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A Franchiser’s Guide to Handling a Franchise Failure

Franchising is the best option for businesses that want fast expansion into new markets without heavy investment all the while maintaining the standard of the offerings and operations. By the end of 2018, there were about 759,236 franchise establishments in the US. This means that one in every 12 businesses in the US is a franchise. Compared to businesses that have to build their brand from the ground up, franchisers have a success rate of 90%. As impressive as this may be, any franchise business could fall into the unlucky remaining 10% and therefore, it is critical to know why certain franchises fail.

franchise success photo

Reasons Why Franchises Fail

  • The franchisee’s inability to properly operate the franchise
  • Underestimation of the effort needed by the franchiser
  • Failure of franchiser to provide proper training and support
  • The location chosen isn’t optimal or is too expensive
  • Inadequate marketing efforts for the franchise
  • Improper budget management

A major advantage to franchising your business is that the franchisee will take part to cover as many costs as you do, which means your own costs to start a franchise will be minimal. This reduced cost makes it a highly feasible method of expansion for small businesses.

However, in the past, this has led to overzealous business owners underestimating the financial limitations they would actually face. Without the capital to support the growth, the move to a franchise can be risky. Consider your new franchise as an entire business on its own, and among other things to consider, you’ll also need to budget accordingly. 

The following are the costs linked to franchising your business:

  • Feasibility Study: A franchise consulting system can help determine whether your business is ready to franchise. This can cost between $3,500- $7.500.
  • Legal costs: Every business intending to franchise needs a Franchise Disclosure Document and a Franchise License Agreement, in compliance with Franchise Regulations. This can cost between $38,250-$91,000.
  • Training and Material: All your franchisees and their employees will require training and an operational system to maintain consistency throughout your franchises. This can cost anywhere between $25,000-$70,000.
  • Marketing: When you begin to franchise your business, you’ll want to market it as quickly as possible. However, the sooner you wish to expand, the more this can cost. Generally, it can vary between $22,500-$135,000.
  • Other costs: Costs like additional staff will vary depending on the number of people you actually hire and the size of your franchise. These can be between $0-$200,000

In a broad estimation, your overall budget should be between $89,250- $503,500. Although this number may look intimidating, falling short can cost you in the long run. Besides a failure to budget, there are multiple reasons why a franchise can fail. Some reasons may be quite apparent, while others may be less obvious.

How to Prevent Franchises from Failing

Avoid Toxic Franchisees

Not only can these franchisees damage the quality of your brand, they can also set a bad example for other owners.

Litigation and Compliance

The franchiser may sometimes get into a legal dispute with the franchisee over something that could’ve been prevented from the beginning. All your franchisees must be properly trained and supported by you. Regularly update the contracts and make sure all franchisees are within it. The renewals should be signed and delivered before the contract is up, and all parties must be in compliance. There should be no defaults from your end.

Keep an Eye on Royalties

As a franchiser, you may face the challenge of getting your royalties from all your franchise locations paid on time. If your franchises self-report their sale, you should check the accuracy of these numbers. Proactively check these trends before they hurt your business. Cross-compare these with the analytics in your database, especially for new franchisees. Most small businesses are in a constant need of funds, and not getting paid on time may affect you financially. Of course, you can always seek out an alternate franchise financing option while you wait.

Avoid Inconsistent Relationships

One of the most important aspects of any business is the customer experience and when it comes to franchises, it’s crucial that the customer experience is consistent at all your store locations. A central operational management system is essential across your franchises. Ideally, these provide a consistent structure and all brand requirements to your franchisees-including the tiniest detail of how to greet the customer’s right and their subsequent journey right to the point of sale. To maintain uniformity, an online training can ensure your locations in one part of the country are almost identical to those in another region.

Ultimately, not all the reasons why franchises fail or how to prevent them are independent. How your franchise is operated daily will be reliant on the individual franchisees. Ensure you keep immediate financial options available as backup for unexpected emergencies.

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