Why do franchises fail?

Arrow, down, failure, fall, decline, dropBooks have been written about the advantages and disadvantages of franchising. The government has even chimed in with its view. As always with these things, there is no definitive right or wrong answer.

One of the great attractions of a franchising system is the promise of a ‘proven system’, making the decision to invest less risky. Yet all businesses run the risk of failure and franchise businesses fail too. Some sources suggest the failure rate is the same or at least very similar. Of course there are widely divergent claims, but as noted here, these claims are often spurious. The claimed “95 per cent of franchises succeed” even goes by the capitalised moniker of ‘The Stat’.

Despite some legitimate doubts about these claims, I would classify myself as a proponent of the format. The market has spoken – given the size of the industry, one would have to accept that there are probably more advantages than disadvantages.

But there is one fundamental issue that is never addressed, which in my view is crucial to the success of a franchise system. While one can argue that the franchisee and the franchisor can share the blame in many instances (and they do) I want to focus on one aspect that is controlled by the franchisor.

The franchisor and the franchisee are not in the same business.

The franchisor is in the business of selling businesses and the franchisee is in the business of whatever the franchise system is (fast food, auto repairs, gardening etc.)

In essence, this means that the direct objectives of the two stakeholders are different. The metrics of success or failure are different. The strategies for growth are different, the daily issues faced are different, the cash flows are different, and the capital requirements are different. Franchisors are in a B2B business in the franchisees are usually in a B2C business – and even when they are in a B2B environment (like an accounting franchise) the market is still very different.

These differences do not necessarily mean there is or should be conflict. The franchisor has a vested interest in maintaining a healthy franchise system, because it makes it easier to sell franchises. But when there is a fall out in the relationship, I have discovered that the underlying cause usually relates to the fact that the franchisor has lost sight of the inherent risks of the divided interests, usually focusing on their business at the expense of the franchise system. A franchisor may focus so much on expanding the network (driving their own revenue growth) that it neglects maintaining the system effectively.

That is, the B2B interests of the franchisor are the primary consideration and the B2C nature of the franchise system becomes the secondary concern of the franchisor. I am not suggesting all franchisors are guilty of this, but in systems which are characterised by mass closures, franchisee revolt, and court cases; this is often the case.

Sometimes franchisees are accused of being uncooperative, or not being proactive or of not following the system. All of these claims seemingly point to the franchisee being the guilty party, but in fact I would argue that it is the franchisee recruitment that is to blame.

It again points to the malaise identified above. The franchisor lowers standards and allows people into the system who were clearly not suitable (often against their better judgement) because they are chasing market growth.

The worst types of franchisees are:

(a) People who think franchising is easy (guaranteed) money are usually the ones who are passive or reactive and whinges constantly about what the franchisor is not doing for them. Instead of understanding that they have a bought ‘a way of doing business’ and that they still have to actually do the business, they expect the franchisor to deliver everything on a plate.

(b) People who are too entrepreneurial to work within the system. These folks will work the system, but they will also break the system. They want to change the menu and change the processes or whatever. They always argue that their location, store, or customers are different and they deserve special consideration and exemption.

There is a fundamental shift that occurs when you move from being the operator of successful B2C business yourself to being a franchisor. The skills and knowledge you have in running your business pre-franchising become less relevant in some ways and you need to acquire new skills and adopt the right mindset.

It is sad when any business fails. It is particularly disappointing when a well thought out business system fails. But much of this can be influenced and controlled by the franchisor, and it is not very productive to blame the franchisee.

Have fun

Dennis

GANADOR: Changing organisations from the inside out to focus on the customer.

Comments

2 comments

  1. Mark Edmonds posted on March 30, 2015

    Good article Dennis. Being involved in a franchise the main issue we see is very poor communication. Changes made to the offer that only filter through without good consultation. On the other hand when the feedback is sought few respond!

    • Mark Anonymous posted on August 7, 2015

      I have only had my franchise for a few months and I had alarm bells ringing from the get go, the franchisor promised this and that but seemed to fade into the distance as soon as I was having any issues whatsoever. As mentioned above, he was solely driven on building his empire and is completely self-serving, this became transparently evident!! I am the first franchisee he has, so you would of thought there would be more urgency to help but he was still to preoccupied with world domination even when I declared I could be bankrupt after just 4 months!!! I am a hard worker, I had to be as I laid everything on the line including my families security and trust, and I don't see in any way shape or form he has fulfilled his obligations to me (and my family) but as it would cost me a small fortune (and he knows this!) to challenge his near water tight contract, then I am as you say Cattle trucked!! yes and the, hard working, honest john loses again!! There is also a lot of honest folk out there trying to make a go of it and getting shafted. Not all franchisee's are lazy, whingers as suggested!! A warning indeed to anyone thinking of splashing out your hard earned cash...

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