Few franchises fail but it does happen from time to time. Mostly, failures in franchising can be avoided if a franchisee understands the process and works with the system. Franchisees have plenty of reasons to be optimistic about their chances of success in franchising.
More than 75% of franchises are still thriving after five years. The statistics for independent start-up businesses show the reverse statistics. At least three-quarters of start-ups fail within the first five years.
Franchisees are in a favorable position for success. They have a proven system behind them as well as franchisor support. Yet some franchisees make drastic mistakes that can lead to failure.
Why a Franchise Might Fail
. Insufficient Working Capital
The required amount (and even more for unexpected circumstances) of funding is a must for franchising success. Actually, insufficient working capital is the main reason for failure in franchising. Sometimes franchisees underestimate the cost at different stages of their business such as the expense of start-up or necessary funding to reach the ‘break even’ point.
. Financial Mess
Even if franchisees have enough funding, they must be able to manage their finances. A financial mess spells disaster for a franchise. Bad financial management will turn out to be a franchisee’s worst nightmare.
Franchisees have to know the score. They must have the complete financial picture. Franchisees need to see where they have been, where they are, and where they are planning to go with their business.
. Bad Operational Management
Poor operational management has been proven to be at the root of more than one franchise failure. Keep in mind, however, that franchising offers definite advantages. Franchisees have methodologies and processes in place. Most likely, the franchise will have a selling guide for franchisees. If a franchise revolves around purchasing, the franchisor should have pricing models and purchasing contracts.
Basically, a franchisee has a ton of resources to draw on for their business. Yet a franchisee has to like management or be in a position to get a qualified person to handle operational management. Poor practices will drag down a business.
. Location
The location of a franchise is a huge factor in the success or failure of a business. If a franchisee wants to maximize their chance of success, they must set up in the best location for that business. The demographics must work for the enterprise. One positive feature of franchising is that the franchisor can help with this decision.
. Poor Planning
Poor planning or even worse – no planning – is a surefire path to franchise failure. Many individuals are not efficient planners but a franchisor could offer support in this area. Even business plan templates can help franchisees to establish a plan for success.
. Out-of-control Growth
Franchisees must maintain an overall balance and that approach applies to growth. All business must move forward but they need to grow in a manageable manner. Rapid growth can put too much pressure on a business. Growth and credit might get in a collision course and cash flow could become a serious issue.