Five things that cause franchisees to fail (and how you can avoid them)

Jason Gehrke | Director | Franchise Advisory Centre

Five things that cause franchisees to fail (and how you can avoid them)

After more than 25 years in the franchise sector, I have seen many franchisees achieve spectacular things that would never have been possible in their previous jobs.

However at the same time, I have also seen more than a few franchisees crash and burn. Typically, when a business fails, the owner will externalise responsibility for this and blame someone else.

For an independent small business, the targets of blame are typically banks, landlords, big competitors, government regulation, the economy, or one or more of these in varying measure.

For a franchisee, these same targets of blame exist, as well as the largest and most convenient target: the franchisor. While it might be easy for a failing franchisee to blame their lack of success on a variety of perceived or imagined shortcomings by the franchisor, sometimes franchisees are the authors of their own misfortune.

So, based on 25 years’ experience, here are my top five reasons why franchisees fail, and what they should do to avoid them.

1 Insufficient Research

For many people, the decision to become self-employed is driven by factors other than money. It’s about taking control of their lives, enjoying a better lifestyle, getting out of an unenjoyable job or work environment, or some other issue. Rarely is it a decision based solely on dollars and cents.

As a result of these emotive decision factors, potential franchisees often don’t do anywhere near enough research before buying a franchise. For those who do make an attempt before signing up, it is often by proxy. In other words, they pay their accountant to do a business plan, and a lawyer for advice on the franchise agreement, then ignore both and go ahead anyway.

So, what you need to do is better research right up front, and neither your accountant or lawyer can do this on your behalf. (And a word of caution here – deal only with lawyers who are knowledgeable and experienced in franchising. They will save you time, money and anguish in the long run compared to the local lawyer who did your will or the conveyancing when you last bought a house). You need to talk to as many current and former franchisees as you possibly can (not just one or two, but dozens). The franchisor will have a list of these, and their contact details in their Disclosure Document.

You should also read the Disclosure Document and franchise agreement for yourself (in addition to getting advice from a lawyer). As boring as these documents are to read, they contain the essence of your future as a franchisee, including what you can and can’t do, and what you might be forced to do in future even if you don’t really want to. So my recommendation is very simple: Be prepared to spend up to one hour of research for each $1,000 to be invested in the business.

Be creative with your research too. Sit outside the proposed location and count the number of cars or pedestrians which pass by. Identify all of the potential competitors in your location, and learn as much about them as you can. Do a small business course online (there are lots to choose from). The more time you spend on your research up front, the better-prepared you will be to run a successful business.

2 Inadequate Business Planning

Starting a business without a business plan is like jumping out of plane without a parachute.

Good franchisors will insist that you do a business plan, and great franchisors will go through yours (and possibly reject it a couple of times because you have made unrealistic assumptions) before they let you join.

So let’s just get one thing straight. Business plans ARE important, but you need to OWN the plan. You need to craft it. You need to determine the sales projections and cost lines. Get your accountant to coach you on putting this stuff together, but it has to be YOUR plan, because your business will live or die by this.

Relying exclusively on your accountant to do your business plan for you is a common and often fatal mistake. Your accountant won’t be running the business - you will. Your accountant won’t be responsible for any losses - you will. Your accountant won’t lose their house if it all goes pear-shaped - you will. So take responsibility up front, and make it your plan.

3 Insufficient monitoring and modification

Once a franchisee has a business plan, has completed the selection process, undergone training and finally started operating, they too quickly forget their plan as they get caught up in the daily needs of the business.

This can be a fatal mistake. The business plan is the road map by which good franchisees drive their businesses to future success. This means they will constantly refer back to the plan while operating the business, and make frequent and minor course corrections to keep the business back on track with the plan. Unfortunately, many franchisees shelve their plans after they start operating, and only wonder what went wrong when they get to the end of their first six or 12 months of trading and wonder why they are so far off course compared to the plan. By then, it can often be too late to make the big changes necessary to turn things around.

So the lesson here is to monitor the performance of your business ruthlessly against the plan. Your plan should have annual, monthly, weekly, daily and even hourly sales targets (depending on the nature of the business), and therefore you should monitor these targets just as often to ensure you are on or ahead of target, and if you’re not, you need to act quickly to improve things before the rot sets in.

4 Not following the System

The ultimate act of self-sabotage that leads to ruin for franchisees is when they don’t follow the franchisor’s system.

When franchisees invest in a franchise, they buy into a formula for how to run a business. When franchisees stop following this formula, not only do they undermine the initial investment that they made, but they also put their entire business at risk.

The risks are twofold:

The first is that the franchisee’s business will simply enter into a progressive tailspin because they aren’t doing all the things necessary to run it properly in accordance with the franchisor’s system, and will find that customers stop buying, sales dry up, expenses blow out, and the whole thing goes to hell in a handbasket.

The other risk is that the franchisor will breach or terminate the franchisee for not following the system, especially if their behaviour is likely to cause damage to the brand or the businesses of other franchisees in the network. (For example, franchisee’s taking shortcuts in performing services, swapping out approved products for unapproved products, failing to follow minimum safety requirements, failing to pay their staff correctly, etc).

Franchisees can still influence positive change in a network, but must do so through the processes established by the franchisor. Some of the greatest innovations in some networks have been developed by franchisees, but these have occurred where the franchisor has assessed the innovation for the benefit of the network as a whole. Franchisees cannot make universal changes to how they run their business without checking the implications of doing so with the franchisor first.

5 Complacency

Even successful franchisees have failed, often because they built their business to a level of performance where they thought they could just sit back and count the money, and therein lies the problem.

A business requires the operator to be BUSY. A successful business is one where the operator stays in control and has their finger on the pulse at all times. They monitor the business’ critical sales and cost data constantly, and know what interventions to apply when things go off track.

Good business owners don’t take their businesses for granted. They don’t abandon the business for someone else without an ownership stake to run it, because then they are only ever one phone call, text message or email away from anarchy and chaos when that key employee resigns.

Good business owners also reinvest in their businesses, rather than plunder its spare cash for expensive holidays, cars, boats or other trinkets that they kid themselves into thinking they deserve. Bad business owners who plunder their businesses later wonder why they didn’t have the cash to pay their annual tax bill, or the means to refurbish their store at the end of its lease, or the means to replace a piece of critical equipment that fails unexpectedly.

Good businesses owners are constantly looking for improvements in sales, margins, cost containment and profit. Bad businesses owners – if they look at these things at all – often focus only on costs to drive profits, and miss obvious opportunities to grow revenues.

The bottom line

This is not an exhaustive list of why franchisees fail, but it is hopefully a warning to potential franchisees who have a rose-coloured view of their future in business. Remember that a franchisee’s best asset is their franchisor, and their worst enemy is often themself.

If you can avoid making the mistakes in this top five list, you will vastly increase your chances of running a successful franchise and start building your business empire.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for more than 25 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News, a fortnightly email news bulletin on franchising issues and trends.