why franchises fail


When compared to traditional businesses, the number of failed franchises are significantly lower.

There are several benefits of running a franchise, as there is considerably less risk involved. However, there is no such thing as zero risks. Here are a few reasons why franchises fail, and steps you can take to avoid it:

#1 Lack of the Right Business Skills

A franchise is an established system that has a brand name, operating manuals, policies, training, support, and excellent marketing. That is why many business owners decide to invest in a franchise. This gives franchisees a significant advantage over traditional businesses. However, for new franchise owners, merely relying on these features to have a successful business would be incredibly naive.

The proficiency and knowledge of a franchise plays an important role in its success, and can easily transform a regular franchise into a highly profitable one. This is particularly true for B2B franchise systems.

For example, strong selling and social skills are essential for the operation of a franchise. If a franchise is unwilling to create strong customer relationships, it will result in poor business performance and ultimately, failure.

You have the responsibility of overseeing staff, operations, handling a certain degree of marketing, and managing financials when you run a business. It’s crucial for a franchise owner to have the ability to manage all these aspects, and self-analyse their performance as well. This helps them correct their trajectory when required.

#2 Underestimating the Work That’s Involved

Several franchises want to maintain perfect work/life balance. A franchise owner must be highly motivated and ready to work hard. Several owners enter the system and think all they have to do is invest and hire a manager. This is a huge mistake, and you have to commit yourself entirely to reap the benefits. It could also mean you have to work long hours and might not be able to dedicate sufficient time to your family.

#3 Rent Thoughtfully

Rent is a fixed cost that small businesses have to pay, and there will be tremendous pressure on your business if your rent is high. Although relocation might be a great idea, in addition to halting production, organizing everything again is incredibly painful and will cost you more money. Renting a place below 8 percent of your sales is recommended. The only exception is if your franchise is a highly profitable and high-volume store, located in the perfect area.

#4 Be Realistic

It’s crucial that you remove all emotions from the investment, and always consider weighing the pros and cons before settling on a decision. There are several elements like the type of industry, support from the franchisor, and level of involvement that have to be taken into account. Ask yourself whether it’s a worthwhile investment and whether you understand what has to be done to achieve your desired results, before investing large amounts of cash.

#5 Inadequate Working Capital

An additional factor that can lead to franchise failure is when you underestimate the capital required to achieve positive cash flow. For example, when it comes to resale, consider asking the broker, franchisor, or vendor, the number of sales that are required for working capital. You will need more working capital if the business is significant.

Also, extra working capital is needed to cover living and personal expenses if your business isn’t generating enough profit to cover the projected franchise drawings.

If you want to know more, feel free to get in touch with us at The Franchise Institute. You can call us on 1300 855 435 or fill in this contact us form, and we’ll reply as soon as we can.

Thanks for reading,
The Franchise Institute Team
1300 855 435

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