Why Do Some Franchisees Fail?

Franchising is widely seen as a blueprint for business success, yet on rare occasions franchisee failures do occur.

Why Do Some Franchisees Fail?

Reasons for franchisee failure

Over the years I have come across several instances of franchisees failing. In none of them was the concept of franchising to blame, rather its flawed implementation. Cold comfort for those affected, especially because, with some foresight, most of these failures could have been prevented.

To help future generations of franchisees and their franchisors to minimise the risk of franchisee failure I have isolated the main reasons for things going pear-shaped and list them below.

  • A gene is missing
    The question whether franchisees are in fact entrepreneurs has been the topic of many debates. Consensus exists that franchisees are individuals who seek ‘sheltered entrepreneurship’; that’s OK, as long as they do not expect the franchisor to operate the business for them. The entrepreneurial gene must be there!
  • Unrealistic expectations
    Some individuals approach an opportunity with rose-tinted glasses. They only see what they want to see and believe that investing in a franchise guarantees success. This is an oversimplification – a franchise is a blueprint for business success, but it is up to the franchisee to make the business successful.
  • Sloppy evaluation
    Prospective franchisees need to investigate not only the business sector they want to enter and the network they want to join, but also their own suitability for the role of franchisee. Speaking to existing franchisees, as well as consulting with professionals, in several disciplines is key but all too often overlooked.
  • Lack of commitment
    Some individuals join a network without having any intention of playing by its rules. They don’t like the prevailing culture but believe that, once they have gained access, they can do their own thing. Granted, the franchisor’s selection process should be thorough enough to filter them out, but some prospects can be highly convincing. They willingly agree to contract terms they have no intention of abiding by and even lie about their skills and available resources, just to secure the opportunity. This is a clear case of ‘shooting yourself in the foot’ because, when the wheels come off, it is not only the brand that suffers, but the franchisee also stands to lose everything.

How can you protect yourself?

Prospective franchisees need to examine their skills, preferences and resources, and then seek out franchise opportunities that match their profile as closely as possible. Moreover, it is useful to invest in a recognised brand and set up shop in an area where the franchisee has roots because this facilitates networking.

After careful evaluation of several opportunities, the prospective franchisee needs to make a decision and then stay the course. Since the beginning of April 2011, he/she has a useful ally in the form of the Consumer Protection Act (CPA), which regulates franchising. Among other things, it compels the franchisor to provide a comprehensive disclosure document and grant two separate cooling-off periods before the franchise agreement becomes effective.

At this point, and given that in most instances a prospective franchisee will invest his/her life savings into the venture and take on substantial debt, it makes perfect sense to have the opportunity of choice checked out by competent advisers before the franchise agreement is signed.

Once the franchise agreement becomes effective, the franchisee must be willing to adopt the brand’s culture and conform to the network’s systems and procedures 100%. This means, among many other things, enthusiastic participation in marketing drives and other activities arranged by the franchisor, including initial and ongoing training. Financial prudence and a willingness to be a hands-on operator are other essential requirements.

A good relationship with the network’s field service consultant is another requirement. He/She is not a head office spy, but can be a useful ally who can act as a mentor and provide valuable guidance. Hiding business problems from him/her is about as clever as a patient hiding symptoms of a dread disease from the doctor.

As we said in the beginning, success in business can never be guaranteed but adherence to these simple pointers will set a franchisee on the right course. Beyond that, dedication and sheer hard work must do the rest.

Franchisors, on the other hand, will be well advised to work within the parameters of ethical franchising, which are now enshrined in the CPA. Of special importance is a tightening up of franchisee selection procedures because granting a franchise to the wrong person will create significant problems for the network; it can even destroy the brand.

Written by Eric Parker (Franchising Plus) in association with Mark Rose, Nedbank

Mark Rose
About the Author
Mark Rose is the Head of New Business Development at Nedbank Business Banking. He holds a Masters in Business Administration (MBA) from the Oxford Brooks University, as well as various business qualifications from the Gordon Institute of Business Science (GIBS), the University of Stellenbosch Graduate School of Business, and the University of South Africa Graduate School of Business. Nedbank’s New Business Development unit develops customised industry specialised offerings to the medium sized business market, including Franchising, Agriculture, Professional – including Financial and Legal Practices, and the Medical Fraternity. This unit has also developed a unique Enterprise Development proposition. For specialist advice and more information on the Nedbank Franchising proposition visit the website or send an email to [email protected]

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