As a third-generation entrepreneur, I firmly believe that franchising is a safer investment than starting your own business the traditional way. With the backing of a proven business system and a supportive network of fellow owners, even people without a lot of business experience can be successful as franchisees. No investment is perfect, however. Franchises do go under. Based on what I’ve seen as a franchise owner and consultant, there are 3 main reasons new franchises fail. Here’s what they are, and how to avoid them.
Reason #1: Undercapitalization
All businesses start out spending more money than they make. And if a business runs out of money before it becomes profitable, it will fail. Simple as that.
Unfortunately, new franchise owners sometimes underestimate the amount of runway their business will need. They may bring plenty of money to the table to pay their startup costs but neglect to maintain a sufficient cushion for ongoing operating expenses.
I’ve also seen franchises fail because the owners were personally undercapitalized. Their business had sufficient runway, but they couldn’t draw a salary because it wasn’t profitable yet. They had not made a good plan for paying their own bills in the meantime, so they had to throw in the towel and return to traditional employment.
How to avoid undercapitalization
During due diligence, pay close attention to the Franchise Disclosure Document. This document includes sections that outline operating costs and time-to-profitability for the franchise. If you work with a franchise consultant like myself or Lauri, we can refer you to a financial consultant who specializes in new franchises. This person can help you ensure that you come to the table with enough funding to provide the necessary runway for your business.
You should also make a personal financial plan before you buy your franchise. Be realistic about how long it will take to replace your current income and what your personal expenses will be in the meantime. Then make the necessary arrangements to cover those expenses. This might mean living off savings, operating your franchise as a side hustle for a while, paring back your lifestyle, relying on your spouse’s income, or some combination of those approaches.
Reason #2: Poor People Management
Some franchises will function well with only the owner to operate them. Most franchises, however, need at least one or two employees. And it’s very difficult to run a successful business if you’re not able to manage your employees well. Turnover, lack of productivity, and pushback or retaliation from unhappy employees can all drag down a business.
This is especially true with executive franchises, where the owner is not working in the business full-time. It’s crucial that executive franchise owners know how to build and lead a team, since the employees are the ones who will be handling day-to-day operations.
How to avoid poor management
Managing employees can be a delicate balancing act. You have to be aware of what they’re doing and challenge them to do their best for the business, without micromanaging them or pushing them to the point of burnout. Based on my own training and experience as a leader, these are my key tips for managing employees well, regardless of their roles:
- Communicate the company vision. Today’s employees, especially, look for meaning in their jobs. They need to know the “why” of a business in order to feel satisfied at work.
- Hire slow. It’s better to spend a little extra time finding the right candidate than to rush out and hire someone who won’t do the job well.
- Give employees the opportunity to grow. People find more satisfaction in their work when they feel trusted to make decisions and have the chance to learn.
- Treat mistakes as learning opportunities. This creates a culture where employees admit mistakes and fix them while they’re small, instead of trying to hide them until they turn into a major problem.
- Be approachable. Your mistakes as a leader will be fixable if you’re willing to accept and respond to honest feedback from your employees.
- Stay engaged. Even if you’re an executive owner, meet with your team regularly. This creates accountability and the opportunity for information-sharing.
- Pay your people. No matter how positive the culture in your business, employees won’t stick around if they can’t pay their bills. Do your best to pay a competitive wage and provide good benefits.
Reason #3: Failure to Follow the System
As a franchisee, you agree to follow the franchisor’s business system. This isn’t so they can micromanage you, control your business, or “keep you down.” It’s because they’ve invested significant time and resources into refining a system that works, and following it is the best way to make your business successful.
Some franchisees, however, have a really hard time following direction. It’s usually part of the reason they’re entrepreneurs: they like to do things their own way. Unfortunately, when that mindset is not managed well, it can be a prime cause franchises fail.
When that happens, it often starts with the franchisee deviating from the system just a little bit on the edges. They keep going if they don’t see immediate negative effects on their business. Before long, they’ve gone too far down their own road, and the business either goes under of its own accord, or the franchisor pulls the plug for violation of contract.
How to stick with the system
Some franchisees have trouble following their franchisor’s business system because they don’t properly understand it. Avoid this issue by reviewing the business system carefully during due diligence and by choosing a franchisor that provides plenty of support. This should include training, documentation, and a mentor or other support person you can call or email with questions.
If you think you’ll be able to follow a system as a general rule, but you want to have room to suggest improvements, consider partnering with a newer franchise brand. They should still have a proven system, but they won’t have tested it with hundreds or thousands of franchisees. They’re often open to feedback from early franchisees, to help them complete that final stage of refining their process.
Finally, self-assessment is extremely important here. You have to be honest with yourself and your franchisor. If you’ve spent your entire career butting up against rules and processes, you’ve always wanted to do things entirely your own way, or you don’t take well to collaborative arrangements, franchising may not be right for you. It’s better to recognize that up front and save your money.
As an experienced franchise owner and consultant, I can help you with the self-assessment process and with planning for success. Book a call with me today to get started on your franchise journey!
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