people and it usually backfires.

The best business opportunities are the ones that cost at least 10,000 as they are usually more structured and have a solid unique selling proposition. These two things will prove to be very important, especially to someone who is new to running their own business and does not have experience in marketing. The more expensive franchises are usually the ones that are already established brands and do not require as much of an effort in marketing.

#2: You Must Ask Detailed Questions To The Representative

Once you’ve submitted an inquiry to a certain franchise, their representative will contact you and ask some questions. It is very important that you ask a lot of questions and ask detailed questions about the franchise you are inquiring about. This is a process that should take at least a few weeks as you need that time to process all the information and make an informed decision. Some topics on which you should ask questions involve:

1) the amount and type of work you will have to do,
2) what is the franchise’s unique selling proposition,
3) ask to see any financial spreadsheets or information about the company’s performance, and
4) what kind of time commitment will you have to the ownership itself. You must make sure to gather a lot of information before you make the big decision to purchase a franchise.